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Gold & Oil Stocks: Is The Bottom In?

Morris Hubbartt
Weekly Market Update Excerpt
posted Jul 1, 2011

US Dollar Chart

Dollar Commentary

  • Fundamentals are the foundation of markets. It is clear the US dollar is headed to lower lows, because of the fundamentals of US rapid debt accumulation. Perhaps it is the end of QE. If so, what comes next? Is it more unemployment, welfare checks and food stamps? This type of economy will not produce a strong currency.

  • Do you want to buy the 30 year treasury bond of a national government, with that nation possibly entering a possible renewed recession or even a depression? Bond buyers are getting about 4% in interest for taking colossal risk. This government is running an annual $1.6 trillion dollar deficit during this “recovery”. The idea of further weakness in this economy being good for the bond market and the dollar is nonsense.
  • Against this fundamental background, gold is relatively undervalued at $1500. Not “set to soar to $5000 any day now”, but it is undervalued, because price of gold revolves around the seriousness of the debt situation, and the debt situation appears to be worsening faster than gold is rising in price. 

Gold- via SGOL- 14 Month Chart

  • More and more we see the next move higher in gold being set up right before our eyes, but I want to prepare you for the technical possibility of a quick move to $1425, followed by the real deal rally that everyone in the gold community has been waiting for. The market is a competition, and your competitor is after your gold at a lower price. If we do drop down towards my $1425 target, hold your gold or buy more. Don’t try to avoid this sell-off because the greater risk is missing out on what follows it.

GDXJ Bull Set-up Chart

  • My stated trading position for several weeks has been that a late June/early July rally will likely end the corrective phase in gold stocks. Over the past few trading sessions, the stocks have begun to outperform bullion.
  • Based upon key indicators and renewed leadership by the small cap gold stocks (GDXJ) and the strong gold/ silver ratio spike indicator (note the chart below), the bottom looks in and I am holding maximum gold stock positions.
  • The likely trading pattern now unfolding indicates a bottom is in, and a retest could occur late in the month of July. Don’t buy into the sentiment of gold stocks doom. Buy gold stocks. If you are low on cash, simply hold your positions.

Gold Stocks Against Gold Bullion Comparison Chart

Analysis

  • The event of climactic selling can mark a bottom, but usually the bottoming is a process that ends with the exhaustion of selling over time. Price may define the bottom with a selling climax, but it may be a long time before selling is exhausted to the point that price can begin rising. 
  • I believe that Monday marked a day of final exhaustion in the selling of junior gold stocks, as a group. A “slow bleed” bottom looks to be in place.
  • I have included three important charts on comparing gold to gold stocks and silver in this update, to help you to understand why bearish sentiment is so prominent, and why it’s likely dead wrong.
  • With many gold stocks now trading at the cheapest levels in the last five years, value is here. Gold has corrected recently, but very little considering how far it has run. With gold near $1500, gold stocks are trading where they were when bullion was just $800!

GDX vs Gold Comparison Chart

  • Many analysts believe that because gold has led and gold stocks have lagged, the entire move in gold bullion is suspicious. Quite frankly, that view is ridiculous. In a debt crisis, it is normal for gold to be the best performer in the early stages of the crisis, and that is what has happened.
  • The mood of gold stock investors is horrendous.  This market now has the most negative sentiment since 2008. Notice that the huge divergence between bullion and stocks is beginning to narrow since peaking in the third week of June. 

Gold to Silver Comparison Chart Via GLD:SLV

  • The CCI Indicator spiked over 200 on Monday. That alerted me that at least an intermediate bottom was likely in for silver. I covered the use of this indicator in my Monday evening video. Send me an email if you want to see that video and I’ll send you the link.
  • When silver turns, the gold stocks tend to turn at around the same time. I’m quite sure that we are at the brink of the turning point I have repeatedly called for into the late June/early July time frame.

GDX RSI-Induced Rallies Chart

  • The action of the RSI indicator is another reason to be massively long gold stocks. Sentiment indicators are running as bullish as they can be right now! Contrarian analysis is what leads me to such a bullish forecast for the gold market.
  • There is now such fear that even the bulls had grown quiet by Monday evening. I would expect GDX to surpass the highs near $64 and rise to about $76, based on the average type of move from this RSI set-up.

USO (Crude Oil Proxy) Chart

  • I want to bring you a look at the crude oil market this week. Over the past two months crude has lost nearly 20% of its value. This is the kind of decline that perks my interest.  
  • My shorter term indicators are now anticipating an advance inside the next 1-3 weeks to the identified trading target. After the decline we have seen in the crude sector, more bottoming from there will be likely.
  • What should not be overlooked is the long term impending crude oil shortage that could become evident in as little as five years. It is estimated that some nations now exporting crude, such as Mexico and Venezuela, will cease to do so in that same 5yr time frame.
  • On a seasonal basis, price typically continues to decline through June and trade mostly sideways in July. The seasonal chart confirms my shorter term technical work, suggesting a 10% advance followed by a lower low or double bottom, but it’s too early to tell for sure.

Energy Stocks via XLE

  • Energy stocks are a quality way to play the long term energy boom that almost surely lies ahead. This ETF is down approximately 8% from the highs when crude is down 20%. I like XLE, and will be a buyer on minor weakness from here. I’ll begin adding buy and sell signals for subscribers immediately.
  • One complaint about the energy commodity ETFs such as USO is the inefficiency of tracking the underlying commodity. I believe the energy stocks will ultimately outperform oil anyways, and the inefficiency issue is just one more reason to focus on the stocks.
  • Most important of all, the energy commodity sectors and energy stocks are a superior way to be long US equities without being long the general equity market. Thanks!

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Jul 1, 2011
Morris Hubbartt

321gold Ltd