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Gold Stocks Recover But Still Mired In Trading Range at Trader’s Narrative

Gold futures (December contract) closed higher at $709.70 an ounce today and dragged with it gold stocks. While many journalists claim it was today’s atrocious jobs data, I doubt it.

That explanation may be neat and tidy but it is useles since gold and gold stocks started this short term rally a while ago, before any attention was focused on economic data.

Most probably the real reason why the gold sector has been doing well lately is that it was extremely oversold. In mid-August when I wrote about gold and gold stocks getting clobbered, I ended by saying:

…right about here I think gold stocks are ripe for an oversold bounce. Nothing fancy, just a tradeable rally.

Within the Gold Bugs Index (HUI) zero gold stocks closed above their 10 day and 50 day moving average. And only 7% closed above their 200 day moving average. Wouldn’t it be hilarious if gold stocks rallied along with the stock market?

Maybe not as hilarious as profitable. Hope you got yours.

gold bugs HUI index SPX august 2007

Now the gold bugs are getting excited but I find no reason to join them in believing that gold is going anywhere in the medium to long term. For one, it has worked off a very extreme oversold technical condition. Now we have 50% of gold stocks above their 200 moving average. When I told you about this upcoming bounce there was only around 10%.

The other reason is that both gold and gold stocks are still mired in a trading range. By the time they make it up to the upper resistance level the technical picture will be overbought and they will get slapped back down again. Had this mid-August technical oversold condition occurred when the AMEX Gold Bugs Index (HUI) was just below 400, things would be very different.

The final reason is that according to the k-ratio that I’ve mentioned many times, the gold bull market is over.

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5 Responses to “Gold Stocks Recover But Still Mired In Trading Range”  

  1. 1 Aaron

    I think the gold stocks have gained on very solid volume in the last couple of days, so in the short-term the stocks may continue to move higher. I do agree though that in the long run, everyone pushing gold will end up being rather disappointed.

  2. 2 Shepard

    I agree with you analysis and I too don’t think gold is going much of anywhere medium/long term. I thought I read somewhere that this most recent “spurt” in price movement was due to heavy buy in India. I think it’s their “gold season”. Something to that effect.


  3. 3 ken

    The StreetTRACKS Gold Trust Shares (GLD) held its 200d EMA and was down only 5% during the recent stock market’s slide, showing relative strength (gold stocks were much weaker.)

    The secular gold bull market started in April 2001, so I think it’s premature to say it’s over. No secular bull market of any kind lasts less than a decade, at least. We haven’t seen a huge parabolic move signifying the beginning of the end of the gold bull run yet. Why should it be that “By the time they make it up to the upper resistance level the technical picture will be overbought and they will get slapped back down again.”?

    There exists that possibility, but not always. Many times, when a market or stock becomes overbought, it can even get a lot more overbougt for a long time. Being overbought at a resistance level is not a guarantee that a market/stock will be smacked down hard. It may just hesitate and/or consolidate slightly under that level for a while, before gathering enough strength to break through. Otherwise, there will never be any kind of technical “breakout”.

    Looking at the weekly chart of GLD, it was building a huge base since May 06 after topping out at $72. I think this recent run may get rejected temporarily at that level, but the momentum should be strong enough for GLD to eventually break out above it. A measured move suggests GLD may run up to $89. Correspondingly, gold futures may reach $890/ounce in the near future. Note the 1980’s high of gold at $880. If that level is broken eventually, there could be a parabolic move upward.

  4. 4 scood

    As one whos traded gold & gold stocks many yrs ive been looking for a way of weighing the overall general mkt valuation of the companies. The K-ratio looks like a decent quick read. Obviously there was no HUI in 1978-1982 but has any work been done looking at what readings it would registered at that time by compiling a similar average using companies of that period?
    By the way, even tho I always own some gold stocks the valuations have always seemed absurd. The only time they ever seemed reasonable was at the all out gold bug panic lo in 99-00. Yeah i kno a lot of the rationalizations of how you get to the value of a gold co., but it still eludes me, so i just trade em w/faith in the past.
    Anyway, it would be interesting to see what a probable K-ratio would have been at the 80 panic top!! With all due respect to your opinion the other way- I think we just might have another one coming [ panic top,that is ]. Its always a lo probability event but the stars seem to be alignig a little bit w/chaos and its a small enuf mkt- wouldnt take too much.
    Thanks for your ex work.

  1. 1 Gold Sentiment Too Bullish

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