Sunday, June 14, 2009

Gold stock correction

Though a double-top is possible, I believe the intermediate-term bull move in senior Gold stocks is over. So the question for Gold stock bulls is when to put more money into the sector. There are two issues in gaming a correction in a bull market - time and distance.

I think both are important. If you look at previous corrections in Gold stocks, some important "pointers" can be learned. There is no question that trying to time a bull market can be fraught with hazard and you can miss out on profits and even lose money in an obvious bull market using such tactics.

However, I for one am going to continue to try. Gold stock corrections at the intermediate-term stage take a minimum of 4-6 weeks to reach the price bottom and even then they usually meander around for several months in the summer and don't get moving until the August-November time frame. "Sell in May, go away, and come back after Labor Day" is unlikely to be an unprofitable strategy this year.

I know that Gold bulls don't want to hear it, but now is not a good time to put new money into senior Gold miners unless one is truly committed to dollar cost averaging into this sector over the next several years. Junior miners and explorers are a wild card, as these are about to become lottery ticket plays and timing them is an arduous task for people far better in trading than me.

For rough guidelines, I think waiting AT LEAST 4 weeks from the June 1st top is prudent. I also believe it is HIGHLY likely that senior Gold mining indices (e.g., $HUI, $XAU, GDX) will touch their 200 day moving average on a daily chart at some point before this correction is over. I also would not buy the senior Gold stocks until the RSI on a daily chart is solidly below 40 (and preferably at or near 30). These three guidelines are probably the best recommendations I could give.

If the Gold mining indices aggressively and precipitously drop to their 200 day moving average within 2 months, then that could be a trading opportunity for a summer swing that may be good for a 30-40% bull trade (or just a good long-term buying opportunity with the understanding that a second low will likely come in later at similar levels). If the correction is shallower and choppy, it will likely last until the fall as a sleep-inducing affair until the 200 day moving average can catch up to the price.

It must be remembered that I am a short-term deflationist and the type of bear market I believe we are in for general stocks has a long way to go. If we break below the March lows in the general stock market indices (which I believe we are going to do), there is no way Gold stocks won't get caught up in a heavy and deep correction. It would be naive in my opinion to think otherwise.

However, when people are dumping Gold stocks again this summer and/or fall, just like last fall, I will be buying. Here and here are some of my real time calls to buy Gold mining stocks from last fall.

Given the heavy volatility that I expect dead ahead, my hunch is that the Gold stock correction will be violent rather than shallow. This may present two buying opportunities (i.e. a zig zag correction with one bottom coming up in the next 4-8 weeks and the second bottom in the fall) before the next leg up in Gold mining stocks. Here's a chart of GDX as a representation of a buyable Gold stock index with my thoughts:

Though I think it is too early to buy the senior Gold mining stocks right now, I remain bullish on small cap Gold royalty company Royal Gold (ticker: RGLD) and continue to hold 2010 bullish LEAP option calls on this stock. RGLD has a propensity to march to its own drummer and doesn't always follow the senior Gold stocks. It's long-term chart is much different than most senior mining stocks and it has recently undergone a long-term breakout from a mult-year trading range (see previous comments on RGLD). The fractal I am following from 2001 remains in play:

And here's a current RGLD weekly chart thru Friday's close:

I personally believe that there is more money to be made going short in general stocks right now than chasing Gold miners but for those who want to play the bull side, patience is now key in the senior Gold mining stock sector. There will be plenty of time to buy at lower levels than today to maximize profits. For now, I think being risk averse (e.g. in U.S. Dollar cash, Gold or short-term U.S. government bonds) and waiting for a better buying opportunity in Gold stocks or being short the stock market are the best options. I would not put new money into senior Gold stocks right now. I still believe Gold has a good chance of making a nominal new high in the next month after the current mini-correction is over.

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