Saturday, May 14, 2011

Bullish Thoughts on Precious Metals

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An intermediate-term play in the precious metals may be at hand. I like the chart of the $HUI here quite a bit. Here is a log scale chart of the $HUI mining index since 2001 in a log scale format:

I also like what is going on in terms of the ratio chart between the GDX mining ETF and the Gold price (i.e. GDX:$GOLD ratio chart):

The U.S. Dollar Index chart ($USD) also suggests to me the possibility of a significant bottom in the precious metals sector in June. Here's a chart of the $USD over the past 8 years with my thoughts:

The key in my opinion will be to watch how Gold stocks react. I think they will rally next week because they are so oversold. This would tie-in well with a drop in the US Dollar. Then, if the Dollar rallies again for 1-3 weeks in a second up leg to complete a simple short term A-B-C correction in its bear market, which would help to reset sentiment in the Dollar's favor, Gold and silver should drop again to lower lows. If the major Gold stock indices fail to make a lower low along with the Gold price, this would be a powerful signal in my opinion that we won't have to wait until the fall for further bullish fireworks in the precious metals sector. If Gold stocks instead do make a significantly lower low along with Gold in this proposed scenario, then a longer-term correction is likely in store and the summer may be rather boring/choppy.

Just my 2 cents and it's all a guess of course. In the longer term, this is all just noise on the way to a Dow to Gold ratio of 2 or less.

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