Is The Gold Mega-Bull Starting To Snort?

It may be time to go grab our red capes from the closet and dust them off.  In the pen is an increasingly agitated bull, snorting and pawing at the dirt.  He's been held back by a combination of natural and man made forces.  He ain't happy.

Gold has had every reason to correct sharply.  It appears that we are in the early stages of another deflation scare.  The money supply is shrinking at unprecedented rates and the economy is going into free fall.  These are NOT the best pre-conditions for a rally.  But they are GREAT conditions to fool everyone, and that is how great moves get set in motion.

When any asset or stock ignores what is unequivocally bad news, it virtually always suggests that the information has already been factored into the market.  I believe that's going on now.

The rally in Gold to near its all time highs has occurred very quietly and without much notice.  So has the recent strength in Silver.  The underlying mining stocks appear to be forming healthy base patterns which are ideal for a resumption of the strong advance that still has a very long way to go.

The key obstacle to an advance here is the tremendous liquidity in Gold.  When the really nasty part of the upcoming market meltdown asserts itself, it will inevitably trigger margin calls among the hedge fund community.  They may be FORCED to sell the most liquid assets they have, and Gold would be at the top of that list.

The key levels to watch for an upside move are $1,250 on Gold and 500 on the HUI.  If these are both exceeded, the technical picture goes from neutral, where it sits now, to very bullish.  Given the very small overall market capitalization of the mining sector, even a small re-allocation of investors' portfolios will lead to huge gains.  Remember how those internet stocks were propelled by the combination of small market floats coupled with surging demand?   You ain't seen nothin' yet!

But, I would highly urge that one does wait for the key levels cited above to be penetrated before diving in.  This is a very tricky market which is actively being intervened in.  A false breakout CANNOT BE RULED OUT!

To play this market in the event of the now growing more likely upside breakout, you can't go wrong with physical GOLD.  But, the real profits will be made in junior precious metals mining stocks.  We will update our analyses of which stocks are the most appealing at the appropriate time.

I would, however AVOID the various Gold ETFs, most notably GLD.  These are built on derivatives and there is very credible information floating around that there is not enough bullion to honor scheduled deliveries.  Thus far, this shortage has been met by the issuance of more paper, but the supply of GOLD is falling rapidly from existing mines.  Imagine the move if future delivery obligations can not be met.

I can see the bull's breath steam in the cold air.  Toro, Toro, Toro!

Marko's Take

Gold Reaction Or Gold Over-Reaction?

There is no more certain way to be right than to make two opposite predictions.  Therefore, ONE must come true.  And so it was last week with this now humble publication.

At first, as we gave an overview of the Gold market's technical picture, we formed a near-term bearish conclusion (http://markostake.blogspot.com/2010/02/technical-review-of-gold-and-silver.html).  Then, two days later, we crowed that the Gold picture had brightened considerably (http://markostake.blogspot.com/2010/02/gold-picture-brightens-considerably.html).

In each case, the pronouncement turned out to have correct and incorrect elements. After the first piece, the Gold market rallied smartly.  After the second piece, the Gold market plunged!  Now that we've taken a big bite out of our hats, let's revisit the entire Gold situation for use from here.

The first piece was basically correct.  There WERE danger signs that the correction in Gold, Silver and affiliated miners had NOT completed their retracement phase.  But, the rush to follow with the second piece was pre-mature, although it, too, was somewhat correct in that the picture HAD brightened and, despite the tremendous volatility of last week, continues to strengthen. 

NOW WHAT?

The danger period for Gold, Silver and mining stocks is either over or very close to over.  Friday's trading witnessed a large number of mining stocks completing "outside day reversals".  As an outside day refers to a bottom, it occurs when a stock or index trades LOWER than the prior day's low and then closes HIGHER than the prior day's high.  Some technical analysts refer to this as an "engulphing pattern". 

Going back to Friday, the outside day reversal is a VERY POWERFUL change of trend indicator!

This means that the odds of a low having been reached intra-day Friday are excellent!

The overall pattern forming is that of an A-B-C correction, where downward waves A and C are of roughly equal length and interrupted by a "counter trend" wave B.

It's time to buy.  For those that are new to the site, I would like to re-iterate the better vehicles.  First, I would AVOID either GLD or SLV, which claim to be backed by physical Gold and Silver, but may not be.
If you wish to invest in a bona-fide metals backed fund, try CEF which is backed by both Gold and Silver.
The only problem with CEF is that it often trades at a premium to its underlying "Net Asset Value" (NAV), so you have to be careful not to overpay.

I prefer GDXJ, an Exchange Traded Fund (ETF) basket of about 40 junior Gold and Silver mining stocks.  It has a very decent selection of miners within it and for most people it will prove to be an excellent way to play the next MAJOR move higher, which ought to start any day now, if it hasn't already started.

I don't think it impossible for the precious metals market to back and fill for the next few days, especially Monday.  However, I highly doubt that it will take more than 2 or 3 days to complete the entire corrective phase from $1,200.

Tomorrow, we'll revisit the stock market, which STILL looks like it is in the very early stages of waterfall decline or crash. 

If you think my logic is less than golden, you know what to do.  TAKE ME ON!

Marko's Take