Saturday, September 22, 2007

The Euro is Fueling Strength in Gold Stocks

In the last 5 weeks, the XAU has shot up in value by more than 40%. It is important to stay disciplined during these times, and to not let massive profits cloud your judgment. This post will look at why gold stocks have blasted off, and, more importantly, if it's still a good time to buy in a objective and disciplined manner.

As mentioned in the previous post, some of gold's strength is coming from the currency scene. I mentioned the US Dollar's weakness, but I did not mention the Euro's strength. Here is a Point and Figure chart showing the Euro breaking out of a bullish triple top formation. This chart goes back in time about 11 months.

On September 11th, I said that, "it [the Euro] has not yet broken through the overhead level of resistance. Once the Euro busts through this level, it will likely add more fuel to the fire for gold and gold stocks." This is exactly what ended up happening. This event is a bullish development for gold, and suggests more upside potential on the way.

Let's have a look at a weekly candle chart of the Euro just so that we can get another perspective.

The chart above goes back about 4 years, and it clearly shows the Euro breaking out of a bullish long-term double top formation. Since the Euro and the US Dollar tend to travel in the opposite directions, this is a major piece of bearish evidence for the US Dollar. This, in turn, is bullish for gold.

But perhaps you are still not convinced that the US Dollar is in trouble. Let's have yet another look at the Euro to make the case even stronger. The chart below is a monthly chart of the Euro. This chart goes back to 1993:

There are two major points in the above chart. Firstly, there is an enormous inverted head and shoulders forming, and second, the Euro has broken out of a triple top formation on this time scale as well. I feel that this extremely bullish for the Euro for the long term.

So, what does this all mean? It means that even though gold stocks have gone up 40% in a relatively short period of time, there is still a tremendous amount of upside potential left. There will be corrections along the way, and these corrections are going to hard to predict, but if you can hang on, you will likely be rewarded handsomely in the months and years to come.

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