Saturday, November 24, 2007

Looking at Gold Through Another Lens -Part 1

For this past week, gold bullion rose by $37.70 or 4.79%, and gold stocks, as expressed by GDX, increased by 4.05%. There were some unusual developments this week as well. For example, the US Dollar and the Canadian Dollar fell simultaneously, which very rarely happens. Also the TSX ended lower for the week despite a bounce back in commodity prices.

The fact that the Canadian dollar fell while gold rose finally gave some relief to Canadian holders of precious metals, which brings us to the first chart. The following chart shows the price of gold denominated in Canadian Dollars on the top, and Canadian gold stocks on the bottom:

It seems that very few technical analysts look at the price of gold in Canadian dollar terms. This is unfortunate, since most of the companies inside the major gold indexes are Canadian. If you look at some of the companies inside GDX, you will find names such as Barrick Gold, GoldCorp, Kinross, Agnico Eagle, and Yamana, and these are all headquartered in Canada.

This means that these company's profitability will be directly affected by gold's price in Canadian dollars. Anyway, if you examine the above chart, you will notice that Canadian gold is at what could potentially be triple top resistance.

This resistance is also round number resistance. This is because the resistance area has formed where Canadian gold has reached the $800.00 mark. Looking at it another way, gold in Canadian Dollar terms is at the same level that it was back in May 2006.

If Canadian gold fails at this level, it will have ramifications for both Canadian and American gold investments.


Anonymous said...

Hello Danny,
Do you think there will be an influx of overseas money into Jr Canadian producers as the Canadian dollar descends?

Danny Merkel said...

Hi Archie,

It is really good to hear from you again.

That situation is somewhat of a Catch 22. This is because in order for investors to be attracted to Canadian miners, there stocks usually have to be performing well.

In order for the stocks to be performing well, commodity prices need to be rising.

If commodity prices are rising, then, in all likelihood, the Canadian Dollar will be rising.

That means the situation where overseas money is attracted to the juniors due to a weak $CDN is unlikely.

In other words, if the dollar is falling, mining stocks are likely falling too.