Sunday, December 9, 2007

GDX, The HUI, and Barrick Gold

Gold was up marginally this week, and North American gold stocks were more or less unchanged. Gold stocks have been treading water for a while now, but probably not for much longer, as this post will show.

First let's have a look at the Gold stocks ETF, GDX. This is a daily chart that covers about 6 months of price action:

The annotations should be self explanatory, so I won't go into too much detail. But one thing I wanted to point out is that the Bollinger Bands are beginning to tighten, which means that volatility is dropping. What often happens is that volatility contractions precede price break outs.

If you observe the above chart you will notice that GDX is sandwiched between solid support and solid resistance. Any breakout from this zone would be a strong buy/sell signal.

Obviously, whether the Fed cuts rates by 25 basis points or 50 basis points will help determine which direction the breakout will be, but let's also look at more charts for additional clues.

What the Bollinger Bands cannot forecast is what direction breakouts will occur in. For that, we must rely on other clues, which are in the next chart. The next chart is also a daily chart, but of the HUI:

This is a similar looking chart, but this chart has additional annotations. In my opinion, a bearish head and shoulders pattern has formed in this chart.

Every week I read dozens of other analysts opinions of the gold stocks market. What I find surprising is that no one else has noticed this pattern, as far as I can tell. I think that the reason for this is because most analysts are bullish on gold, and their minds are screening out anything bearish that appears on the charts.

Even fundamental analysts, like the ones on Bloomberg, are all bearish on the dollar, and bullish on gold. This is definitely an ominous sign for gold bugs. These are the same guys that come out and declare that the gold bull market is over every time there is a correction, like last August.

That being said, the long-term fundamentals for gold and silver are still, like always, intact. For the next ten years, gold and silver will likely outperform every other asset class. Gold stocks will likely do well too. In fact, here is a long term bullish perspective on one gold stock in particular, Barrick Gold:

The above chart is a weekly chart, and it goes back to around 2002. It is a relative strength chart, that compares ABX to the TSX Composite Index. As you can see, ABX has been under performing the TSX for about 6 years.

What is interesting is that Barrick's relative strength has broken out of its channel, and has started outperforming the TSX. That is certainly bullish for the long term.

By the way, I am experimenting with a new layout for this site. The objective is to make this site look more like a 'real' website rather than a blog. If you prefer the old look, please write a comment.


Paul said...

I've noticed this pattern too, and a quick search on Google for "head and shoulders GDX" brought me to your blog. For the next week I'll be watching closely for any break below the neckline.

Danny Merkel said...

It is good to see that I am not the only one who has noticed this pattern.

GDX is getting very close to the neck line, with todays sell off. I would be watching the charts like a hawk at this time.