Below is an excerpt from a commentary originally posted at www.speculative-investor.com on 13th September 2009.

Current Market Situation

The following chart shows the HUI and the HUI/gold ratio. Of importance is that the HUI traded as much as 22% above its 50-day moving average on Friday and ended the week 19% above this moving average. There is no telling how 'overbought' a market will become before it begins to retrace, but note that the HUI has rarely, in the past, been as far above its 50-day moving average as it is right now. Also of importance is that the HUI/gold ratio ended last week at a new high for the year. This is important because there is a tendency for the HUI/gold ratio to reach an intermediate-term peak well in advance of the HUI.

The HUI's position relative to its 50-day moving average points to at least a 1-2 week pullback, while the HUI/gold ratio's move to a new high for the year suggests that the HUI's next pullback will be followed by a rally that exceeds the September peak. The idea that there will be additional upside following a pullback is supported by the fact that Royal Gold (RGLD) has just broken its sequence of declining tops.

XGD is a fund that tracks the performance of the gold sector in Canadian dollar terms. Whereas US$-denominated gold-stock indices such as the HUI and the XAU have just surged to new highs for the year, the daily XGD chart displayed below shows that the gold sector has not yet broken out in C$ terms.

Our guess is that XGD will consolidate at C$20-$22 over the next 1-2 weeks and then achieve an upside breakout of its own.

Late-Stage Stocks

Some junior gold mining stocks have had huge upward moves this year, but there are still plenty that haven't gained much ground at all. Furthermore, there is often no company-specific reason for the lacklustre performance, other than an absence of exciting news. Pediment Gold (TSX: PEZ), which was added to the TSI Stocks List early last week, is a good example. There are many other examples, some of which we intend to highlight at TSI over the weeks ahead as long as our overall market outlook doesn't change.

One of the most interesting characteristics of the micro-cap stocks that lie at the speculative end of the gold sector is that these stocks regularly don't do much until the final stage of an intermediate-term gold rally, at which point they take off. It is not uncommon for the bulk of their gains to occur during the last few weeks of a 6-12 month advance, and they can even gain considerable ground after the gold-stock indices have already reached intermediate-term peaks. That's why we (and others) refer to them as "late-stage stocks".

Our point is that even if the HUI is now within 10% of an intermediate-term peak, there is probably still some very interesting upside potential within the ranks of the smallest gold stocks. Of course, speculators must balance the reward potential offered by the juniors towards the end of a gold-sector rally against the risk of overstaying one's welcome and becoming caught-up in the subsequent large declines that most of these stocks WILL experience.

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