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Is This A Good Time To Get Back Into Gold And Mining Stocks With Your Money?

This essay is based on the Premium Update posted December 23rd, 2009

Please imagine a private room at a posh downtown restaurant. The guest list is invitation only and limited to the wealthiest clients of Bank Edmond de Rothschild, which specializes in private banking and wealth management. Rothschild is legendary with a reputation that has made the name synonymous with banking for several centuries. The family-owned bank has been passed down through generations and kept its reputation and solvency despite political turmoil, wars, persecutions, revolutions and market upheavals. It has done so with what the Rothschilds like to call "instinctive caution."

Two leading in-house experts were flown in to meet with the clients at the posh restaurant to deliver a year's end economic report and a look at what's ahead.

The title of the talk was "Back to Growth, But Not Yet Back to Health."

Although talk about gold was somewhere towards the middle of the lecture, I'll skip to that, because that is what interests us the most. The savvy folks at the Edmond de Rothschild bank are looking at two target prices, the first at $1,500 and the second at $2,000. The reason is simple, they say, less supply and more demand with central banks being net buyers rather than net sellers. Please note that the first of these two targets is in perfect tune with what I wrote previously after analyzing the very-long-term chart of gold.

We have been a fly on the wall at an exclusive briefing by some of the savviest, most conservative and cautious investors in the world. And they like gold. So if super conservative investors like the people at Bank Edmond de Rothschild are on the gold bandwagon, does that mean we are close to the end of the ride?

You can do your own gold bubble test during this holiday season when you see lots of friends and family members at parties.

Ask people if they own gold, or if they know why gold has climbed from $650 to over $1,100 in the past three years and see what they say.

The average person has heard about gold on television and in the media, but has no idea why it's rising, who is buying it, and how far did previous bull markets took PMs in the past. They might even like to buy it, but don't really know how.

Baron Benjamin de Rothschild writes in a letter to the bank's investors that the Chinese world for "crisis" is written with two ideograms, one meaning danger and the other opportunity. More comments are on that topic are available in the full version of this essay.

I hope that in the coming year we will avoid danger and embrace opportunity. The best way to do that is to see what the charts can teach us. Let's begin with the gold chart (charts courtesy of http://stockcharts.com).

The long-term chart didn't change much since the previous Premium Update was posted. Back then I wrote the following:

Taking a closer look results in one more support level that was previously rather invisible - the $105 level in the GLD ETF. This is the price that stopped the initial post-$1,000-breakout rally, and it currently corresponds also to the medium term support line. This may stop the decline for a while (and both indicators on the above chart: RSI and Stochastic confirm this) (...).

The above applies also this week, but please note that this time the price of gold is very close to the long-term support level (rising thick blue line) - the aforementioned $105 level. It is also currently in the area marked with red ellipse, which suggests that the bottom may be very close.

Moving on to the situation in the precious metals stocks sector, let's take a look at the long-term chart of the HUI Index.

The situation didn't change much from the long-term point of view since the last week. Back then I wrote the following:

Please take a look at the thin blue lines coming from the same price/time combination. Each of them was pierced, before the final bottom was put in, and this is what I expect to take place this time.

The very long-term support line has just been touched. The HUI Index even moved below it on an intra-day basis, but finally closed above this level. Therefore, taking the historical performance of the gold stock sector, it seems that PMs will need to move a little lower before putting a bottom.

The additional confirmation comes from the analysis of the Gold Miners Bullish Percent Index (a market breadth/momentum indicator that is calculated by dividing two numbers: the amount of gold stocks on the buy signal (according to the point and figure chart, which emphasizes strong moves while ignoring small ones) and the amount of all gold stocks in the sector.)

The above chart features the particularly favorable moments for opening long positions in PM stocks. These moments are created by three signals: the value of the index declined significantly, the value of RSI is below 30 and the value of William's %R is below -80. This has been the case for several days now, but please note that the buying opportunity used to emerge several days after the initial signal, so this is what I expect also here.

Naturally, this is not a signal for day-trading, but rather for estimating the medium term bottoms / tops. The implications of the above analysis are in tune with what I wrote previously - we are at / near a buying opportunity from the long-term point of view, but the short-term situation is still cloudy. The analysis of short-term charts, comments on the changes in the strength of influence from each of the key drivers of PMs, signals from our unique indicators and much more is available to my Subscribers.

Summing up, gold is currently in the area that I've marked as the level that is likely to contain the end of the current decline. The area is relatively big, which makes this signal not very useful for day-traders, but if you were waiting on the sidelines with your long-term capital in order to get back on the long side of the gold market - it seems that this is a good moment to do so. If you prefer to enter the market over a few days instead of making one single big purchase (I'm not advocating dollar-cost-averaging over several weeks / months - the explanation is in the Key Principles section), it might be a good idea to start now/soon.

To make sure that you are notified once the new features are implemented, and get immediate access to my free thoughts on the market, including information not available publicly, I urge you to sign up for my free e-mail list. Sign up today and you'll also get free, 7-day access to the Premium Sections on my website, including valuable tools and charts dedicated to serious PM Investors and Speculators. It's free and you may unsubscribe at any time.

I would like to take this opportunity to wish a happy and wonderful Holiday Season to you and your families.

 

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