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Is the "Sweet Spot" in the XAU Still Sweet?

The XAU gold/silver index continues its momentum uptrend as reflected in the dominant short-term moving averages. In my previous two commentaries on the XAU short-term outlook ("XAU still in the sweet spot") we examined the determinants for the XAU's continued rally to higher highs in the foreseeable future. Despite a couple of "white knuckle" pullbacks along the way, the index is still above those key moving averages and is poised to make yet another stab at its yearly high.

One reason why the gold stock sector has continued its momentum uptrend can be attributed to the post-election rally that began last week when President Bush was re-elected. Commodity-based stocks in general rallied across the board along with the broad market since Bush is viewed as an "inflationary president." This was certainly true during his first term of office, but it remains to be seen whether this will continue in his second term. But as far as the market was concerned, Bush was the "right" man for the job at hand and consequently the metal stocks reacted in positive fashion. For the present time that's good enough for the XAU.

The above daily chart of XAU shows the continued strength factored into the 30/60/90-day moving averages, the dominant short-term trend and momentum identifiers. As I've pointed out before, when these three key moving averages harmonize on the upside it nearly always produces at least a 2-3 month rally before the first serious corrective pullback commences.

What about the Amex Gold Bugs Index (HUI)? HUI shares the same bullish immediate outlook as the XAU since its 30/60/90-day series is also still positively harmonized and reflective of continued upside momentum and underlying support. The pivotal 240 resistance is obviously key for HUI right now, with a breakout above 240 on a closing basis the signal needed for a continued move higher to the 250-260 upside target area.

The key to the 3-month rally in gold stocks has been relative strength. Ever since the July/August lows in the XAU and HUI indices, the gold stock sector has been diverging positive to the broad market. When a stock sector can make higher highs and higher lows while the S&P 500 is making lower lows and/or lower highs it shows the obvious influence of insider accumulation.

That being said, the gold stock sector is showing signs of age in its short-term uptrend and once the upside objectives for the XAU and HUI have been reached later this month it would be surprising to see the first major test of the uptrend in the closing weeks of 2004. This will let us know what to expect for the first part of 2005 in the way of the dominant gold stock sector trend.

For now, though, the trend remains up and the "sweet spot" continues for the XAU.

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