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Four Reasons Gold Stocks Are About to Rise

Are you uneasy about gold stocks? After the Federal Reserve raised interest rates last week, gold fell 19 points. We found out on Friday that as of June 28, 2005 commercial shorts had a massive 165,000 contract net short position against the metal. After gold dropped some people cried manipulation. Others just shook their heads at what seemed like another beating for gold bugs.

I know most people are a little shaken up right now. My advice - Don't be. I'm more confident and optimistic now about what the future holds for gold stock bulls than I have ever been before. In fact, over the past few weeks I've been buying gold stocks hand over fist.

At any moment, gold stocks are going to turn up and begin another giant bull run. That statement might sound bold to you. You might find it hard to believe, especially with the recent drop in gold, but let me explain to you why.

1) Gold is Going up Now Against All Currencies

Since May, gold has been rising along with the dollar. We have never seen this before. In fact gold is now going up against all major currencies. It broke out against the Euro a month ago and just broke out against the Japanese yen.

This is a change in the macro trend in gold. For the past few years, the gold bull market has primarily been driven by a bear market in the dollar. As the dollar has dropped, institutional investors have sold their dollars and bought gold as a hedge. Now that currencies all over the world are starting to drop against the metal, investment demand for gold is going to become international.

Since the May bottom in gold, the yellow metal has become the world's best performing currency.

2) Long-term XAU Chart Spells Breakout

Since their May bottom, gold stocks have had the largest rally off of a bottom that they have made during the past three years of this gold bull market. The rally has been nothing but amazing.

That rally came to an end when the XAU hit resistance at 95. This 95 level is major resistance as it is the intersection of the 150-day moving average on the XAU and the resistance point of the downward trendline connecting the November and March peaks in the XAU. It also represents a fibonacci 50% retracement level of the November high and May low.

The 95 level has held down the XAU for the past three weeks. Once the index closes above it you will see a key breakout in gold stocks that will take it to the 105-110 area.

3) Gold Stocks Are Outperforming Gold

Gold stocks tend to lead the metal. Since 2002, we have seen three major uptrends in gold stocks. A fourth one is just beginning right now.

Notice the green price relative to gold (XAU/gold ratio) on the chart above. When this line is rising it means gold stocks are outperforming the metal. Each of the three major uptrends in gold stocks began when the stocks started to outperform gold. For seven months the stocks lagged the metal. This relationship switched in May.

What is amazing now though is that gold stocks are growing stronger when compared to the action in the metal. Even though gold fell down to 421, over the past week, gold stocks barely fell at all, with the XAU standing firm above 90. In fact on Friday, when gold fell over 9 points, the XAU managed to close in the green.

One has to ask oneself, if gold stocks are acting like this when gold drops, what are they going to do when gold goes up?

I'll tell you... They are going to explode in value. This is a pure powder keg.

4) A Breakout for the XAU Appears Imminent

When it comes to the price action of stocks, one rule is that large moves are preceded by sharp drops in volatility. When a stock or market trades in a more and more narrow range the forces of supply and demand become equal. Eventually one side grows stronger than the other and the volatility rapidly expands causing a large move in the stock or market.

Think of it like a rubber band. If you take a rubber band and stretch it you usually apply equal pressure to both sides of the rubber band. If you let one side of the band go it will quickly snap back to the other side.

The XAU has reached an extreme low in volatility over the past four weeks. The indicators that I use to measure volatility are called bollinger bands. When they narrow it means that volatility has shrunk to an extreme level.

The last time this happened was back in March, when the XAU was making an important peak. It then quickly fell over 10% in three weeks.

Another large move is about to happen. In fact, judging by the bollinger bands, it is likely to happen at any moment. This time though, it should be to the upside because of the strong performance of the gold stocks against the price of gold. Notice back in March they were actually underperforming. Now they are outperforming.

The XAU is knocking on 95. It should bust right on through any day now. You need to be fully prepared and ready. This is not the time to get nervous or scared about gold stocks. It is the time to get excited. The fuse is lit.

To find out what gold stocks Mike Swanson holds and plans on buying subscribe to his free Weekly Gold Report at http://wallstreetwindow.com/weeklygold.htm.

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