After watching gold go through such a wild move last week, and if you are like me then I'm sure you felt some pain from it, it's useful to step back and take a look at the big picture. Has anything changed? Are gold stocks and gold still in a bull market?
Right now, gold and gold stocks are in a large sideways consolidation period within a secular bull market. The XAU has been in a huge range with support at around 120 and resistance at around 150 since last March. One of the most important indicators to follow in order to understand the long-term trend of the XAU is its 200-day bollinger bands, which tend to act as support and resistance during long periods of consolidation. In 2006, this moving average acted as resistance in May and support in October.
If you look at the history of the gold bull market since 2000 you will notice that the XAU doesn't have long six month plus bull runs until it rallies above the 200-day bollinger band. Once it makes a major top it can take up to a year for it to gain enough traction to do this.
In September, we saw the XAU correct and bottom at its low 200-day bollinger band. I bought around this October low and watched my position rally up into December. It then began to correct, but it appeared to bottom in the middle of December. Going into this year I was hopeful that we would see the XAU break above its 150 resistance level and rally up to its 200-day bollinger band by the middle of February. This would have set it up for a big bull run to start in the summer, which would coincide with the Fed starting to lower interest rates.
Recent news has suggested that the Fed is going to hold well into the summer. There is some hawkish rhetoric coming out of the Fed, but I think it very doubtful that they are going to raise interest rates this year. It's more likely that they will talk hawkishly, which would put a damper on the broad market, to disguise the fact they just want to sit on their hands for as long as possible. They know that over the past twenty years every time they engage in a tightening cycle they create a financial problem in the economy and then have to lower rates to save it. They don't want to do this again. However, they also don't want to lower interest rates without signs of real weakness in the economy and the stock market and they shouldn't.
I believe it is these facts that hit the market last week. I don't think it means the gold bull market won't resume this year, but that it is just going to be put off for a quarter or so. The market is falling to factor that in. But where it bottoms will likely be the low for the rest of the year. This correction is succeeding in shaking everyone out. I sold myself, but I'll look to get back in, but I am sure that most who sell during these times will not. Jim Cramer is now telling people not to buy gold stocks.
I still think the XAU is going to go through 150 this year and test its 200-day bollinger band. But instead of this move starting now we're going to go through this correction first. Once it's over that should be the move that follows.
I think the current situation is similar to what we saw in the first quarter of 2003. In 2002, the XAU made two major bottoms. It then corrected in 2003 to make a final third bottom after which it took off like a rocket and never looked back. When we look back at all of this months from now we may see the same three bottoms and up pattern happen all over again.
Although this move here caused pain in the long run it will be better for gold stocks if they stay in their big range for an extra quarter or so. As Andy Emerson said in Friday's WallStreetWindow podcast "the more consolidation, the longer the basing, the bigger the breakout."
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