In our June 22 commentary, we talked about a very high bearishness level among the "gold bugs". This, we pointed out, indicated that a lot of bad news has already been factored into the gold price, that downside is limited and that it is reasonable to start buying selectively. Gold came within a reaching distance to our first support level in the $630s and rebounded.
To turn decidedly bullish, we need to see gold break out above the short term downtrend line and then above the $675 level indicated by an arrow on the chart below. We see that in the next couple of weeks gold may attempt to do just that.
Gold stocks performed strongly last week. Many big cap producers broke out of their descending trend lines on large volume. Those who were following our advice and started accumulating in June should have very nice gains. The Triple Seven Day (07/07/07) may have brought us good luck, but this is no time to get complacent. From both contrarian and technical points of view further immediate upside is unlikely.
Most analysts point out that when gold stocks are stronger than the metal, this is bullish news since stocks typically lead the way. This may sometimes be true, but probably not during the summer doldrums. We believe what is happening now is a short covering rally. An upswing in the broad market is adding some fuel to the fire as well.
For the short term, precious metals stocks are overbought. Sentiment is turning more and more bullish. We would caution investors against getting overly excited about the recent run-up in precious metals stocks.
One of our favorite short term indicators is the 60 minute XAU chart. It proves to be very reliable in warning about the tops and the bottoms.
The Relative Strength Indicator (RSI) is currently extremely high. A reading above 70 or below 30 almost always produces short term reversals in prices. We don't expect the XAU to power higher without a consolidation in prices that would hold 139. A break below that level will lead to additional downside - possibly to retest the end-of-June bottom.
If the retest happens, instead of panicking we will be happy to continue our strategy of accumulating our favorite gold and silver stocks for cheap.
This is a fragment from the Resource Stock Guide Newsletter originally posted on June 7, 2007.
