ARCHIVE

The Gold Sector Retreats. How Far Will It Go?

By Louis Paquette, Contributing Writer and Editor of the Emerging Growth Stocks Newsletter
June, 2002

I promised you gut-wrenching corrections and significant resistance around $325 - $330 in the May issue of Emerging Growth Stocks. Well, we got them.

Has the bull run its course? Long term? I hardly doubt it. Why? Because the fundamentals are too strong. Neither have the technical indicators come close to signalling the bull market is over in Precious Metals. That doesn't mean there won't be violent swings in market sentiment in the meanwhile, though. Neither is the public in up to their ears yet. The average person doesn't hold gold stocks (yet). The price has been overdone. It has gone too far too fast, having broken out to the upside of its nice orderly price channel in May. A let-up in the steady stream of bad news out of Wall Street or in the geopolitical situation was all it took to convince the traders to sell.

I've done some charting and will provide you with some up-to-date targets for the correction currently underway.

The previous normal cyclical corrections to date this year have been in the $15 to $20 range, lasting from two months to weeks, and then recently, only days. At the mid June NY Spot closing price of around $318, the price was still above a fairly sharply sloping trend line that can be drawn from when prices really started to move in the last week in January. The price won't break this trend line until it breaks decidedly below $313 or so. Just below that, the previous high in early May will form another first line of support. The best case scenario then is another $6 or so to the downside to these trend lines and support levels.

These charts do also have a way of trying to fool as many participants as possible by temporarily breaking below support, only to reverse later and resume the bullish trend. So, always take them with a grain of salt and in the context of everything else. If nothing else, this tells you what the key benchmarks traders are looking at.

If the price were to break decidedly below $310, then the short-term bullish trend will have broken. This becomes more of an 'intermediate correction', but the longer-term bullish trend remains in place. The next level of strong support is another more gently sloping trend line going back to April of last year. This line currently lies around the $300-even mark. I would be surprised to see this tested, let alone broken, as it calls into question the year-long bullish trend. Mind you, it did this in the last quarter of 2001, a real head fake that was the last great opportunity to get these gold stocks really cheap.

Another way to guess the extent of the decline is to consider the move up that has led to it. The total move has been from just under $260 to around $330 - about a $70 move. A not-out-of-the-question 50% correction would be $35, giving us a target of roughly $295 (ouch! - that would hurt gold stocks in the meantime). Another not-so-long-ago move has been from around $280 in late January to gold's high of $330, translating into a $50 move. Half of that gives us a target of $305.

Which, if any of these targets are the right one? These are some benchmarks, but who knows day-to-day? That all depends on the day-to-day news, unpredictable geopolitical events, the performance of the U.S. dollar, and possibly, second quarter corporate earnings that should begin coming out by mid-July. This correction could be over before we know it, or it could be a more prolonged affair. But I can tell you that I am sticking with my $350 target for the coming year.

Louis Paquette is an independent research analyst based in Vancouver, British Columbia. Louis is a regular contributor to Investor's Digest of Canada, Bull & Bear, The Money Saver, and is on the Cambridge House Investment Conference circuit. EGS is available through direct subscription, or at Baystreet.ca and Infomine.com, and his specialties are finding value and growth situations sector analysis and market timing. In the past year, EGS has turned bullish and bearish at profitable intervals in the Technology, Energy, and Gold Mining sectors.

To Subscribe to EGS: Mail a Personal Cheque payable to: Louis Paquette for US$99 or C$149 to: 102 - 2020 Comox Street, Vancouver, B.C. V6G 1R9 Canada. Includes 8 - 10 Issues by Hardcopy or Email, and EGSNEWS Updates & Alerts (Email only). Call 604 687-5772 or Email louisp@shaw.ca for further information.

DISCLAIMER
Louis Paquette`s Emerging Growth Stocks is an independent publication committed to providing an objective analysis of the markets, focusing on the CDNX, and individual companies with substantial upside potential over the next six to twelve months. The information contained herein is believed to be accurate but this cannot be guaranteed. The analysis does not purport to be a complete study of securities mentioned herein, and readers are advised to discuss any related purchase or sale decisions with a registered securities broker. Companies featured in EGS are often at very early stages of development and can therefore be subject to business failure, and are to be considered speculative and high risk in nature. Reports herein are for information purposes and are not solicitations to buy or sell any of the securities mentioned. The author may or may not hold a position (long or short) in the securities mentioned herein. This publication may not be reproduced without the expressed prior consent of the author. The author is not a registered securities advisor, and opinions expressed should not be considered as investment advice to buy or sell securities, but rather the author's opinion only.