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Gold Sector Outlook Strategy Update

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

Since before the correction in gold prices began on June 5th, I began pointing out technical resistance in the high $320s, the over-performance of gold equities over the metal's price, the overvaluations, as well as the importance of selling in May. Two issues ago, I targeted support levels for gold prices at $310 and $300 and now we're here. When gold last rallied back to $323 and the stocks failed to join along, the handwriting was on the wall.

I commend readers who distanced themselves from the bullishness and froth that was prevailing by late May and locked in some of those profits. Personally, I took precious few of them but am glad I took some. However, if you're like me, you were concerned about the prospect that gold prices could also just keep moving higher and not being aboard for the ride.

As painful as this correction has been, gold still remains in its long-term uptrend channel that was established since late 2000. Only if it breaks decidedly below $290 will the trend be reversed. And through the seasonally weakest month of the year (August), I wouldn't even rule this out if even for a short spell, just to terrify and shake out as many last remaining bulls as possible.

If you've waited this long to take profits though, I might suggest it's a bit late now considering the carnage to date and the fact that seasonally strong September/October lies right around the corner.

As Leonard Kaplan noted recently, when the market gets so volatile that the Dow can swing as much as 10% in just one day, fear overwhelms reason. Fundamental and technical factors no longer apply for a time. It makes little sense to sell into this kind of irrational weakness - if anything you want to buy it, not sell.

Take a look at the above 10-year chart of gold stocks relative to the price of gold itself. Just last issue, the lighter line representing gold stocks had burst sharply above the gold price. As of the sharp downturn in late July, it's right back down well below the gold price, suggesting now that gold stocks are back into the buy zone.

In fact, the line representing the XAU appears to be completing a possible second shoulder in a multi-year Inverse Head and Shoulders formation that's begging to be bought in weakness by patient investors looking for above average longer-term returns. I would draw the 'neckline' of this Inverse H&S right around the '+0%' line. Once we see the XAU line break decidedly above not only the gold price line, but this neckline as well, we will have strong confirmation the bull market is underway in earnest.

The choice here is simple. Highly patient investors might be wise to 'bottom fish' at the extreme low end but they must be willing to wait for the bull market to really get going. Or one could wait for a buy signal. But by then, investors must be willing to pay much higher prices. I prefer the lower priced but patient approach as I feel there is safety in the lowest price range possible.

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.

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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.