Gold Sector Working Through Weakness

The gold sector has been a source of both delight and frustration among traders in recent weeks. On the one hand, many gold equities - blue chips and junior mines alike - have positively soared in value and some have doubled, trebled or quadrupled in share price since the mining sector took off last fall. On the other hand, the yellow metal itself has been stuck in a rather loose trading range between $288-$308 since February and came under a bout of short-term selling pressure last week, closing the week just below the psychologically important $300 level. The question on many gold investors' minds is, "What gives with gold?"

What is happening right now is that gold has come under the influence of two dominant short-term cycles which happen to be crossing currents. The underlying parabolic cycle responsible for gold's strength since December is still in the ascending phase but it being met by an equally strong parabolic dome cycle which is just entering its "hard down" phase. This is what produced the sharp three-day decline in gold futures last week and it also accounts for gold's overall trading range environment over the past several weeks, that is, the two cycles meeting. The good news for gold investors is that the underlying series of cycles (which has manifested on the chart as a bowl-shaped pattern from last fall until present) is larger than the current short-term parabolic dome cycle pushing against gold's price line. Once this latest pocket of overhead weakness is worked off, gold should continue its ascent and further add to its recent gains.

Even after formally bottoming, some markets are slow to develop sustained upward trends. Such is the case in the present gold market. It can clearly be seen where gold has established its bottom, first in the fall of 1999 and then a successful test a year later. The amount of supply in the gold market has taken a long while to absorb, as might be expected. Right now the gold market is working on taking out its third major line of supply (trend line) and has just nipped at this line before being turned back earlier this week. This same pattern can be seen in the charts of leading gold equities such as Barrick Gold (ABX), which has posted a short-term double top at just under $20. This is where the third and final trend line of its "fan line" retracement descends so it should not be surprising if Barrick and other gold stocks more or less float along under their recent highs before the final line of supply is broken. In Barrick, once $20 is overcome it opens the way for a test of the 1999 peak at $26, a milestone which should be reached quite easily. Our interim forecast for the price of COMEX gold futures is $345 or thereabouts by summer. From there things get quite interesting.

In the immediate-term, the XAU closed Friday (April 5) at $68.41. We wrote in Wednesday's newsletter, "The XAU's latest slide should bottom around $68 and possibly by Friday." There is, however, downside potential to as low as $67.50 during Monday's session. If the XAU stays above $67 this week it will be a strong indication the index has established its short-term bottom.

We warned two weeks ago that gold was nearing a short-term peak and would likely correct after testing recent highs near $304. We mentioned that several magazines and newsletters would feature gold in their April issues, and that this would probably trigger a short-term sell-off ("buy the rumor, sell the news"). Well this is precisely what happened as the first two days of April witnessed a spate of bullish news articles on the yellow metal. This coincided with last week's price peak and was probably enough to suck in some "dumb money" public investment dollars. After zooming to the $306 area last week, prices promptly reversed and Wednesday-Friday was a three-day loss for the gold sector. This is not surprising given the extraordinary upside momentum and exuberance of the gold market in recent weeks. Fast-moving markets tend to turn on a dime and can experience scary corrections; however, since the gold market has an underlying strong technical and cyclical outlook the current corrective phase shouldn't last too long, nor inflict too much damage.

As an example of what's going on in the gold sector, let's examine Duran Roodeport Deep (DROOY), which is a microcosm for this sector right now. We wrote in Monday's newsletter that Durban had enough upside momentum to made it to at least $4.00 before losing upside momentum and that it would peak somewhere between $4.00-$4.20. After reaching approximately $4.05 Tuesday (April 2) on an intra-day basis (from Monday's close at $3.70), Durban turned around and fell quickly to retrace all of the day's gains and close near Monday's closing level. Wednesday saw another big decline for Durban, which fell over 10% to close just under $3.40. On the tick chart, the cycle channels show a dual pattern developing. Durban's underlying parabolic cycle is nearing its mid-point and will start to turn up this week, while the falling cycle channels above the price line are cascading down into a selling climax to end the latest price decline. In order to remain technically strong Durban must bottom at or above the $3.00 chart support level. This level not only represents an important psychological area and recent chart support, it is also where Durban's 4-day parallel channel is met and it also represents an important cycle channel convergence point. Also, the $2.95-$3.00 area approximates to a Fibonacci .618 retracement of the recent upswing. Finally, this area is also where a four-month projected rising trend channel intersects. So the weight of evidence points to a strong price floor around $2.95-$3.00, followed by an equally strong continuation of its recent upward swing.

The overall intermediate trend for Durban Deep, like the market for gold itself, remains up so this latest decline should represent nothing more than a temporary set back regardless of its depth and duration.

Our junior mine feature of the week is Kinross Gold Corp. (KGC: Amex). The most prominent feature of KGC's long-term chart is a sort of modified head and shoulders reversal pattern. We call it modified because it lacks a well-developed left shoulder but does have a nice rounding head and right shoulder as well as an apparent "neckline" breakout. Based on the measuring implications of this type of pattern (from bottom to top) it projects to around the $2 area, assuming the next highest neckline at $1.50 is penetrated. This pattern can be divided into two parts. From the bottom around $0.50 to the first neckline at $1.00 forecast a move to around $1.50, which has happened. In doing so, this creates yet another neckline resistance at $1.50. There was a natural reaction near $1.50 but our guess is that KGC will make an attempt to $2 since this level is a "magnetic" level, a round number, and we doubt the market makers would have pushed KGC this far just to stop short of a test of the important $2 resistance area. We also like the high volume spikes at important accumulation areas. From a short-term trading perspective we'd hold KGC above $1.25, and from an intermediate-term swing standpoint, we'd buy KGC as long as it held above $1.