Gold Shares Show the Way

As previously forecast, gold's dominant intermediate-term cycle has bottomed and the outlook for the yellow metal is firming up for the first time in months. After yet another cycle bottom in April, gold should be ready to take-off. Fundamentally, this timeframe coincides with the release of first-quarter earnings, which will undoubtedly be a time of chagrin among stock investors, who will begin looking toward safe havens for preserving their dwindling assets. Gold will naturally fit the bill.

At times like these it helps to look to as many angles as possible in order to get an accurate gauge for trend forecasting. We can think of no better looking glass for gaining insight into gold's future than the mining stocks. Since money-moving insiders always stake their inside knowledge in equities before commodities, gold stocks often serve as better trend forecasting devices than physical gold itself. Accordingly, we will provide a brief survey of the leading mining stocks and how closely they correspond to the main trend.

The gold mining stocks, by and large, move as a group. When the tide is up for gold in general, gold shares stand to gain across the board. The widely-embraced notion that those mining shares that are "hedged" stand to suffer is mistaken. A comparative glance at numerous gold stock patterns will bear this out. AngloGold (AU), Barrick (ABX), Placer Dome (PDG), et al, all evince a chart pattern nearly identical to that of the XAU mining index as well as several non-hedged gold stocks. This proves exactly what we have maintained all along, viz., there is no danger of a sell-off in "hedged" mining shares as long as the broad outlook for mining stocks remains bullish. The technical action of these stocks shows a tremendous institutional support for the hedged shares—more so, in fact, than most of the non-hedged issues. All boats in the sea will rise when the tide is up, regardless of structure.

A basic premise of securities analysis is that stocks, like water, will always seek their own level. This applies to mining shares as well as any other equity. Low-priced shares are given low valuations by Wall Street for a reason. Similarly, mid-priced and high-priced shares (notwithstanding the extremism of occasional speculative bubbles) are judged by professionals as being worthy of their price. In other words, a stock can generally be judged by the level aside from the technical action of its price. Most of the so-called "hedged" gold mining shares have a higher base price than do most of the non-hedged shares currently in favor among gold stock speculators. In fact, many of these favored gold stocks are little more than high-risk penny stocks with little prospect for success. Others are in the midst of prolonged sideways consolidations and may not be ready to move higher for some time. The safest course of action when trading in mining issues is to seek out those shares which have a price which conforms to the mean. And the mean price of the gold shares at this time is reflected in such as issues as AU, ABX, and NEM.

The outlook for mining stocks is mixed. Some shares look good short-term, reflecting the new-born intermediate gold cycle currently underway. Others are encountering resistance after recent run-ups in share price.

The case of ASA Ltd. (ASA) is a case in point. ASA's long-term chart, at first glance, is quite bullish. A five-year declining trendline was recently taken out and the stock subsequently bounced higher in bullish fashion. However, trading volume did not increase at the trendline penetration, which indicates that the excess supply was not properly absorbed. This meant that the breakout was not legitimate and that ASA would give back much of its gains. Sure enough, a few days later an conspicuous spike in trading volume appeared at the top of its rally (at around $20), and prices promptly stalled. After a day or so ASA's price turned down and had fallen nearly 5 percent on twice normal volume in a single trading session (March 13). Looking at ASA's tape shows that the sell-off is probably not yet complete as there still exists some downside potential over the next few days. The $20-$20.15 area will prove tough resistance indeed for buyers to overcome as every attempt at taking out this level has met with a dramatic increase in selling. Once overcome, ASA will represent an excellent buy—but not until then.

A better indication of the overall trend in the gold market is Newmont Mining (NEM). This blue-chip gold, much like PDG and AU, sports a chart which closely corresponds to the XAU. Unlike ASA, its recent penetration of its downward-sloping line of supply (i.e., trendline) was done on high volume, which adds credibility to the upside breakout. NEM will also encounter resistance around the $20 level, and it may take until the April cycle bottom before this level is taken out. Regardless, its chart inspires more confidence at this point than that of ASA and it definitely represents an excellent long-term investment at current levels.

Homestake Mining (HM) is running on a classic quarterly cycle (i.e., three months). This is the ideal cycle duration for the dominant short-term cycle and it makes cycle analysis and trend forecasting much easier. HM's 3-month cycle isn't due to bottom again until May, so HM still has potential for a resumption of its recent uptrend. A move above $6 would solidify this stock as one of the biggest short-term values on the list.