A LOT of weak hands panicked and sold out near the bottom which is exactly what the Golden Bull needed before embarking on its next upmove.
We try hard to formulate risk management techniques that prevent us from selling into these fire sale panics. One approach we have adopted is to remain focused on the long-term by shutting out today’s gold price machinations. That’s why we keep a copy of this chart close at hand:
Chart 1 - Gold Stock Price does well when Yield curve widens
It’s a bit of a complicated chart so let’s break it down:
The main chart shows the ratio of 5 year bond yields versus 30 year bond yields. This in effect is the yield curve which shows how long-dated bonds perform versus short-dated bonds. A rising chart means that the yield curve is widening which is a monetary response to slowing economic growth. Short term rates decline relative to long term rates in order to entice people to borrow short and invest long, stimulating economic activity.
The Green line represents the New York Composite Index, a market value-weighted index that is made up of all of the NYSE stocks.
The lower chart represents our friend the Amex Gold Bugs Index (pink line).
Current Interpretation:
The main driver behind an extended move in Gold and Gold Stocks is a marked increase in the money supply. This is usually predicated by a widening yield curve. To that end, the current situation looks remarkably similar to 2000 – 2002 (blue rectangle).
The yield curve has recently blasted above resistance and broken out to the upside (as it did in 2000/02). As explained in Prime interest rates and the market value of Gold, the yield curve is destined to widen even further.
It’s not by coincidence that the New York Composite index (green line) has turned down (as it did in 2000/02) in response to growth fears.
Now for the exciting part:-
It was these exact conditions back in 2000 that kicked off the exhilarating 2 year run in Gold Stocks. Most major Gold stocks rose over 500% and some juniors even more. Much more!
Whilst it is still likely that we will probe the lows put in place over the last few weeks (280ish), we are getting ever closer to that time when the market will begin discounting the above bullish fundamentals. Gold Stocks, unencumbered by weak hands, will then take off higher.
Nobody said it was going to be easy!
More commentary and stock picks follow for subscribers…
AUGUST 24, 2007
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