Gold Stock Prices turned back (again) - where to now?

Gold Stock prices have been turned back again from major resistance. The 3rd time in a year! What does it mean? Are we entering another gut wrenching correction or will we reverse higher?

Can I be forgiven for asking if Gold shares will ever break out?

Chart 1- Gold Stock prices bouncing off major support for the 3rd time in a year

So what’s really happening here?

2 theories:

1 – Gold has been a relative underperformer versus the stock market for the last 6 months. Now that momentum is waning in the stock market, Gold Stocks are slowing down alongside.

2 – Gold shares are schizophrenic and don’t believe that Gold is going a lot higher and prefer to act like regular penny stock listings.

I vote for the later.

The establishment banks have been trying for months to sweep the sub prime problem under the carpet. It just won’t go away. Fears of credit problems continue to spread. A friend at a big American bank tells me there are no bids out there for CDOs or CLOs. The latter being the instrument of choice for Private Equity capital raisings!

Credit spreads are widening and no matter the spin, this credit problem will continue to grow and chip away at market confidence.

And that’s when Gold will shine. Gold stocks are by nature counter-cyclical and Gold bullion is the ultimate safe haven. When confidence turns to fear, the HUI will take out 370 and move much higher.

But for now the level of confidence is still high. Investors prefer to move to the safety of Bonds or Foreign Currencies. In time they will realize that these financial instruments will also suffer from credit problems. The whole globe is fuelled by debt and that debt is beginning to implode along with the level of confidence.

Sit tight because this is a great buying opportunity to load up on those Gold Shares.

Thursday, July 26, 2007