With reference to the following daily chart, over the past two weeks the HUI has
moved from resistance at 460 to support at 420 back to resistance at 460. The
chart already has a bullish tinge, but a solid break above 460 would enhance the
picture (from the perspective of those who are long).
As noted in recent
commentaries, the "1973 Model" suggests that the gold sector will be
relentlessly strong over the next few months, whereas the seasonal pattern
points to choppy action during July-August followed by a big rally during the
final four months of the year. If the HUI were to follow its seasonal pattern
then a short-term peak over the coming week or so would be followed by a 2-4
week pullback.
We have been using Royal Gold (RGLD) as a gold sector indicator for
years, although until two weeks ago we had never recommended buying it (in the
30th June Weekly Update we suggested buying the stock and/or the January-2009
$30 call options). RGLD has been mired in a consolidation for the past 2.5
years, but the recent price action indicates that an upside breakout may finally
be about to occur. Friday's rally might have pushed the stock slightly above its
downward-sloping trend-line and might therefore have constituted a breakout of
sorts, but the key resistance level is defined by the October-2007 and
January-2008 peaks at $35.23 and $35.26, respectively. A solid close above this
resistance would break the sequence of declining tops that dates back to January
of 2006, which would be a bullish omen for RGLD and for the overall sector.
Although it doesn't feel like it right now, buying gold (or silver)
in the ground, especially when the ground is in a politically secure region,
should ultimately prove to be a very good investment strategy. Buying gold in
the ground is a very effective way for a person to position him/herself for the
eventual huge REAL rise in the gold price because it is like buying a gold call
option with no expiry date. As things currently stand there are many legitimate
concerns about exploration-stage gold mining companies, but almost all of these
concerns will evaporate if there's a sufficiently large rise in the real gold
price (the gold price relative to the prices of other commodities). For example,
there will always be people willing to finance the construction of a new gold
mine if the mine's projected return is high enough.
Additionally, we can
envisage the situation arising whereby purchasing in-ground gold becomes the
most politically acceptable way for well-heeled investors to prevent themselves
from getting trapped in the inflation quagmire. A multi-billionaire may not be
able to defend his/her wealth via the purchase of gold bullion without incurring
the wrath of government, but it's currently possible to buy millions of ounces
of in-ground gold cheaply and inconspicuously.
