Based on the October 7th, 2011 Premium Update. Visit our archives for more gold & silver articles.

There are times when we need to have the courage of our convictions, even when we are losing money in the process. (That’s where the courage part comes in. Like Ernest Hemingway said: “Courage is grace under pressure.”) We are still bullish on the precious metals sector in both short- and long term. Although the whole sector moved lower again early this week, important support levels remained firm. Many of our readers are probably concerned, as it is easy to get emotional at times of uncertainty. This is why we need to underline that although mining stocks took a hit, we have not changed our mind about our long position. If the situation was very oversold before, now it is extremely oversold. We are of a view that the precious metals sector is forming a bottom. Such pullbacks are healthy as they indicate gold has much, much farther to go.

Corrections in a bull market are inevitable as death and taxes. Markets never go up in a straight line. By the time gold put in its most recent high on August 22 after its parabolic rise during August, it had logged a stunning 44% appreciation in calendar year 2011. And even after its recent fall, gold is still 22% higher than it was on its 2011 low, which took place on January 27. Does that mean that gold has further to fall, and that the tumble could be steep?

To see whether gold and mining stocks are a good investment in the short-term as well as in the long run, let’s move to the technical section of this essay. We will start with the long-term XAU Gold and Silver Index chart (charts courtesy by http://stockcharts.com.)

In the very long-term chart XAU moved sharply lower early in the week to a level below the long-term rising trend channel. The 38.2% Fibonacci retracement level based on the 2008-2010 rally has been reached and this coincides with the 50-week moving average as well.

With these two support lines in play, it seems that gold, silver and gold and silver mining stocks will likely rally. The XAU Index is now slightly above its rising support line and the recent breakout could be confirmed or invalidated in the days ahead. The bullish confirmation of the recent breakout appears more likely.

In the long-term HUI Index chart, gold stocks are seen to have reached the lower target level we mentioned several weeks ago close to the 500 level. A quick reversal has seen the index move sharply higher and the upside target level appears to be around 580. The previous bottom was also confirmed by RSI levels. The outlook appears bullish from here.

The short-term GDX ETF chart shows similar price action this week. A few resistance lines are being approached at this time and the closest is around $57. It appears that this initial resistance will probably be broken and a likely upside target level of $60.70 seems reasonable.

Before summarizing, let’s take a look how miners performed relative to the yellow metal.

In the GDX:GLD ratio chart (if you're reading this essay on our website, you can click this chart to enlarge it) this week, we can see how the miners performed against gold. This week, the ratio touched and moved to the previous lows and quickly bounced back. In fact, we mentioned the 0.31-0.32 as the possible target for this ratio on Sep 16, 2011. It was not likely to be reached recently, however a decline to this particular level followed by a rebound is still not something overly surprising.

The mining stocks have been on an extremely scary and volatile ride of late but their recent price action has not been a complete surprise. Although we would not say this was a most likely option, it was one which we knew was possible. Now that the support level has been reached, the odds of a subsequent rally are likely increased once the ratio breaks out above the declining trend channel and the move is verified. The situation therefore appears to be quite bullish at this time.

In our previous essay on the possible gold rally we wrote the following:

The SP Gold Stock Extreme Indicator flashed a buy signal. (…) Such signalswere usually (…) very close to a local bottom each time (!) since 2008 and in most cases before this date. (…) not each and every bottom was indicated, but when we have actually seen SP Gold Stock Extreme Indicator flashing a buy signal, each time a short-term rally followed. What we have seen right now is a very strong buy signal.

(…) based on multiple factors, including charts and indicators, it appears that we are close to or have already seen a major bottom in gold.

Summing up, the situation in mining stocks has become very bullish and it appears that higher prices will likely be seen very soon.

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Thank you for reading. Have a great weekend and profitable week!

P. Radomski

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In today's premium version of the above essay we cover the following:

• Euro's intra-week action,
• USD cyclical tendencies and long-term trends,
• USD vs. gold
• Self-similar pattern on the general stock market,
• Financial sector
• Precious metals correlations
• Big gold chart
• Gold from the non-USD and yen perspective
• Short-term analysis of gold, silver and mining stocks
• Silver's cyclical tendencies
• Platinum
• Gold Miners Bullish Percent Index
• Future of euro

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