I have not changed my bullish view on the PM sector, but I believe that given yesterday's volatile upswing in gold and mining stocks, you will find this Market Alert useful.
What we have just seen is a significant breakout from the triangle pattern that I referred to in several previous updates. Not only did the gold price close much above the upper border of the triangle, but the move took place on a very strong volume. This is exactly the type of confirmation that I like to see during a breakout. Still, one should keep in mind the conservative rule about waiting for the confirmation of a breakout. Yesterday's breakout will be confirmed once we close above $975 in gold and $40.5 in GDX for two more days.
What's next?
Generally, very strong moves are followed by some kind of consolidation, however this time it seems that we would go at least a little higher before correcting.
Although the price may seem too high on an immediate-term basis, I don't think that getting out of PMs right now is a good idea. The fact that the volume has been massive, is not by itself sufficient to make any specific calls. However, putting this fact into proper perspective (here: what type of price action preceded particular move) provides us with much more information - we are able to see if we apply proper analogy in our analysis.
http://www.sunshineprofits.com/files/images/market_alert_2009sep3_gld.pn...
http://www.sunshineprofits.com/files/images/market_alert_2009sep3_gdx.pn...
After rising on very high volume, mining stocks moved at least a little higher before correcting, pretty much regardless of the price action that preceded the move. On the other hand, the gold chart shows that there is indeed a difference in the most probable outcome, depending on what happened before the high-volume upswing. The difference is especially visible between the February move (gold moved about $60 higher), and the mid-March move (gold moved about $80 lower). The former took place as gold broke out of a trading rage, whereas the latter was a bounce after a decline (yes, decline can be viewed as a form of consolidation, but let's not get into details here). Therefore, the price/volume action that we have just seen does not imply an immediate sell-off.
Gold has just broken out of a multi-month consolidation, and is ready to move higher. One way to look at it is that most speculators are already out of this market, as there got discouraged by small volatility in the recent months - consequently they are ready to get back in and fuel a substantial rally once we break above previous highs.
Additionally, although gold is so close to breaking into four digits, I've lately noticed a substantial amount of bearish commentaries on the PM sector. Naturally, I respect my colleagues' work, but when too many analysts, and thus investors are on one side of the market, then it is usually the other side that one should take. Moreover, a friend of mine, who is not interested in PMs nor stock market, notified me that she has read an essay in a non-investment-related newspaper on gold, where the author advocated being cautious with PMs. This serves as another subtle indication that the public is not participating in the market right now, and... That it will enter the market once the prices are higher. As always, the situation may change even in the near future (Members of the Premium Service would receive another alert from me should that be the case), but now many factors point to a strong rally. Yesterday's price action is a signal that this rally is just beginning.
If we get a pullback from here on a very small volume that does not take gold and gold stocks below the upper border of the triangle patterns, it will serve as a strong buy signal. I realize that most investors, who follow my analysis have already established a long position in PMs, but if the aforementioned scenario does materialize I plan to make additional, aggressive purchases.
This does not mean that I recommend waiting for a small pullback with entering the PM market with most of one's capital, as the risk to the upside is just too big - yes, there's always a next train, but you definitely don't want to miss this one.
Sincerely,
Przemyslaw Radomski
