Friday, October 29, 2010

Gold will correct - miners show outperformance.

I was cleaning out my 90 different charts I have annotated because I became unorganized in my research which ultimately creates sloppiness in my work. As I was deleting unwanted charts, I stumbled on a chart of the GLD and noticed some advice I posted on my blog more than a year ago. It was about a $1,300 dollar price target on Gold and around a 130 price target for the GLD. Although I believe we still have more upside to finally reach the 12th round of this Gold vs. The World grapple match, I will take my own advice and call this current move complete and will assume a consolidation for 6-9 months .

I first analyzed the chart below in the blog post Assessing The Gold Breakout - in the article I pointed out some guidelines of technical analysis for determining price targets on some of the different type of potential pattern breakouts that were occurring in Gold and the GLD.

This chart is from that blog on the gold breakout in August of 2009.

This is the same chart with time elapsed to present.

Basically, the price target I was predicting is here - 1300 - and the current Gold trade is finished for now. If we see more upside momentum, it will be short lived IMO. Although Gold is overdone on the long side, the new price levels in which Gold will consolidate are now higher than that of the last two years. This means volatility in the price itself which translates into smaller margins for the Large Cap miners. For the junior miners, small-cap and exploration companies, this means their growth potential and margin potential will continue to shift in the right direction - especially miners with rising production numbers.

The below chart is the Junior Miner Index - Market Vectors Junior Gold Mine - which is outperforming Gold and the Large Cap Miners in the GDX. This means finding the right mining stocks, specifically ones with growth and rising production will pay off medium-long term.

The Gold bull remains but a short-term correction will occur and I will assume it will be faster, more violent than any correction to date in the current Gold Bull. It will also provide great trading opportunities, specifically on the volatility side. It's also a good time to start implementing any option/equity strategies to hedge your risk according to your market bias.

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