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The Dow closed above its July highs on Wednesday, signalling the potential for further gains. Gold Stocks will likely follow higher.
Although the Major averages have been range bound for the past 2 months their action belies a much different picture. Beneath the surface, one key sector after another has broken down - Retail, Housing, Recreation, Consumer Services are all looking Poor.
What would cause Gold Stocks to awaken from their Slumber? At this time, the catalyst for a Surge in Gold Stocks would need to be higher gold prices + higher stocks prices. Gold stocks have been moving in lock step fashion with Major Averages. So what would bring about higher stock prices? Especially if we consider that continued strength in the Bond market implies a softer economy ahead (and by extension a continued deterioration in key sectors). The answer can be summarized thus – A FLIGHT TO SAFETY. Is
this what is happening?
Chart 1- S&P500 vs Russell Small Cap (and Mid Cap below)
It
seems likely that a Flight to Safety from Small, Mid and Emerging Market
Stocks to Large Cap stocks began in April 2006.
Chart 2 - 1-3 year Gov Bonds vs Corporate Bonds
Since
Aug ’05 Investors favored the safety of 1-3 Year US Government Bonds
as opposed to more risky Corporate Bond issues.
Chart 3 - Gold vs. Industrial Metals There seems to be evidence that Gold is beginning to Out Perform Industrial metals. Gold performs better than Base Metals during Weak economic conditions. This trend has not yet exerted itself fully but is certainly evident in the chart above. [Remember,
these are Weekly charts where trend changes are more significant than
for Daily charts.] Why does this mean for us? A Flight to Safety ultimately means Higher Gold Prices and (initially) Higher Large Cap Stocks which is exactly what will accelerate Gold Stocks higher.
Chart 4 - HUI setting up for a Bullish breakout
The
correlation with a strengthening Stock Market looks likely to affect
Gold stocks positively and the odds favor a break above July’s high of
350. In contrast to the prevailing mood of Boredom, Gloom and Disinterest, the HUI could quite easily move to new Bull Market highs in September / October as a Flight to Safety accelerates. This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis. CONTACT
INFORMATION The opinions of FSU contributors do not necessarily reflect those of Financial Sense. |
