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It's Time to Get Cautious on Gold

By Jeff Clark
Friday, November 3, 2006

The dead-cat bounce for gold shares has just about run its course...
 
In my October 5 column, I suggested gold shares were oversold and due for a bounce. Since then, the widely followed AMEX Gold Bugs Index (HUI) is up about 13%... and investors are getting excited again about a new leg up for the great gold bull market.
 
So that should just about do it for this rally.
 
There’s one major problem with this bounce... gold shares are still underperforming the metal itself. Think about it: In just the past two days, gold is up $21 (3.5%) per ounce, while the HUI barely managed to gain 4 points (1.2%). During true gold bull rallies, the stocks lead the metal higher, and that’s not what we have here.
 
What we have here is a bounce. A bounce that’s about to come back down.
 
Take a look at this chart of the HUI...
 
 
The action over the past month has traced out a “bearish rising-wedge” formation. This technical pattern nearly always breaks lower and retraces at least 100% of the preceding bullish move. So, we’re looking at a potential decline back down to 280 or lower on the HUI.
 
Of course, there’s a remote possibility that the index could break out of this wedge to the upside. That’s a very bullish move, and could propel the index as high as 350 or so.
 
But since gold stocks are currently underperforming the metal, the odds greatly favor a move to the downside.
 
The other thing that bothers me about this gold stock rally is that investors are still way too willing to jump into gold shares.
 
You can get a feel for the sentiment surrounding gold stocks by visiting the Internet message boards of the major gold mining stocks like Newmont, Goldcorp, or Barrick. If you visit these boards today, you’ll notice almost all of the posts are universally bullish toward gold shares.
 
It’s odd to have that high a degree of optimism towards a sector that’s 20% below its highs for the year... and still down 10% over the past two months.
 
And if all that isn’t enough to turn you cautious on gold shares, then consider this...
 
My mom wants to buy gold.
 
So forget about buying the gold stocks here. In fact, if you have the intestinal fortitude to do so, the smart trade is to sell the sector short.
 
Just don’t tell Mom I told you to do it.
 
Best regards and good trading,
 
Jeff Clark




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Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%