This Bounce in the Gold Markets Merits a Cautious Approach

March 7th, 2007

March 7, 2007

Yesterday, just like clockwork, we received the bounce in global markets that always follows strong corrections. European, Asian, U.S. and Canadian markets all experienced a nice bounce in their respective stock markets. If we look at the Gold Bugs HUI index below, it is not uncommon for a reversal to occur after a breakdown below the crucial 200-day Simple Moving Average whereby the index will bounce back to “kiss” the 200-day SMA. However, if we look at yesterday’s action, not only did the index “kiss” the 200-day SMA but it broke through it. If we look at this chart, you’ll see we have three very recent precedences to look at, in mid-November and the end of December of last year, and most recently at the end of January this year. In mid-November, after the HUI broke the 200-day SMA, it marked the beginning of a good rally. In December, 2006, when this happened, it was followed by a “false” rally that eventually broke down much further to the downside again, and currently, we stand at the third occurrence of this event within just the past six months.

So what will happen this time?

It’s hard to say, but keeping an eye on what happens in the global markets is a good idea for some direction on what to do. Furthermore, in regard to gold stocks, this is the first downturn in the past five to six months that has likewise been accompanied by a flight from emerging and developed stock markets, and significant involvement from hedge funds, so this situation is markedly different from the previous two times gold stocks experienced a significant correction. The short-term coupling of movements between traditional stocks and gold stocks is likely to be stronger this time around due to their closer relationship this time around. I discussed in our special Member Only alert that was distributed yesterday the relationship between traditional stocks and gold stocks and how to play this correction and the inevitable bounce (which happened yesterday). As well, as a special tip to our SmartKnowledgeU™ members, this correction has not only provided a great buying opportunity in gold stocks, but also in many of the asset classes ignored by the average investor that we discuss in our learning modules (be sure not to ignore the buying opportunities in these additional asset classes as well!).

However, it is important to realize that bounces such as those that happened yesterday are commonplace after sharp market declines and by no means does it signify a global turnaround in traditional stocks or gold stocks. Instead, to make an educated assessment regarding the direction of the markets, it is important to keep a close eye on developments over the next week, though I believe the probability of further declines in traditional stock markets are considerable and that investors should take the market recoveries as an opportunity to pare down positions on holdings that still have considerable gains.

Technorati Tags: gold, HUI, how to invest in gold

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J.S. Kim is the founder and Managing Director of SmartKnowledgeU™, a comprehensive online investment course that uses novel, proprietary advanced wealth planning techniques and the long tail of investing to identify low-risk, high-reward investment opportunities that seek to yield 25% or greater annual returns.

Entry Filed under: Gold Investments