Steve Saville
18 October, 2002
One month ago we were very unenthusiastic with regard to the major gold stocks. Our view, at the time, was that most of the stocks had minimal upside potential and short-term downside risk of around 30%. As such, we suggested that any new buying be focused on the junior gold stocks where the downside risk was small compared to the upside potential. We also noted that we had, for our own account, been 'lightening up' on the large-cap gold stocks and increasing our exposure to some of the juniors.
Towards the end of last week we became more enthusiastic about the short-term prospects for the gold sector in general, noting at the time that the plunge in gold stock prices on 10th October was potentially a successful test of the 26th July low. After yesterday's action in both gold and gold stocks we are now even more enthusiastic.
Yesterday (Thursday 17th Oct) the HUI once again spiked below its 200-DMA, only to once again rebound and close above it. Furthermore, the December gold futures contract dropped to within a few cents of its 200-DMA before rebounding. Note that on 10th October the HUI bottomed at 102 while December gold bottomed at around 317. On 17th October the HUI bottomed at 106 while December gold bottomed at 310. That is, a $7 drop in the gold price was accompanied by a higher low for the HUI. This is the scenario (the gold price making a lower low while gold stocks make higher lows) that we clumsily tried to describe in yesterday's Interim Update. It is a positive divergence.
We had planned to add Golden Star Resources (AMEX: GSS) to the Stock Selections List on a drop to US$0.90. The stock is holding up quite well and probably won't fall that far, so we'll add it immediately at US$1.17. For those who don't already have positions in these stocks, Kinross Gold (AMEX: KGC) and Cumberland Resources (TSX: CBD) look attractive at yesterday's closing prices (US$1.66 and C$2.15 respectively).
The copper price was very strong on Thursday and has risen by 6% over the past 2 weeks, so the inconspicuous bull market in commodities continues to broaden out. A daily close above 0.7150 in December copper futures would be a very significant upside breakout (the contract closed at 0.6970 on Thursday).
Best wishes,
Steve Saville
321gold.com |
