Last time I posted this guys thoughts on the TSE I got hammered.
Don't know why, he is an excellent technician & has been right on the money.
Anyway, here is his latest...
Pulling out the winners from basket of gold stocks
May 25, 2007 04:30 AM
Bill Carrigan
A few weeks ago, the price of gold was trading at about $680 (U.S.) and threatening to pop above the February 2007 peak of about $690. At the same time, the S&P/TSX global gold index was trading at 299 and threatening to break below the prior March low of 292.
Clearly, one of these two related investments was wrong because usually the price of gold and related gold stocks move together when a trend is established. Only when a trend change is probable does some type of divergence in price occurs.
In this recent example, the price of gold (bullion) was advancing and the price of a related gold index was falling. The technical analyst will call this condition negative price divergence.
Price divergence is important because it usually occurs at important junctures or turning points. The larger the divergence in terms of days or weeks, the more significant is the turning point.
In order to get any type of divergence we need the plots of two related indices, stocks or commodities. In the case of precious metals, we are looking for price divergence between a gold stock index and the related commodity – gold bullion.
Divergence is a situation that occurs when two lines on a chart move in opposite directions vertically.
There are two kinds of price divergence, positive and negative. Positive price divergence between two related securities or indices would normally occur following a long decline in both related securities, when one unexpectedly turns higher while the other is still declining.
The opposite condition, negative divergence, would normally occur following a long advance in the price of two related securities when one will unexpectedly turn lower while the other is still advancing.
Our chart this week is that of the daily closes of the StreetTracks Gold Shares Trust, which is listed on the New York and American stock exchanges, plotted above the daily closes of the iShares Canadian Gold Sector Index Fund, which trades on the Toronto Stock Exchange.
According to State Street Global Markets LLC, the StreetTracks Gold Shares offer investors a new, innovative, relatively cost-efficient and secure way to access the gold market. Gold Shares are intended to offer investors a means of participating in the gold bullion market without taking physical delivery of gold, and to buy and sell that participation through the trading of a security on a regulated stock exchange.
According to Barclays Global Investors Canada Ltd., the iShares Canadian gold fund seeks to provide long-term capital growth by replicating, where possible, the performance of the S&P/TSX global gold index through investments in the constituent issuers of such index.
According to Standard & Poor's, the S&P/TSX global gold index is designed to provide an index of global gold securities. Eligible securities include producers of gold and related products, including companies that mine or process gold, and the South African finance houses that primarily invest in, but do not operate gold mines.
There is no doubt these two investment products are related, and as such are valid for this particular study.
At this time, price divergence is obvious. The current price on the upper plot of Gold Trust (bullion) is higher than the February/March 2007 low. The current price on the lower plot of the gold stock index is below the February/March 2007 low.
This condition is positive divergence, because the event occurred at the end of a downward price movement in both plots. We have a bullish condition in the precious metal complex.
Don't get me wrong, I am not a gold bug. We have heard it all before: gold is a potential safe haven from the uncertainty of economic events, political unrest and high inflation; gold offers investors an attractive opportunity to diversify portfolios – potentially reducing overall portfolio risk and ultimately preserving portfolio wealth.
In reality, the average Dow Jones industrials component offers the same, if not better protection, and you get capital appreciation.
I like gold and gold stocks right now, only because I think they will, as a group, advance in price and therefore provide opportunity for some short-term capital appreciation. When they stop going up as a group, I'll move on to other attractive sectors.
The problem is not all gold stocks are created equal, and in fact, many components of the S&P/TSX Global Gold Index have been terrible investments.
The best way to get around this problem is to scan a basket of gold stocks against the related gold index by using a spread, or ratio chart. Select a small basket of the stronger names and enjoy the next advance.
My scan produced the following TSX-listed symbols: AQI, ARX, HRG, KRY, MAE, QMI, RNG, SLW, SVM and YRI.
Enjoy, and remember you're in for a good time – not a long time. |
