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Gold Stocks Imminent Pullback Buying Opportunity?

Commodities / Gold & Silver Stocks Dec 17, 2008 - 11:48 AM GMT

By: Michael_Swanson

Commodities Best Financial Markets Analysis ArticleWith yesterday's historic Fed move and the wild action we have seen in gold the past few months a lot of people have been asking about gold stocks. Since 2002 I have been in and out of the gold market, catching some of the great moves we have seen in the past few years and becoming known as a big believer in the long-term secular bull trend in gold. I also have had a reputation for being objective when it comes to gold, because at times I have taken profits in gold and have sat on the sidelines. Let me tell you what I see now.


In August and September I tried to buy gold stocks only to get stopped out a few days later when they broke through key support levels. I last tried to buy gold stocks when the HUI was around 300. After getting stopped out it then fell all of the way down to about 150, for a 50% drop. It has since rallied about 80% from that low and people want to know if it has bottomed or if they should buy now.

First of all I have no idea whether they put in an ultimate bottom. I think they have, but I won't be able to say that with certainty until I see how things play out a bit more. You see back in the summer I thought Fannie Mae and Freddie Mac were going to go broke and cause a collapse of the stock market. I also thought that the Fed would lower rates and print money like mad as a result and that would propel a new bull move in gold. I went short the market and long gold stocks. I made money on the short side and got stopped out for a small loss in my gold position. Obviously I was right about much of this, but wrong when it came to what gold was going to do.

When I got stopped out In September I took my loss and admitted to myself that I was probably wrong about what I thought gold was going to do. If I was correct then the gold stocks would not have done this. The fact it did proved to me that something was going on with gold that I did not expect. Making money in the market isn't about being right all of the time, it is about maximizing your gains when you are right and taking a small loss when you are wrong.

I still believe we have a new gold bull market ahead of us at some point, but I do not know when it will start. Gold stocks have been hit so hard on this correction that they will have to spend some time recovering from their big drop - even in the face of their big move off the low. People are excited about the 80% gain in the past two months, but to reach their highs they need to rally an additional 80% plus from here. It is very unlikely that is going to happen without gold stocks first pulling back.

The way I see it gold stocks are below a key resistance zone of 295-325 of the HUI. This area marks the 1/3 retracement level of the March high and October low and the HUI's 150-day moving average. I see a pullback starting at a point below this zone or inside of it within the next few weeks.

What I want to see is how the next pullback in gold stocks plays out before drawing any solid conclusions about the meaning of this rally. So far the charts have been bullish for gold stocks. Gold stocks have outperformed both the metal and the S&P 500 during the past few weeks. I would like to see the relative strength in the stocks continue over the next month. I would expect the HUI to take back at least half of its recent gains. From here that would mean a correction down to the 215 area.

The key though is if the strong relative strength of the stocks versus the metal continues on the next pullback or correction that would be a positive sign that a long-term bullish move in gold and gold stocks is developing. Next year could then prove to be a great one for gold stocks investors. I may be a buyer on the next pullback.

By Michael Swanson
WallStreetWindow.com

Mike Swanson is the founder and chief editor of WallStreetWindow. He began investing and trading in 1997 and achieved a return in excess of 800% from 1997 to 2001. In 2002 he won second place in the 2002 Robbins Trading Contest and ran a hedge fund from 2003 to 2006 that generated a return of over 78% for its investors during that time frame. In 2005 out of 3,621 hedge funds tracked by HedgeFund.Net only 35 other funds had a better return that year. Mike holds a Masters Degree in history from the University of Virginia and has a knowledge of the history and political economy of the United States and the world financial markets. Besides writing about financial matters he is also working on a history of the state of Virginia. To subscribe to his free stock market newsletter click here .

Copyright © 2008 Michael Swanson - All Rights Reserved.

Disclaimer - WallStreetWindow.com is owned by Timingwallstreet, Inc of which Michael Swanson is President and sole shareholder. Both Swanson and employees and associates of Timingwallstreet, Inc. may have a position in securities which are mentioned on any of the websites or commentaries published by TimingWallStreet or any of its services and may sell or close such positions at any moment and without warning. Under no circumstances should the information received from TimingWallStreet represent a recommendation to buy, sell, or hold any security. TimingWallStreet contains the opinions of Swanson and and other financial writers and commentators. Neither Swanson, nor TimingWallstreet, Inc. provide individual investment advice and will not advise you personally concerning the nature, potential, value, or of any particular stock or investment strategy. To the extent that any of the information contained on any TimingWallStreet publications may be deemed investment advice, such information is impersonal and not tailored to the investment needs of any specific person. Past results of TimingWallStreet, Michael Swanson or other financial authors are not necessarily indicative of future performance.

TimingWallStreet does not represent the accuracy nor does it warranty the accuracy, completeness or timeliness of the statements published on its web sites, its email alerts, podcats, or other media. The information provided should therefore be used as a basis for continued, independent research into a security referenced on TimingWallStreet so that the reader forms his or her own opinion regarding any investment in a security published on any TimingWallStreet of media outlets or services. The reader therefore agrees that he or she alone bears complete responsibility for their own investment research and decisions. We are not and do not represent ourselves to be a registered investment adviser or advisory firm or company. You should consult a qualified financial advisor or stock broker before making any investment decision and to help you evaluate any information you may receive from TimingWallstreet.

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