Gold Price Analysis from the Mining Stocks' Perspective

Based on the May 10th, 2011 Premium Update. Visit our archives for more gold & silver analysis.

In our previous essay (Freefall in Silver, What’s Next?) we described the current situation in silver and today we would like to provide you with a mining-stock-related follow-up.

Gold and silver markets appear to be consolidating after a slid in the immediate past. If there is anybody happy in the world about the declines in precious metals it must be Warren Buffett who keeps on buffeting gold at every opportunity. Here is what he said at the recent Berkshire Hathaway’ annual general meeting. You can fondle it, you can polish it, you can stare at it. But it isn’t going to do anything. Gold really doesn’t have utility. I’d bet on a good producing business to outperform something that doesn’t do anything.

A very well-known phrase of Buffet’s about gold which we have quoted previously, is that gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.

Of course Buffet said this when gold was trading for a fraction of its current cost. He must be scratching his head and asking himself why he didn’t buy it when it was less than $300. We guess that we will start worrying the day Buffet says he’s buying gold. That could be the ultimate signal that it’s time to sell as it seems that absolutely everyone is already in the market if even the most die-hard gold bears are buying.

Whatever be the logic behind taking positions in precious metals markets, one thing is true, ‘a lot of things are happening in precious metals market’. Off-beat, let’s see how gold and silver mining stocks perform amid the fluctuations in precious metals market. Let’s turn to the technical portion with analysis of the XAU (Gold and Silver Mining Stocks) Index chart (charts courtesy by http://stockcharts.com).

Actually, the above chart analysis is just a warm-up before the following chart, as in this case, the only thing that can be seen is that gold and silver mining stocks have once again moved to their 2008 highs. This factor alone should make you consider betting on higher precious metals prices in the short-term. More details are visible on the HUI Index chart.

On the above chart we see additional important trade signals than the fact that 2008 highs have been touched. The index has moved to the long-term rising support line (marked dashed line) and the RSI indicator (at the top of the chart) has declined to a point which has marked previous local bottoms. Consequently, an upturn from here appears quite probable regardless of the following medium-term move.

Please take a look at the SP Gold Stock Extreme Indicator for more details.

The chart provides extreme readings, however recently it has been providing accurate buy signals. This signal greatly increases the odds that the local bottom is in and that a short-term rally is likely. We described its performance in the March 18^th 2011 Premium Update (just after it flashed the previous buy signal)

In the Gold Stock Extreme Indicator, we see a quick move above the dotted line. This has coincided with local bottoms for gold stocks every time this line was crossed since 2008. As we can see, not each and every bottom was indicated, but when we have actually seen SP Gold Stock Extreme Indicator flashing a buy signal, each time a short-term rally followed. This happened on most occasions prior to 2008 but every time since. 100% accuracy simply cannot be ignored.

Overall, the gold and silver mining stocks’ charts suggest a short-term bounce from the current levels similar to what is likely for gold and silver. The way this bounce plays out could provide many of the missing details which might impact the precious metal sector on the whole and determine if we are still in the final part of the rally or has a major decline already begun.

Summing Up, while the next medium-term move still appears rather uncertain (with a slight bearish bias), it seems that from the short-term perspective gold, silver and gold and silver mining stocks are likely to be impacted in a positive manner from the support levels currently being reached.

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