Gold bugs were raving at the end of January that new all time highs (>$850) were coming very soon. Seminars on gold options made bull market debuts. Despite being a long term gold bull (15 or more years to go), it's clear to me that wild exuberance leads to pullbacks.
The $50 pullback in gold in December barely registered on the XAU gold stock index. But the second correction of $40 in February coming so soon after the first did get gold stock players' attentions. In fact the percent decline in XAU in February was 14.8% compared to the last meaningful pullback of 12.4% last October. It is a market maxim that the first pullback in a bull market which exceeds the last largest correction is grounds for alarm that a change in trend is due.
Further old gold market wisdom comes from looking at the ratio of gold's price to that of the XAU. Since the gold bull market began in 1999, tops in XAU have been made when the gold/XAU ratio had weekly closes under 3.75: 3.63, 3.66, 3.73, 3.64, 3.81. On February 1 the ratio had an intra day low of 3.66, but by Friday the ratio had rallied to close at 3.81. However, on this ratio basis one could make a case for not only a larger correction--which we've had--but also for a longer one. Other reasons were outlined in my brief December article for Gold Eagle.
XAU itself has recovered very little of its 14.8% drawdown, and the daily MACD of XAU--not shown--remains negative. Even so the ratio of unhedged Newmont Mining (NEM) over hedged Barrick Gold (ABX) shows that gold stock buyers have not given up on their bullish views. On a daily basis the MACD of the two stocks prices has given a buy, while the weekly MACD remained bullishly unphased since last August.
It's possible that the 23% pounding give to XAU stock FCX by several Indonesian government prounouncements, while XAU as a whole was down but 14.88%, might account for this disparity between the preference for NEM and the gold/XAU ratio spike. I still feel that the fundamental and technical ideas discussed in the Gold Eagle article still apply. However, this is a long term gold bull market, and I have sold nothing, since surprises in bull markets tend to be to the upside. Both the NEM/ABX and gold/XAU ratios convince me that gold market sentiment is still quite exuberant which makes the market vulnerable. It would take new highs in gold and XAU to convince me that a longer and/or deeper correction isn't coming this year.
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