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A NEW UPTREND IN GOLD

7/26/2013

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COMMODITIES CORNER

There's still opportunity left in precious metals; specifically gold. You just have to know when and what to buy and of course how to buy it.

Jeff Clark

On Monday, the gold sector did something it hasn't done since last November: It traded above its 50-day moving average (DMA) line.   Most technical analysts view the 50-DMA as the line in the sand separating intermediate-term uptrends from intermediate-term downtrends. Stocks trading above the 50-DMA are in bull mode, while stocks trading below the line are in bear mode. So Monday's action is a BIG deal. And the rally should have folks looking to buy.


Last month, I explained how the failure of the sector to rally above its 50-DMA – when it was set up almost perfectly to do so – created a firestorm of selling pressure. I also told you that I believed the disappointing action in the gold sector could be setting up for an even more violent rally in the coming months. Here's what I wrote; This is the type of oversold condition you only see once or twice in a generation. Other than the liquidation event of 2008, we haven't seen anything similar to today's conditions since 1976.  

Gold stocks, as measured by the Barron's Gold Miners Index (the "BGMI") – the most popular gold index in the 1970s – declined 67% from their 1974 highs to their 1976 lows. The index bottomed 44% below its 200-DMA.   Using 1976 as a guide, there's still room for gold stocks to move slightly lower here. But by that same guide, gold stocks rallied more than 600% in the years following the 1976 bottom. So the sector could explode violently higher once the bottom is in.

Of course, it won't be a one-way move higher. The sector will have plenty of selloffs and back-and-forth action as it starts its new uptrend. Traders should look at any declines as buying opportunities – especially any declines that come back down and retest the 50-DMA – like the one we got Wednesday...
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You can see how the Market Vectors Gold Miners Fund (GDX) broke above its 50-DMA (the blue line) on Monday. It extended that rally on Tuesday. Then Wednesday, it came back down and is now testing the 50-DMA as support.  

That support should hold. I don't expect GDX to decline much more than a couple percentage points below its 50-DMA. If that turns out to be the case, Monday's action will prove to be the start of a new intermediate-term uptrend for the mining sector. And GDX should work higher toward its 200-DMA (the red line) over the next several months.
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