Gold Stocks Investors Strap Yourselves in This Rally is Going to be HUGE...

Commodities / Gold & Silver Stocks Oct 07, 2010 - 04:21 AM

By: Clive_Maund

We are on the point of a major breakout by Precious Metals stocks that is expected to lead to a powerful rally. The reason that the rally will be powerful is that stocks have been held in restraint since late last year by a zone of very strong resistance in the vicinity of the 2008 highs. This resistance is on the point of being overcome and when it is the last argument that bears are using to justify their position will crumble - namely that of the non-confirmation of gold's continuing new highs by stocks - and they will be forced to cover or face annihilation. This covering should give added fuel to the accelerating rally.

The concern that gold and silver are heavily overbought is of course understandable. However, some of the biggest rallies in markets have commenced with the market breaking out in an overbought state and then running an overbought condition for a long time as it continued higher, with all those who missed the boat waiting for a sizeable reaction that never happens. We are well aware that gold and silver are now extremely overbought on a short-term basis and thus prone to a sharp but relatively shallow �air pocket� reaction which should be bought aggressively, as any such reaction, although unnerving, is likely to be short-lived.



As we look at this 4-year chart for the HUI index, we can appreciate that the big gains lie right ahead of us for the market has barely broken out yet, and the blue arrow shows the kind of advance we can look forward to if it, and the XAU index, break out to clear new highs shortly. So despite the gains of recent weeks, the lion's share of the expected major advance lies immediately ahead of us.

Many investors have been vexed by the underperformance of PM stock relative to the metals. As we have seen on the HUI index chart, conditions are ripe for stocks to surge now. With regard to the possibility that stocks will soon outperform the metals, the chart for the HUI index over gold certainly makes for interesting viewing at this time. On a chart for this ratio going back 18 months we can see that it has been converging within a Symmetrical Triangle for over a year now and as it is approaching the apex of this Triangle it MUST break out soon. For various reasons it is expected to break out upside, not least of which is the fact that stocks have a marked tendency to follow gold. If it does and gold continues to ascend as expected, it is obvious that it is perfectly reasonable to expect a dynamic and substantial uptrend in PM stocks.



What about the possibility of the stockmarket crashing or going into severe decline and dragging the PM sector down with it? That used to be a concern of ours, but with the QE (Quantitative Easing) pumps running full blast, it doesn't look like we need to worry about that anymore. On the contrary the prospect of endless rounds of competitive devaluation and generous helpings of QE should keep things humming along nicely, with the bill being pushed onto the little guy later in the form of robust inflation.

We would like to end this article by giving thanks on behalf of the gold community to the gold-friendly geniuses at the US Federal Reserve, US Treasury and the government itself, whose imaginative and spirited bailouts, money creation and monetization have made possible an accelerating bullmarket in gold and silver and Precious Metals stocks. We salute you.

By Clive Maund
CliveMaund.com

http://www.marketoracle.co.uk/Article23303.html