More on Gold, and a peak at Denison

by JDH on April 25, 2009

Good news! I am NOT going to talk about going green, or about Earth Day. I’m not going to give you a bunch on inane suggestions like take cold showers to save energy, or live in an unheated shack in the woods with no electricity to save the planet. I have no objection to saving the planet, and I personally don’t waste energy, and if you want to live in a shack in the woods, good for you. (Although if you have no electricity I don’t know how you will read my ramblings each week).

In other good news, the world did not end this week! Those of you who have followed the writings of Martin Armstrong will know that this was the week he predicted an intermediate top in the markets. Of course he may be correct; this week may indeed, in hindsight, mark an intermediate top, and the markets may fall to new lows from here. But, the markets didn’t crash this week, so let’s take comfort in that.

(As I posted on the Forum this week, for those who don’t know, Martin Armstrong eventually pleaded guilty and is currently serving time in jail for fraud (so we know he’s credible  Huh. Here is a summary of Martin Armstrong’s predictions, and here’s the link to his long essay. You can judge for yourself whether or not he’s credible). The Dow and the S&P were relatively flat this week, with the Dow and the S&P down less than 1%, so on the broad averages it was an uneventful week.

Last week in my comments on gold I said:

Where is gold heading? My gut tells me we are nearing a near term bottom.

If you draw an uptrend line from the lows of November 2008, it hits where we are today. Coincidence? Perhaps. But the 200 Day Moving Average is $860.37, and gold closed on Friday at $869.10, so it’s possible that both the uptrend line and the 200 DMA are support levels.

Looking at the three month chart the $860 level also looks like support, and the RSI is as low as it’s been in months, so again, a bottom could be here.

If gold breaks below $850 this week, I will assume that we are going for a big fall. If not, we could be at a decent support level, so now may be a good buy point (although I will wait and see before committing any further cash).

Gold closed the week at $913, so all that stuff I said last week: yup, that was pretty much it. We did not break the $850 level, so the likely direction is up from here.

Not surprisingly, gold stocks did very well this week. Here is the performance this week in some of my gold stock holdings:

K.TO – Kinross Gold Corp. up 16.62%

ABX.TO – Barrick Gold Corp. up 12.29%

G.TO – Goldcorp Inc. up 10.02%

AEM.TO – Agnico-Eagle Mines Ltd. up 9.88%

Kinross was the best performer on the week, which isn’t surprising given my pessimistic comments from last week:

For example, K.TO – Kinross Gold Corp. closed the week at $16.73, a big drop from the $24 level we hit back in January, February and March. The RSI at 31.39 is also very low. Is this a breakdown with a big fall ahead, or is this a “breakdown” that was artificial, like we saw back in November, that was in hindsight a fantastic buying opportunity?

I won’t bore you with the charts, but the charts of AEM.TO – Agnico-Eagle Mines Ltd. and G.TO – Goldcorp Inc. and other gold stocks look remarkably similar. Gold itself has not broken through it’s base, but the gold stocks have, which either means they have over-corrected and are due for a bounce, or bad things are coming. In fact, even the silver stocks look the same (SLW.TO – Silver Wheaton Corp. and PAA.TO – Pan American Silver Corp., for example).

Again, it appears to me we are at a significant decision point. If these levels in gold and silver hold, we may be at a near term bottom. If they don’t, we could easily see $800 per ounce gold; we will have a good idea this week, and a very good idea before the end of the month.

So, do we have a better idea now?

I don’t know. Obviously all the gold stocks had a bounce this week, and obviously Kinross did not fall anywhere near to it’s November lows, so a bottom may be in. Historically an RSI passing over the 50 level is a good buy point. But, the stock has come a long way in a week, and the downtrend that started in February remains in place, so I’m undecided on this one. I therefore think the best option is to “hold”, although I may put in some sell orders at $22 to lock in some of the profits.

Silver stocks were also strong on the week:

PAA.TO – Pan American Silver Corp. up 10.87%

SLW.TO – Silver Wheaton Corp. up 9.21%

SSO.TO – Silver Standard Resources, Inc. up 7.55%

But what was the best performer on the week in my portfolio? DML.TO – Denison Mines Corp. up 28.37% on the week, including over a 9% gain on Friday. Denison was under a $1 earlier this month; I bought it for $1.11, and it looks like it’s headed for $2 before it gets even close to the down trend line.

A double in a month is a huge run, which I can’t believe is sustainable, so my sell order for half my holdings will be in at $2. If it keeps running, I leave some money on the table but that’s fine, I like cash in my pocket.

Beyond that, I still continue to maintain a bearish perspective. I still believe the economy is not even close to being out of the woods yet. The commercial real estate crisis and the credit card crisis is just beginning, and the problems in the auto sector are obviously not yet solved. Cash is king, and I want lots of it on hand if we see another big drop, which is what I expect. My portfolio is up slightly on the year, and I’d like to keep it that way.

The weather will great this weekend, so outside I go, thanks for reading, and please continue to post your thoughts on the Buy High Sell Higher Forum; see you next week.