A chill over the gold market, and on the ski hills

by JDH on January 22, 2011

I am writing today from Ellicottville, New York, home of the Holiday Valley ski resort where I am spending the weekend skiing with my family. (More precisely I will be skiing with my two sons, while my wife does her best to avoid the freezing cold weather by spending time in the spa. She’s no fool).

We left our cozy home in Southern Ontario on Friday morning, and crossed into the USA at the Queenston-Lewiston Bridge. We of course were treated to the usual spectacle at the border, where the border guards pick every ten car and subject it to an intensive search, opening the trunk, asking lots of questions, delaying all of us for 10 extra minutes, and then finally waving him through. Fortunately when our turn came the guard decided a tired looking guy with a car full of ski equipment didn’t pose a threat to the country, so he just asked the standard “what’s your citizenship?” question (which should have been obvious given the four Canadian passports I handed him), “where are you going?”, “how long are you staying?”, and “do you own this car?” With those questions answered, we were through and on our way, into the snow squalls. We got in three hours on the slopes in the freezing cold in the afternoon, and then the boys enjoyed sitting in an outdoor hot tub while the snow fell, freezing our hair. That was pretty cool.

Speaking of pretty cool, what’s the deal on the price of gold? (Hint: it’s not that cool).

It would appear that if the price of gold drops much below the $1,325 level a series support level will be breached, and from there we could see a more series drop, perhaps down to the August lows in the $1,150 range. My thoughts?

So what?

In the medium and long term gold and silver are going much higher, so a drop is simply to be viewed as a buying opportunity. A $100 drop from the previous high in the $1,425 range is simply not that big a deal. The Big Boys want to cover their shorts, so they are driving the price down to shake out the weak longs. That’s fine, it brings the price back to nice buying levels, and it sets the stage for an even bigger rally in the future. It’s all good to me.

So, as I sit by the fire in our rented ski chalet, I will tell you two things.

First, thanks to punter over on the Forum for pointing out this article in the Globe and Mail, There’s gold in those earnings revisions. You can read the article for yourself, but here’s the short version: in the last two months it’s the gold stocks who have had their earnings revised upwards the most. That means that even though the price of gold has pulled back in the last two weeks, a small drop in the price of gold does not crater earnings expectations for many gold producers.

Second, as a result of this weakness, I did some significant buying on Thursday, before leaving on Friday morning for the ski hills. I bought mostly the small, junior producers, in the hopes that they will advance once this correction ends.

We shall see if that strategy was premature. If it was, I’m not concerned. I’m not buying on margin, so I can weather the storm, which is apparently what I’ll be doing for the balance of the weekend on the ski hills.

Thanks for reading, and if I survive the hills and the cold I’ll see you next week.

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