Aside from a strong surge in China and Japan yesterday, precious metals took centre stage as gold and gold equities continue to recover. What is interesting about this latest rally is that, for the first time in a long time, gold stocks are outperforming the metal by a significant margin. I am becoming confident that a double bottom is now in and that, after correcting from peak levels above $1800 two years ago, the selloff phase of precious metals may now be over. Near term, we could encounter some resistance in gold at $1275 and a short correction, which would also see gold stocks correct lower from current overbought levels, but the primary trend is now bullish for the sector in my view.
Gold (chart below) now appears to have established a double bottom broken upwards from a two year corrective downtrend
During the bull market in the 1970s, gold had a stellar run from about $30 in 1970 to $200 in 1975, following President Nixon’s decision to take the US dollar off the gold standard and close the conversion window to foreign central banks. After going up by more than six times, gold then corrected 50 percent and many called the bull market all but over. As it turned out, after correcting to $100 an ounce the price rose by more than 8 times over the next five years and it was during this phase that the public began to speculate en masse (see chart below).
What we have witnessed in the past two years is similar in that the gold price has corrected by around 30 percent from peak levels above $1800. The gold sector itself has become very depressed and gold producers have had the cheapest valuations in decades. This of course now establishes a significant foundation and sets the market up for a large rally and perhaps a retest of the $1800 highs later this year or next (see chart below).
