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Time To Mind The Miners
July 4, 2010
On June 21st, spot gold hit a price high of
$1266.50, which was in line with one of the price targets we discussed
last month (the other being a move to the low 1300s). Since
achieving that milestone, prices have dropped back 5% at this
writing. Much of that move occurred following a downside breakout
from a triangle, a bearish resolution which warns of the potential for a
sharper decline in price. If so, what effects could this have on the
stock prices of gold explorers and producers?
Our charts above raise the question of
whether the rally in gold mining shares has finally run out of
steam. As with the commodity, the rally in the HUI Gold Miner's
Index has been upwardly corrective, but unlike the commodity, has failed
to produce a new high. As the monthly HUI chart suggests, we count
the rally as a Primary Wave B (encircled) advance, which fell short of a
full retracement of the previous bull market peak by only 3 points.
Since hitting 516 on December 2nd, attempts to recapture that level have
failed, as indicated in the daily chart just above. If our Elliott
Wave labels above are correct, then it would suggest a Primary Wave C
correction in the group would be getting underway, and the most
significant correction in gold shares since the October 2008 low would lie
ahead.
Another issue that we see for gold shares
is valuation. Currently, the PE multiple for the gold group is
around 26x, with a number of the name companies already in excess of that.
There thus remains significant potential for distribution, adding another
layer of risk for anyone who's thinking of getting long in
here.
Click
here to view current Gold & Silver market sentiment.
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