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Gold stocks on the move

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Gold stocks as depicted by the Gold and Silver Index (XAU.X) are on the move again today as this sector leads sector winners. The move here is a two part puzzle that we've laid out in past commentary. Either market participants still feel there's a concern for inflation going forward, or the market is making some bets based on a scenario for debt/currency/banking troubles.

Gold/Silver Index Chart - Daily Interval

In early January, we alerted traders and investors to a potential move in gold stocks. The breaking above our wedge as MACD began turning higher just above the zero level gave some bullish tecnicals. We were also noting a very tight range and wedge in the Gold Futures market an high activity there. The rising price of gold in the past week has me still wondering what this move means. It will be the action in the bond market that will most likely hold the final answer.

I will make quick note that the February Gold Futures (gc02g) are not confirming what we're seeing in the XAU.X right now. February gold futures traded a high of $289.60 on January 10th. Today's high on this futures contract has been $289.90, but current trading is at $286.30.

Gold is considered a hedge against inflation or a safe haven against some type of currency, debt, or geo-political disruption. All three of these could be in play as gold moves higher. Another scenario for a higher move in gold is on "fears" of inflation. It has been my statement that any sign of "fear" of inflation right now might be welcome by broader market equity bulls and this hints at some type of economic stimulus that would drive demand.

We are watching bonds closely. In the past several sessions, we've seen buying in bonds. That action has us thinking that the market is "worried" about something and not inflation. It would well be the buying we've seen in Treasuries lately is simply a move by the market to dodge the earnings season as money rotates out of stocks ahead of earnings. Should we begin to see YIELDS move higher, along with the action we're seeing in the gold market, then we might well expect stocks to rally.

The recent economic data has NOT shown any type of inflationary concerns. But we all know, the MARKET is forward looking. Recent earnings reports have been pretty much inline with estimates with not too many downside surprises. It's still very early in the earning's season. Comments from companies in conference calls are still rather cautious and that is what is spooking investors. However, we do know that a company doesn't get sued for making cautious comments; they get sued by shareholders for making bullish comments that don't come to fruition.

Jeff Bailey
Senior Market Technician
Option Investor

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