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Gold stocks catching some fire

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Back in mid-December, the Gold/Silver Index (XAU.X) broke above downward trend and that caught our eye. Then on January 3rd, the XAU.X broke back above the still trending lower downward trend, but we felt that move may have more legs behind it as our MACD indicator was "hooking around" and gave better technicals for a more bullish move. Today, the XAU.X is breaking into our upper zone of retracement which has been a zone of distribution dating back to last summer.

Gold/Silver Index Chart -

It's funny, but many "tech traders" won't touch a gold stock. Hard to figure out why. Some link the two as being "speculative" and based on some unknown type of growth or catalyst driven event. Gold stocks actually have several drivers to performance. One is "fear of inflation" where the underlying commodity itself might benefit from a rise in price as demand builds for the precious metal as a hedge against currency weakening or loss of purchasing power. Another is "fear" of currency weakening due to geo-political concerns.

I've talked before in our intraday commentary's how a rise in the XAU.X might actually be a "bullish" sign for the broader market. If the current move higher is a sign of "inflation" fears, then my thinking has been... "inflation means some type of economic growth must be coming."

As for the commodity, February Gold futures (gc02g) are up 0.49% at $283.50. To give you a comparison, when the XAU.X hit the $65 level last summer, the February Gold futures (gc02g) contract traded around the $290 level for a couple of days. Right now, gold stocks look to be moving ahead of the commodity itself and bullish traders need to be careful in the stocks they're holding. For those that played a stock or two from our alerts, don't feel bad if you take some partial profits off the table here.

Adding observations

Last week and then again yesterday we commented on copper. Copper is not necessarily a "hedge" against inflation. It's more of an industrial metal. That's why I'm leaning toward the move in gold stocks as more of a "fear of inflation," but bullish toward the economic growth thought process. I will continue to monitor things for both of these commodities. Oh... late last night, I also noted in the market monitor some nice moves in the aluminum stocks like Alcan (NYSE:AL) and Alcoa (NYSE:AA). Those are also considered "industrial" metals stocks.

Jeff Bailey
Senior Market Technician
Option Investor

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