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Currency action is some type of concern

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In today's 01:00 update, I played devil's advocate. In part, just to keep us honest with ourselves and make sure we were staying more unbiased and not rushing off on a potentially wild goose chase.

Now we're going to quickly discuss some gold stocks and what is taking place here. Just after the terrorist attacks, we addressed some issues regarding gold stocks as a "defensive" mechanism. Even then, while markets were halted for trading here in the U.S. we pointed out that there was a good chance that "gold bugs" were going to be active in the gold stocks and that we needed to keep an eye on the U.S. dollar and the U.S. Treasuries.

"In the end" things worked out to a bull's liking as the MARKETS did sell the U.S. dollar briefly when trading resumed, along with the U.S. Treasury, but within about a week, the MARKETS got further information, the dollar stabilized, gold stocks as depicted by the Gold/Silver Index (XAU.X) fell roughly 16% from the 60.00 level and all was well. Right? Not necessarily.

I've heard and read that "gold is a short above $300/oz.." That kind of thinking has gotten you nowhere if you've been shorting gold stocks based on that type of thinking. Today, the June Gold futures contract (gc02m) $318.30 +0.6% broke to yet another contract high and trades well above the $300 mark.

There is some things going on in the gold stocks sector that is rather telling that the MARKET prefers certain stocks over others.

For instance, just after the terrorist attacks, we talked about gold producers that hedge their production by selling future month futures against pending or current production along with current inventories.

Perhaps the most well known and largest hedger of gold production is Barrick Gold (NYSE:ABX) $22.83 +0.43%. On April 26th, we alerted traders that this gold producer's stock was breaking a triple-top buy signal at the $20 level. Since that time, the stock has performed well, but not nearly as well as other stocks in the group that don't hedge their production.

For gold stock investors, knowing if the company is a "hedger" or not can have an impact on just how the stock performs in a rising commodity price market.

The "lagging" of Barrick Gold (ABX) relative to some other stocks, like a Goldcorp (NYSE:GG) $21.96 (unchanged) is somewhat telling.

You and I know that "hedging" is simply a way to try and reduce downside risk. While the downside risk can be hedged, the hedge in itself will partially limit the upside potential of an investment.

To drive home the point, here's a relative strength chart comparison of price performance between Barrick Gold (ABX) and Gold Corp (GG). I've left the trends on the chart to give the subscriber an understanding of how Barrick Gold has performed relative to GG over time.

Relative Strength Chart of ABX versus GG

Analysts will advise clients that if you're looking for a hedge against currency weakness or geopolitical concerns, then gold bullion is the best alternative.

However, it can be tough to walk into a 7-eleven, pull out your gold bar and shave off a few grams to pay for the candy bar.

Stock investors however that understand or know about a gold producer's strategy of hedging can then understand how the price rise in the underlying commodity or decline can impact a stock's future price action.

As you can see from the above relative strength chart, GG has vastly been a better longer-term performer relative to ABX.

But understand too, should gold prices suddenly decline, then would expect that ABX may become the better performing stock.

While the recent rise in gold prices has been favorable to both ABX and GG, it has benefited GG more.

But does that make GG the "better investment" right now after such a powerful move? Not if gold prices were to fall.

The markets are "all knowing" at least some (myself included) believe this to be true.

Quick notes on hedgers and non-hedgers

I'm running way late with this update, but some quick notes on who does and does not hedge their gold/silver production.

Hedgers include.... ABX, NEM, PDG

Non-hedgers include.... AU, GG

I'll try and get more info on the gold stocks to make sure of who does and does not hedge.

An interesting note. Goldcorp (NYSE:GG) is trying to take steps to actually issue stock dividends in gold bullion instead of cash. Wow! Talk about a true hedge. I wonder if GG bulls will ever be able to sell their "fortunes" for gold bullion when they go down to the brokerage office after they sell?

Think about that if you are a true "gold bug" and buying stock in a company to really try and hedge a currency devaluation of some sort.

Jeff Bailey
Senior Market Technician
Option Investor

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