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A "Santa Claus Rally" for the Gold/Silver Stocks

By: Clif Droke

-- Posted 6 December, 2005 | |

In my previous commentary I asked the rhetorical question as to why there are so many investors manifesting a bearish spirit on the gold stocks right now despite the XAU, HUI and GOX indices have recently made new highs for the year? I concluded that it could be that many mid-tier and junior mining shares are still coming off recent lows and havenít quite picked up enough upward momentum to capture the publicís imagination.

But I still hold that "once widely held stocks such as Royal Gold (RGLD) start moving higher toward, and eventually above, the September highs more investors will wake up to the bullish trend in the sector that has actually been underway for some time." RGLD finally joined the list of precious metals stocks making new 10-week highs this week, which means that forecast is that much closer to becoming a reality. I believe that as the month progresses the sentiment on the gold/silver stock sector will gradually improve and more investors will finally wake up to the bullish message these stocks are currently sending.

The "Santa Claus rally" referred to in the above title failed to materialize last year in the gold stock sector, but appears to be on its way to reality this year, a belated gift as we close out a volatile year. The dominant trend for the precious metals shares until recently was net sideways, with a steady downward bias for the first half of the year, followed by an upward bias from May onward. But such prolonged trading ranges have a way of creating bearish sentiment among the public, and thatís another reason why sentiment on the metals shares has been subdued, especially when compared to last year. But this is all the more reason to expect the upward bias in the gold/silver stock sector to persist until once again the public becomes super bullish and over-invested in gold stocks. We arenít even close to seeing that happen yet.

Among our leading indicator stocks, Freeport (FCX), Newmont (NEM), and Inmet (IMN:TSX) all made new 10-week highs on Tuesday. NEM breaking out above $48 pivotal resistance was particularly gratifying to see.

That W.D. Gann anniversary date test mentioned last month as being a factor for the XAU was passed with flying colors. The gold stock sector has now pushed higher compared to the year-ago turning point, when the XAU and the leading gold/silver shares turned down sharply and continued falling in the months to follow. The internal situation this time around is so much better for the sector than a year ago. For instance, there were 13 new 10-week new highs on Tuesday (Dec. 6) with no new lows Ė a record for this year. The new highs were comprised of the following symbols: AU, AEM, AUR:TSX, CEF, FCX, GLG, GBN, IMN:TSX, NEM, PDL:TSX, PDG, RGLD, and SRLM. Itís usually best to trade among the stocks that consistently make new 10-week highs, and this list has been growing. Another comment to be made is that itís good to see the platinum/palladium group actively participating in the new highs, as well as FCX, since I consider these to be leading indicators for the overall metals sector.

The individual silver shares weíve mentioned of late have been strong performers so far this month. Iím particularly impressed with the silver shares, as they finally seem to be playing "catch up" with the white metal itself, which has been screaming to the upside of late. Last week I mentioned Silver Standard Resources (SSRI), which still has the benefit of favorable upward momentum factor in its favor and which should see higher highs in the foreseeable future as reflected in the daily chart below.

Pan American Silver (PAAS), one of our top short-term turnarounds since last month, closed higher by 2.58% on Tuesday at $19.85. PAAS probed precisely the $20.00 psychological resistance level in intraday trading before settling slightly beneath it at the close. As discussed in previous reports, the upward bias and momentum still present in PAAS should allow PAAS remain buoyant during this latest correction and eventually break out above the $20.00 pivotal resistance. As the latest daily chart shows (below), the 30-day moving average has recently crossed above the 60-day MA, sending a confirmed bullish signal for PAAS in the near-term.

Apex Silver (SIL) successfully tested its 30-day moving average this week and appears to have sufficient upward momentum for another thrust to a higher high in the near-term. SIL should be able to re-test its previous high at $18.00 and most likely will overcome this benchmark in the foreseeable future. Internal readings for SIL are "oversold" and wave form analysis suggests another rally is very near. Is it time for the silver shares to once again take the lead over the gold shares in the near-term?

Now that mining shares are on the up-and-up again, itís not surprising to see mergers and takeovers being discussed among the bigger names in the industry. It seems that whenever an industry experiences a lasting bull market anymore, the windfall profits are used to consolidate the industry and make the biggest names even bigger by subsuming competitors. Even the smaller names are getting in on the act. The most recent name to crop up as a takeover candidate is RNC Gold, which is being sought for takeover by Yamana Gold. Iíve maintained that the gold/silver stock bull market wonít end until we see merger mania sweep not only the blue chip and mid-tier companies, but the junior mines as well. The RNC/Yamana deal is just the first small step toward this realization. But weíre still a long way from the end.

Clif Droke is the editor of the daily Durban Deep/XAU Report, a technical forecast and overview of several leading gold stocks, including DRDGold and the QQQ available at  He is also the author of numerous financial books, including "Stock Trading with Moving Averages."

-- Posted 6 December, 2005 | |

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