Gold stocks and in-ground gold

With reference to the following daily chart, over the past two weeks the Gold Bugs Index (AMEX: HUI, Stock Forum) has moved from resistance at 460 to support at 420 back to resistance at 460. The chart already has a bullish tinge, but a solid break above 460 would enhance the picture (from the perspective of those who are long).

As noted in recent commentaries, the "1973 Model" suggests that the gold sector will be relentlessly strong over the next few months, whereas the seasonal pattern points to choppy action during July-August followed by a big rally during the final four months of the year. If the HUI were to follow its seasonal pattern, then a short-term peak over the coming week or so would be followed by a two-to four-week pullback.

We have been using Royal Gold (NASDAQ: RGLD, Stock Forum) as a gold sector indicator for years, although until two weeks ago we had never recommended buying it (in the June 30 Weekly Update we suggested buying the stock and/or the January 2009 $30 call options). RGLD has been mired in a consolidation for the past 2.5 years, but the recent price action indicates that an upside breakout may finally be about to occur. Friday's rally might have pushed the stock slightly above its downward-sloping trend-line and might therefore have constituted a breakout of sorts, but the key resistance level is defined by the October 2007 and January 2008 peaks at $35.23 and $35.26, respectively. A solid close above this resistance would break the sequence of declining tops that dates back to January 2006, which would be a bullish omen for RGLD and for the overall sector.

Although it doesn't feel like it right now, buying gold (or silver) in the ground, especially when the ground is in a politically secure region, should ultimately prove to be a very good investment strategy. Buying gold in the ground is a very effective way for a person to position him/herself for the eventual huge real rise in the gold price because it is like buying a gold call option with no expiry date. As things currently stand, there are many legitimate concerns about exploration-stage gold mining companies, but almost all of these concerns will evaporate if there's a sufficiently large rise in the real gold price (the gold price relative to the prices of other commodities). For example, there will always be people willing to finance the construction of a new gold mine if the mine's projected return is high enough.

Additionally, we can envisage the situation arising whereby purchasing in-ground gold becomes the most politically acceptable way for well-heeled investors to prevent themselves from getting trapped in the inflation quagmire. A multi-billionaire may not be able to defend his/her wealth via the purchase of gold bullion without incurring the wrath of government, but it's currently possible to buy millions of ounces of in-ground gold cheaply and inconspicuously.

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ABOUT THE AUTHOR

Steven Saville

Regular financial market forecasts and analyses are provided at our website:
http://www.speculative-investor.com/new/index.html

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