January 09, 2007

The new year started off with a blast for gold but not the one we would like to see since gold sank like a stone thereby scaring many gold investors out of their gold positions. Does it spell trouble down the road ahead? Well, although the brurtal sell-off was a scary one I remain confident that the current setup for gold and its shares is phenomenal (as described in my piece ‘2007 – Discovery fever’).

Sure enough many readers are worried that the first week of 2007 marked the beginning of a new steep correction but I want to emphasize that major sell-offs (corrections) don’t start from a setup which we’ve had by end of 2006. At least that didn’t happen since the beginning (April 2001) of this gold bull market. In fact the opposite is true right now and yes believe it or not but gold finds itself within strong ‘BUY’ territory, a real strong ‘BUY’ territory which only occurred six times before since the gold bull market began in 2001.

This ‘BUY’ territory for gold is indicated by the rGold chart (relative Gold chart)

I’ve been using relative charts for years now in order to pick major bottoms in gold (and HUI) therefore providing the investor with a unique ‘buy’ opportunity.

The rGold chart is a chart which dives the gold price against its own 200 dma. So if gold trades exactly at its own 200 dma then the rGold chart will display a value of ‘1’.

Now when the rGold value drops below ‘1’ (gold dropping below its own 200 dma) then the odds are you will be facing a bottom rather sooner than later. Simple fact is that during this entire gold bull market the rGold value never dropped below a value of 0.95. Now this week the rGold value dropped below ‘1’ again reaching a low of 0.98. What does it tell you? Well, it tells you a bottom must be near.
 

Now let’s take a peek at the rGold first…

As you can see the rGold chart nailed all previous major gold bottom’s perfectly.

A second important remark is that the rgold chart enters the green ‘BUY’ zone again soon after it left it in November 2006. So in fact the rGold chart is making a ‘double’ bottom here and the odds are that this time it won’t reach the low of 0.95 as it did in October 2006. When you examine the previous major gold bottoms in May 2004 and May 2005 you’ll notice that these bottoms were being characterized by a ‘double’ bottom in the rGold chart as well.

Conclusion:

Gold's downside risk is limited and correction could be over any moment. If gold were to correct all the way down to a rGold value of 0.95 then gold could reach a maximum downside target of $590.

Again, that’s only when rGold goes down to its October low of 0.95. Previous major bottoms (May 2004 and 2005) were being characterized by double rGold bottoms as well of which the second don-leg didn’t reach the same lows as the first one.

Best Regards,  

Eric Hommelberg & Partners

The Gold Discovery Letter/

The Gold Drivers Report

www.golddrivers.com