Nervous Gold Bugs

If you’re a gold bug and you own a basket of gold stocks you have to wonder what is wrong with the group. The gold stocks as represented by the AMEX Gold Bugs Index and the TSX Global Gold Index are well below their price peaks of last December which is a worry in view of yet another financial crisis and a recent all time high in the gold price.

Our daily chart displays clearly the obvious price divergence between Dec 2009 peak and the lower mid May 2010 peak - and now the shorter mid May peak to the lower June 9 peak – a series of swing failures in the broader gold stock indices. I expect this divergence to continue even if the gold price powers up to another new high because of a change in the way investors value the gold stocks. The problem is the structure of the current secular uptrend in the gold complex. We are now into the 5th bull in the series that began in mid 2000. In the first two bulls the gold stocks advanced faster than the gold price due to a symptom I call “recognition of survival”. In the later stages of a secular advance the participants will splay or exhibit typical 5th Elliott Wave failures basically meaning fewer and fewer will post new 52-week highs. The only strategy to employ now is to avoid the broader sector gold stock indices and ETFs and do selective stock picking.