Gold recently made a strong uptrend with the June gold futures on the COMEX, rising from $620 at the start of the year to just below $700 on February 27, 2007. After failing to break $700, June gold has retrenched back to some support at $640, but know that it is oversold.
The breakdown saw gold break below trendline support, as prices could trend lower. The near-term technical picture for gold is bearish yet oversold, given the recent selling, so we could see some near-term buying occur.
The June contract fell below its 20-day and 50-day moving averages of $674.90 and $656.40, respectively. June gold also fell below its 200-day MA at $646.90 on March 5, 2007, but managed to stage a current rally to $660.80 on March 9, 2007, where we can see some resistance.
The positive sentiment in gold was related to the softness of the U.S. dollar; it acted as a hedge against potential inflation. The decline in the U.S. dollar (against other major currencies) makes gold cheaper for foreign buyers, since it is quoted in U.S. dollars. Also, the recent market concerns had some investors locking up their gold positions.
As well, given current world uncertainties and the constant threat of market shocks, gold continues to gain in strength as a safe- haven investment.
Going forward in the near term, I don’t advise that you chase gold higher, but rather that you wait and see how strong the momentum is. I also advise seeing if there is decent downside support. If you miss this surge, you may have another opportunity to enter into positions. Based on the chart, there is potential for buying between $600 and $620 — should the June gold fall that far. It is clear that the bias toward gold, at this time, is to buy on dips.
Gold companies that you should focus on are those that do very little forward hedging. Small-cap gold stocks with promising reserves and output could also be of interest, due to the possibility of industry consolidation occurring. One of our favorite mid-tier gold stocks that you may want to look at is Yamana Gold Inc. (NYSE/AUY, $12.86, market-cap: $3.78 billion).