TORONTO (ResourceInvestor.com) -- In the face of a USDX all the way back up at 88, gold is showing signs of strength and holding up nicely near long term support. Perhaps of more interest to investors in the sector is the AMEX Gold Bugs Index (HUI), which at today's high, was up nearly 20% from its May bottom. In fact, since bottoming around 165 on May 16th, the index has advanced steadily, making solid gains on 6 of the last 12 sessions. During the same time period the price of gold has been flat.
With the dollar technically ahead of itself and the Euro oversold due to the appearance of a weakening economy and apparent failure of the proposed EU constitution, it stands to reason that things may be looking up for the weary and battered investors in the yellow metal. On a currency basis, the long awaited decoupling of gold from currencies, which should signal the next leg of gold's secular bull could be upon us, as recent market action is not bearing out the traditionally near perfect correlations. That said, market timing is always a difficult game (especially where gold is concerned), but the patient investor will usually be rewarded for their composure when they are on the right side of the trend.
Famed market prodigy Jesse Livermore believed that 'being right and sitting tight' was the surest way to grow one's capital and nowhere is this maxim more appropriate than in relation to the volatile gold shares. Rather than buying when on the way up and panic selling into the first minor correction, investors would be well advised to establish a position with which they are comfortable and can afford, and go to sleep in confidence that the underlying bull will ultimately assert itself.
There are many analysts and technicians who don't believe we've seen the bottom on gold or gold shares just yet. While that may be so, anyone who claims to know exactly how the future is going to unfold should be sent directly to Coventry. If this and past gold bulls have proven anything it's that absolutely nobody knows exactly where prices are going at any given time. Some of the most respected members of the gold community were calling for prices north of $500 an ounce well over a year ago. Unfortunately, today's short-term trading mentality and culture of immediate gratification means that these individuals are almost forced to say something at all times, or risk losing business to the competing bull (or shill) with the loudest voice.
In the long run however, the consensus is clear - prices are going higher. With that in mind, the 190 level on the HUI will prove quite inexpensive down the road and is a sound entry point even if the current correction has yet to fizzle out. The HUI's 200-day moving average is currently around 210. If investors are unsure, layering in exposure is never a bad idea either. As recent work conducted by Resource Investor pointed out, gold shares are historically quite cheap as compared to the price of bullion. A strong near-term move in the POG would signal that the recent run in shares could be more than just another head fake.
Either way, investors would do well to be less involved in short-term action, and take heed of some time tested market principles.
