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« Yamana Gold Incorporated: Improving Reserves | Main | SPDR Gold Trust (ETF) A Safe Haven? (Part 2) »

Are Gold Producers Under the Spell of the DOW?

USD Chart 03 Mar 09.JPG
Chart courtesy of Stockcharts

On 23 February 2009, we wrote “Today the DOW dropped 250 points to close at 7114, thus penetrating a previous important support level. If it does not recovery in the next day or so then the broader market could well be in for another battering taking it down by 15% to 20%, to around the 5700 level.”

Today the DOW is trading at 6761 as we write having dropped another 300 points and unfortunately is taking the Gold Bugs Index down with it. Gold has also dropped to the $925/oz level as profit takers move in and take their cash to the side lines. Todays drop in gold prices equates to around 1.4% but the stocks have fallen around 7.4% which suggests to us that it is the broader markets performance that is having the greater influence on the gold producing stocks. For gold producers the price of gold is still relatively high, the cost of energy is now a lot lower and the same goes for materials, so this should be a good environment for the stock prices to move higher. The two party spoilers are the broader markets and the the US dollar which is still heading higher as it closed today at 88.88. The US dollar is being diluted on a daily basis as the printing presses continue to belt out the cash needed for the bailouts and stimulus packages. However the market is telling us that the other currencies such as the Euro and the British pound are in even worse condition.

This volatile situation does present trading opportunities if you are nimble and are prepared to reduce your exposure to gold stocks and build up some cash. We see a world in turmoil and have more or less decided to go up and down with the market for now. Also remember that the HUI has come from a low of 160 in November 2008 to 320 in February 2009, so some sort of breather is to be expected.

A quick look at the above chart shows that the USD is still in the ascendancy as governments around the world slash lending rates resulting in their own particular currency being devalued. This action appears to have an immediate effect, however whatever trading advantage was gained is soon negated by the similar actions of other governments. It looks as though all major currencies will soon have close to zero interest rates so once they are all in the same boat we will see if the USD is the preferred currency or not.

Got any comments? Fire them in!

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Reader Comments (10)

Warren Buffet just made his 'excuse' for being wrong about the economy. The oracle shows his humanity. Fortunately all is forgiven as I respect the man deeply.

Nonetheless I remember a fellow named Will, a little guy that crosses regularly and was highly sceptical (personal even) about my deflationary articles I wrote back in October - December on this website.

I wonder what he thinks now after the excuse of his 'master', Mr. Buffet and the obvious deflationary currents underlying in the capitalist system now being ignored (or battled) with inflationary policies. New lows are becoming visible.

I don't think I get Will's excuse for being spot on till now. A well, just the silence of him says enough.


March 3, 2009 | Unregistered Commenterde Graaf

there is no 'serious'support for the dow until 800. therefore the small 50% correction we have had so far will be dwarfed by where it ends up. ALL stocks will suffer. ALL bonds will suffer. At some point there will be a stampede to gold and gold stocks. This current correction could take gold down to 875. I sold half at the end of January and am looking to buy my position back. I do not trade the market but can't help taking a profit when gold is extremely overbought. love the commentary, keep up the good work.

March 3, 2009 | Unregistered Commentermark

you calling me out degraaf? yeah degraaf im still here...who you calling little man? if im little than youre a tiny man....buffets only human ...still he is one of the best traders/investors who ever lived..if the banks were regulated this would have never happened like it did...buffet wouldve been spot on when he said it was time to buy..if only the calamity of the usa banks hadnt happened deeply as it did...and yeah i still challenge your deflationary the economy gets going again we will all see major inflation happen...tons of funny money dumped into the economy by the printing will hit new highs...and your theory of deflation will be a joke im sure.......................wil

March 3, 2009 | Unregistered Commenterwil

I'm having a laugh here. :D

Yeah I called you out for sure. I believe we experienced some very interested facts lately. Reading your reply above make me belief you still don't really understand my reasoning, let alone our world economy. Nevermind Wil. Ignore the deflationary forces as you like. Half of the world changed their mind in the last three months, so some a little slower than others. ;)

March 3, 2009 | Unregistered Commenterde Graaf

By the way, your last two sentences are also my view. But I don't have to repeat myself every time, right?

Allrighty then.

March 3, 2009 | Unregistered Commenterde Graaf

Could you two get together and have a nice cup of tea?

March 3, 2009 | Unregistered CommenterGold Prices

That will probably never happen. But I can try to pretend having a cup with Wil.

I simply could not resist the rant. I'm done now. Back on topic in request of Bob.


March 4, 2009 | Unregistered Commenterde Graaf

for now im out of my gold and silver stocks -- been in since november and sold last month --- really nice returns....thanks for the im in discount stores and energy stocks are heating up nicely oh yeah dont forget the agriculture stocks---fertilizer --watch and see if all goes well -- fertilzer stocks have been doing well-its one place the pros go -im told- when the economy and market isnt doing as well as it could and see the energy stocks take off now --- crude is going up ---tell us oh tell us what ya doing degraaf we all want to hear---what you in degraaf?

March 4, 2009 | Unregistered Commenterwil

hmmm i dont know much about economy huh? fertilzer stocks taking off.,,,, crude is going to have a run and discount stores such as biglots and dollar tree to name a few will and have been doing well...... enough helpful info yet....i know nothing but ive recommended enough here for now ... watch and see...what does degraaf do but babble.......time for some green tea.....gotta go ----- cheers

March 4, 2009 | Unregistered Commenterwil


Please let us know when you go back into gold and gold stocks.They have had a better today, gold is up about $28/oz as we write and some of the stocks are up 7% or so.

March 5, 2009 | Unregistered CommenterGold Prices

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