Are Gold Producers Under the Spell of the DOW?
Monday, March 2, 2009 at 06:17PM
Gold Prices in Gold, Gold Mining Companies
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.

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