This column was originally published on RealMoney on Aug. 12 at 2:23 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.
The price action in gold- and silver-mining stocks has been very good over the past couple of weeks, and there is every reason to believe that the move isn't over yet.
Dollar weakness, which
I discussed Wednesday, continues to support gold bullion.
This can be seen in the daily chart of a continuous gold bullion contract vs. the Dollar Index (data hidden).
In the bottom panel is a relative strength indicator comparing prices between the two, and you can see that gold is just now starting to outperform.
Gold is on the launching pad of a six-month base, and prices are likely to move beyond their December 2004 highs at $458 per ounce.
Based upon the width of the base, a reasonable price projection would be $475.
Strength in the underlying commodity should support equity prices, and the weekly chart of the Philadelphia Gold and Silver Mining Index (
$XAU.X) concurs with that assessment.
In the first half of 2005, the index pulled back about 27%, but found support at the upsloping trend line from the 2001 bottom that has defined this bull market in gold and silver mining shares.
With the uptrend still intact, it bounced and thrusted higher, breaking a down-sloping trend line in the process. This is strong price action.
This has the makings of a measured move where the points gained from the trend line bounce to the recent short consolidation period and can be added to the break-out point to determine a price target.
This would suggest that the $XAU has a minimum target of $105; and looking at the strength within the sector, there is every reason to believe that the old December 2004 highs at $110 will come under pressure.
Gold Bullion Contract vs. Dollar Index
Philadelphia Gold and Silver Mining Index
However, it is the stocks within the sector that have me most excited about the future prospects for gold-mining shares. Initially, I thought the gold miners would be laggards as rising rates would be a drag on prices, but looking at the price action across the sector shows strong stocks making significant upthrusts turning prior resistance levels into support.
Volume has also been very heavy and has lent credence to the price advances. And most importantly, the majority of stocks are just starting to wake up and move above their 200-day moving averages, suggesting there is still more room for prices to advance.
So with this backdrop, let's take a look at several gold- and silver-mining stocks.
The weekly chart of
, which is the only gold mining company in the
shows a stock that found support at $35, and is now in the process of making a significant upthrust that is taking out a down-sloping trend line.
This is strong price action, and very suggestive of a bottom. Newmont is just approaching its 40-week moving average and the resistance at $42 formed by two prior significant down thrusts. If Newmont can make it through these levels, $45 and $50 would be the next areas of resistance.
The daily price chart of
is very typical of many of the other equities within the sector. There is a nice base that has formed over the past five months and it almost has this cup-and-handle pattern to it. Over the past month, volume has been very exemplary suggesting that the stock is under accumulation and prices are only now thrusting above their 200-day moving average.
As mentioned, this is a pattern -- nice base with strong volume on the breakout -- that is being seen in other gold- and silver-mining stocks including
Golden Star Resources
Pan American Silver
, just to mention a few.
Returning to Kinross Gold, the depth of the bowl is about 1.5 points and adding this to the break-out point at $6.50 yields a price target of $8.00, which is in the neighborhood of the October 2004 highs.
Coeur d'Alene Mines
is a gold-and-silver mining company, and its weekly chart shows the stock has broken above an 18-month down-sloping trend line, and price is starting to form a significant upthrust pivot. This is very strong price action, but it does suggest a change in trend for these shares.
This past week has left prices somewhat extended, and I would look to be a buyer on any pullback. Prices have a good chance of making it to the $5 level, which is the next pivot of significance.
Coeur d'Alene Mines
My approach to buying gold- and silver-mining shares is one of patience. I strongly believe, for fundamental and technical reasons, that higher prices are in our future. So with this as a backdrop, I like to buy on what I call reaction days. Reaction days are those days in which shares sell off on no news.
The swings in gold- and silver-mining shares can be volatile, often producing an emotional ride. Waiting for your price is a reasonable strategy. Be mindful of your price targets and don't forget to take profits along the way.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider Golden Star Resources to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
P.S. from TheStreet.com Editor-in-Chief, Dave Morrow:
It's always been my opinion that it pays to have more -- not fewer -- expert market views and analyses when you're making investing or trading decisions. That's why I recommend you take advantage of our
premium Web site, where you'll get in-depth commentary
money-making strategies from over 50 Wall Street pros, including Jim Cramer. Take my advice --
At the time of publication, Lerner was long Newmont Mining and Kinross Gold, although holdings can change at any time.
Guy M. Lerner, M.D., is an anesthesiologist and a freelance writer who trades for his own account. He blends technical and fundamental analysis to determine those factors that lead to sustainable moves in the markets. Lerner's approach is research-driven and focuses on supply-demand issues, investor sentiment, intermarket relationships and monetary liquidity. He is a member of the Market Technicians Association and is the founder of
, a Web site that offers content, commentary and strategies for investors and traders. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. He appreciates your feedback and invites you to send your comments by