Market Sentiment More Positive For Gold But Critical Resistance Level Looms

Gold prices remain largely range bound with gold mining stocks continuing to show relative strength despite a strong close for the DOW and S&P last week. Job growth in the U.S. remains anemic even though the unemployment rate continues to drop which for most reasonable people seems counterintuitive given the uneven nature of the so called US “recovery.”

What’s ahead for gold in the coming months? The shift in investment sentiment for mining stocks suggests some people at least are betting on higher gold prices. Just how high is the big question, however.

Citi’s FX Technicals Groups believes “an overall a double bottom pattern with a neckline at $1,433 is in the making” noting they would not be surprised to “see an inverse correlation between gold and Equities just like we saw throughout the last bull market in the 1970’s.” After reaching the double bottom neckline of $1433, Citi has a target of $1686.

During the recent sell-off in the DOW and S&P, the positive action in mining stocks generally correlated well with the decline in the latter, although Friday’s market action boosted miners and the broader market as well. This coming week could be a crucial test for gold and its ability to breach the psychological $1300 level.

People tend to forget the tedious nature of gold’s rise to over $1900 and its efforts to break through critical resistance levels including $1000. I would rank it right up there with Chinese water torture. In any event, it will take a bit of patience and a longer term commitment for investors to realize some serious gains in the precious metals market. No doubt, 2014 will present some surprises both good and bad.

What to buy? Most of the major gold producers have been beaten up badly, not only because of lower gold prices but also because of some bad acquisitions and massive cost overruns on various mine development projects. These have typically been large volume, low grade situations with inherently high production costs.

What these companies were betting on was a continuation of the gold bull market which peaked at $1,913.50 in 2011 and spiraled downward thereafter. Perhaps the real irony lies in the fact that their desire to get more profit leverage to projected higher gold prices had the opposite effect: they ended up with more leverage to lower gold prices which was compounded further by higher production costs. As stock market investors know all too well, leverage is very much a two way street!

Smart investors should seek out companies with low or no debt and reasonable (all-in) production costs. There are a lot of junior gold producers that fit into this category and they are priced well below their senior counterparts.

Some good quality junior explorers are trading for pennies but this market segment is not for the faint of heart. First and foremost it’s always best to diversify investments in this sector keeping in mind the old “safety in numbers” axiom. Sometimes three good ones out of five will make it worthwhile. Companies with experienced management, good projects (preferably with good quality  gold resources), $1-$2 million in working capital, and good market liquidity are probably the safest bets.

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