A key bellweather, NEM, is approaching a major break-out...

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Gold Mining Stocks on Verge Of Breaking Out

Claus Vogt

June 30, 2010

The long-term story for a gold and a gold mining stocks bull market is clear and easy to grasp: Dubious monetary policy and irresponsible fiscal policy with government debt rising all over the world are a surefire recipe for a surging demand in gold.

Toss in stagnant or even declining supply, and you have all the ingredients for much higher gold prices.

But …

I Don’t Like
Being a Gold Bull

That’s because rising gold prices are a byproduct of lousy economic and political conditions.

Indeed, gold does not create wealth. Yet it can help conserve your capital in complicated times. Then when the economy finally hits bottom and a new long-term up trend emerges, you’ll be in the ideal position to take advantage of the turn around.

However, now is not the time to dream of the next long-term up swing. Instead, it’s the time to prepare for the next cyclical slump while the …

Recession Warning
Is Getting Stronger

That’s the signal the Economic Research Institute’s leading economic indicator is sending us. Last week I drew your attention to this important indicator when it declined to minus 5.7 percent, a reading low enough to be interpreted as a recession warning.

Now … it’s down to minus 6.9 percent, strongly amplifying the message of a coming recession.

With this background the behavior of the bond markets starts to make some sense …

You see, longer-term government bonds would normally be considered extremely risky whenever there are inflationary implications of high and rising government debts, which would send interest rates soaring. And that is indeed our situation today.

But interest rates haven’t risen this year; instead they’ve been falling! Take a look in the chart below.

So why aren’t interest rates rising?

During times of uncertainty, short- to medium-term buying pressure for safe haven investments, including long-term Treasuries, can trump longer-term inflation fears. And that is exactly what has been going on during the past months, which tells me the economy is headed for a recession.

Gold Bugs Index On the
Verge of a Breakout

At the same time Treasury yields have been dropping, gold and gold mining stocks have been rising. How is this possible?

Well,

• Maybe the gold market is considering the short- to medium-term potential of a double dip recession.
• Maybe the gold market is already reacting to the longer-term inflationary implications of the above mentioned monetary and fiscal policies.
• Maybe the two markets — Treasury bonds and gold — are currently playing different time frames. And maybe this decoupling will continue.

At least one thing is crystal clear: On the chart below you can see the Gold Bugs Index is at a very important juncture. It has crept back up towards major technical resistance at the 500 to 520 area.

A breakout above this massive resistance would send a very strong bullish message for the gold market.

Classical chart analysis tells us that the breakout scenario has a high probability. Price action since December 2009 looks like a triangle. And triangles are trend continuation formations.

In the bigger picture, the price movements since March 2007 looks like a huge cyclical correction ready to break out to new, all time highs.

Bellwether Newmont Mining
Looks Ready for a Breakout, Too!

The bullish chart pattern of the Gold Bugs Index gets support from bellwether Newmont Mining (NEM). As you can see on following chart, it’s zooming upward.

My suggestion: Keep a close eye on NEM. On Monday it hit a new high of $62.62. If this stock gets enough interest to establish itself above this level, it’ll probably signal the next strong up leg in the gold bull market.