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We were surely spoiled by the spectacular runs in gold and silver stocks since 2002. But in the past year or so, it has been like watching paint dry. I am all for a healthy correction, but how long can this last? Where is the action we have grown accustomed to over the past 4 or 5 years? We truly expected gold to break one way or another by now, but it has remained stubbornly range-bound.

Sentiment is negative, forecasts have been adjusted to the downside, and some respected writers have even toyed with idea that the gold bull is over. But let’s take a closer look at the action since the bull started kicking, and see if there is cause for alarm.

Since January 2006, the HUI, which tracks a basket of 14 leading (unhedged) gold miners, has mainly been trading in the 300-350 range. This range has tightened along the way, with recent action suspended in the 320-340 range. But as boring as this consolidation may be, it is in line with the previous trends of this gold stock bull. How much longer can it last?

The HUI had an impressive run from November 2002 to November 2003, increasing by about 120 points or nearly doubling. From this point, it traded within the 175-250 range for 2 years. The latest run was also an increase of about 120 points, from 250 in November 2005, to 369 in May of 2006. The duration was shorter (about 6 months), and the percentage increase was also less.

This gain has been followed the consolidation in which we are currently resting. The time frame for this consolidation has been just over a year, or half of the previous consolidation. Since the last run was also about half the time of the previous surge, we might expect this consolidation to also be half the duration. If this is the case, the end of the consolidation should be upon us.

click to enlarge
HUI Chart

  • November 2002 - November 2003: The HUI doubles from about 125 to 250.
  • November 2003 - November 2005: The HUI is volatile, but starts at 250 and ends at 250 two years later.
  • November 2005 - May 2006: The HUI increases from 250 to all-time high of 369 (a nearly 50% gain).
  • May 2006 - June 2007: The HUI consolidates in 300-350 range.
  • And as we pointed out in a previous article, the range of the consolidation has increasingly tightened. I suppose it could simply flat line from this point, but that would be extremely uncharacteristic of the gold market. We think it is more likely to release the stored energy from a year of tightening, and breakout in one direction or another. It is difficult to forecast the direction of this breakout, but we like the fact that 320 support has held a number of times and the consolidation has continued to put in slightly higher highs and higher or equal lows.

    So as boring at the past year has been, there is nothing to suggest the bull is over, and in fact, the technicals point to a breakout in the short term. The negative sentiment and disinterest in gold is always a precursor to such a breakout, so we welcome this development as well.

    We maintain core positions in gold, silver and energy stocks, but our trading account is all cash at the moment, looking for a home. Energy might be a better short-term play, as tensions increase with Iran and oil topped $70 for the first time in more than 9 months. But don’t turn away from the gold and silver market for too long. As we have learned from the past, when the gold bull decides to wake from its slumber, the ride is fast and furious.

    Source: How Long Will Gold's Consolidation Last?