Technical Analysis Report: Hey gold, where’s the glory?

After a torrid run, the yellow metal has cooled off with the coming of the new year. 

The Northern Miner felt it would be a good time to dive into the charts to try to make some sense of it all, and perhaps find a few choice junior companies that could be primed to make a run should the metal recover some of its former steam.

The case for continued strength in gold pricing is well documented by now. With the Fed bent on quantitative easing to re-invigorate a lackluster U.S. economy, and central banks and large investors only now coming back to the once out-of-favour metal, the bullish case for gold is as sound now as it was six months ago.

Despite this, a look at the charts gives some cause for concern.

When looking to explain gold’s recent run via the charts, what stands out is a reverse head-and-shoulders formation which began forming in early 2007 and was broken out of in September 2009. Prices coming out of a reverse head-and-shoulders formation are considered extremely bullish, and true to form the gold price has been on a steady bull run ever since breaking the neckline.

Where the cautious investor may draw some concern, however, is from gold’s pattern from that point until now.

The famed Elliot Wave Theory, states that prices move in a succession of three upward waves (each defined by a mild correction), followed by two strongly formed downward waves (also followed by mild corrections, which are now upward movements).

While discerning such waves is more art than science, three distinct upward waves can be seen to have formed since September 2009, with the third wave beginning to turn downwards since the beginning of this year.

Whether this downward motion represents the onset of an overall, two-wave movement down, or whether it is merely a minor correction is a matter of opinion. But chart watchers are, no doubt, watching closely.

Of course such observations have to be taken in the context of gold’s secular bull-run.

There can be little doubt that the metal has been on a steady rise since 2001, and while some investors may fret that such a run has to come to an end at some point, it should be considered that gold’s preceding bear run lasted for roughly 20 years.

Also pushing against any bearish sentiment is the inflation adjusted gold price. While a look at the recent sharp spike in the gold chart in nominal dollars may have even the riskiest of investors heading for the exits, more prudent minds know that it is the inflation adjusted price that really counts. And on that front, the inflation adjusted gold chart still shows that there is considerable room for appreciation when comparing to the highs of the early 1980s (while metrics on inflation adjusted charts vary, the Consumer Price Index adjusted chart puts the spike in the early 1980s at roughly US$2,000 per oz. in current dollars).

So if the long-term case for gold still looks good – and the backing of hedge fund heavyweights such as Thomas Kaplan and John Paulson can easily persuade one that it does – then how best to approach the current correction?

One way is to search for junior gold miners that could be poised to take-off if another wave of exuberance overcomes the gold market.

A good place to start looking for such diamonds in the rough is to see what the smart money is backing.

Pinetree Capital has carved out a reputation in the sector as being just that – smart money. The investment bank has a strong track record of investing in junior gold companies that move on to future success.

Surveying a list of the company’s junior holdings, this Technical Analysis Report will look to cherry pick a couple of the best based on their current chart status.

One such company is African Gold Group (agg-v).

African Gold’s share price has built steadily upwards since last September – when a wave of capital flooded the gold market, lifting so many gold juniors. But unlike some others, African Gold’s share price exhibits no worrisome sharp spikes. Slow and steady is the best way to describe its chart with the recent pullback in the sector overall pulling its share price down to the bottom band of the Bollinger bands.

The last time it hit that marker, in early November 2010 with a price of 54¢, it quickly bounced back and shot up 38% in just a week’s time, reaching 75¢. The stock continued on its steady incline from there and closed at 95¢ on Jan. 5. Since then, however, the stock has come off and was trading in the 75¢ range at presstime.

But with the Williams %R and the Slow Stochastic charts, both flashing over-sold signals, the stock could be positioning itself for another rebound should gold prices recover.

As of Sept. 30, 2010, Pinetree held 9 million African Gold shares along with roughly 3.3 million warrants.

Another interesting stock that Pinetree has a stake in is Latin American Minerals (lat-v). The company hasn’t participated in the junior stock run to the degree of many of its peers, as its stock price has moved up from the 12¢ range to the 25¢ range since last September.

While those gains are nothing to dismiss, the company’s chart progression looks downright conservative next to the great leaps and bounds that so many of its peers’ charts exhibit.

Besides the relatively sideways movement of its price, Latin American also shows bullish signs on its volume chart. Chart specialists consider heavy buying volume as a bullish sign for future price growth, as it often signals the entrance of large-scale and astute investors.

Indeed Latin American’s chart displays two occasion of heavy buying, one in mid-September and one in early December, and neither of them were followed by heavy selling volume – which often happens as less optimistic investors take profits.

The entrance of new money, and the unwillingness of old investors to sell, shows strong underlying support for the company which is in the midst of a drill program on a gold project in Paraguay.

Pinetree holds 15.8 million Latin American Minerals shares along with 2.5 million warrants.