As we position ourselves and wait for the coming breakout in gold stocks I read the following today on the Internet:

Ike Iossif of Marketviews.tv wrote a subscribers only report about gold stocks on Monday. I just want to quote one paragraph from it:

"Last but not least, SEASONALITY strongly favors gold/gold stocks. Historically, September has been one of the best months for gold/gold stocks. Take a look at the chart below, notice that for the past 5 consecutive years the price action in gold/gold stocks has been characterized by a modest rise during the first half of August, followed by a shallow decline lasting until the end of the month, which in turn is followed by a robust rally that starts during the first 5 trading days in September, it lasts thru out the entire month, and its magnitude is between 20%-30%! If seasonality plays out this year as it has in the past, the XAU has the potential to rally to the 172-175 level in just four weeks time."

From Fallstreet.com:

"August 3, 2006
$608 Billion Went In. How Much Will Come Out?

A potentially ominous report crossed the wires last week and barely anyone noticed:

“Stock funds posted an outflow of $8.40 billion in June�.

With hedge funds taking more control of the daily volume, oil near record highs, and war raging in the Middle East, you can’t blame the average investor for not paying attention to dated statistics from the Investment Company Institute. However, remember that the average investor - who spent the year 2000 waiting for tech stocks to bottom - is usually focused on the wrong things. Now, repeat after me: “Stock funds posted an outflow of $8.40 billion in June�

Fund Flows Can Highlight Larger Themes

That for the first time since March 2003 investors pulled money out of equity funds may not seem that big of a deal. After all, money previously shifted out of domestic (US) stock funds in December, October, September, and August 2005 in favor of world equity funds and the markets were not impacted in a negative way.

Nevertheless, the key difference between last year’s domestic outflows and June 2006 is that fund money didn’t simply rotate to different areas of the marketplace in June -- it was taken out of the equity game completely.

Historically speaking mutual fund redemptions are rare and they are nearly always a symptom of a broader stock market malaise. Accordingly, the risk today is that a couple months of redemptions could be foreshadowing a lasting shift in investor sentiment/risk tolerances.

From April 2003 to May 2006 $608 billion moved into stock funds. During the same time taxable money market funds posted a net decline in assets of $136 billion. In other words, $136 billion of ‘sidelined’ money has moved into stocks since April 2003 and $471 billion of new money has entered the equity scene.

Using estimates from Trimtabs, more than $14 billion left stock funds in June and July and, according to ICI, taxable money market funds attracted $27 billion in June alone. Not exactly a shocker, new money has been stepping into cash as opposed to stocks since June.

Focusing on the flows and an expected slow down in the US economy, it is increasingly likely that the April 2003-May 2006 period will go down in history as the boom. This means that we have now entered the bust. -$14 billion...and counting."

-And from USA Today:

"An Aug. 7-10 Gallup Poll found only 22% of Americans think the economy is getting better, the lowest confidence level in five years. Recent surveys by Moody's Economy.com and the National Federation of Independent Business indicate executives of both large and small firms generally foresee sustained, though somewhat more muted, growth. Declining confidence is most pronounced in U.S. construction and real estate firms."

Fact - Home sales in the US are down 7% annually so far this year with sales in the west coast falling -14.7%

George Bush Press Conference on Iraq

That's some food for thought today.

My Personal Trading Portfolio:

I have about 130k invested in several of the small cap stocks on the top 10 list, with AMGX and BMGX being the biggest holdings, in addition to the holdings in the WSW Power Portfolio. I sold a bunch last week and got off margin(not any of the small caps though) and that is why the value of the holdings have dropped over the past week. I have about 250k in buying power that I would like to use over the next couple of days.

To do this I need to either see the XAU/HUI pause for the next few days or buy several stocks that I am watching if they breakout of their recent trading ranges - ABBI, PPH, AU, PAAS, BHP, and GDX. Steel stocks also look like they are consolidating and about to break out in a few days.

Update by Andy Emerson (8/23/06)

The most important thing to note about the gold stocks is the relative strength over the past couple of months. The chart below of the XAU puts this in perspective. First take a look at what happened in July. The XAU pulled back to the 130 area while the metal dropped to 599. Then the bounce came!! Now here's the most important part about the relative strength picture. After the bounce in July the metal dropped back down in August to retest 600. But this time, the XAU only pulled back to around 138. This shows major relative strength in the stocks and is telling us one thing? The gold stocks are getting ready to make their Fall run. It doesn't get much better than this folks!!!

Chart of the XAU - Compare the lows in July and August on the metal's chart below the XAU's chart and you can see it for yourself.

Quick notes on the gold trade:

I'm hoping that we can get a little more sideways action here at the breakout range on the XAU. The more the better.

It looks like the metal might trade out sideways for a few more days before turning up. It might even take a week or two but the stocks seem really bullish here the past few days and are sitting right at the breakout point. I don't think the metal will make a run at 700 until the Dollar is ready to fall through 84 range and make a stab at 80.00. This is when the gold stocks are going to explode upwards.

If I get a dip back I might add a share or two in the gold stocks. I'm pretty heavily invested already. So I don't really need to add. But if I see some sideways action and catch the breakout just right I will add on.

The best way to add on here is to buy any kind of dip now. I would be looking for the 60 minutes stochastics to get oversold. That's when I would buy.

All of the gold stocks look really well now. Even AUY and BGO, which got hit with some bad news last week, look good. The charts of both of these still seem like buys.

Chart the metal again

Watch for the bollinger bands to tighten. I would then expect a move higher, a fast one. When the metal starts moving higher I feel it will go right through resistance at 650 and march its way up to the 52 week highs.

- Andy