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Given all the nattering naybobs of negativity who seem to be in such a hurry to pronounce this move in gold as being topped out, and finished; I thought it would be a good time to update a few charts.

First, let’s take a look at Gold.

Gold has just made an uninterrupted run from $681 in late October, to an interim high of $1007 last week. To encounter a bit of resistance,
and some profit taking after a $327 move, is to be expected. But, do not let anyone tell you that gold is either fundamentally, or technically “overbought”… because it isn’t.

Gold is still comfortably within the middle of it’s present trading channel. We have strong technical support at $875, with the triple convergence of the bottom of the support line, and the lower band of the bollinger’s, and the convergence of the 50 & 200 day moving averages.

Gold Chart

Fundamentally, this rally in gold has been driven by fear, by the collapse in some foreign currencies, and by the massive amount of spending contained in the bank bailout and stimulus packages.

And this is not the last bailout, or stimulus package that we will see, and the market this morning, along with gold, is confirming that reality.

Senator Bob Corker of Tennessee cut through all the double speak at yesterday’s Senate Banking Committee hearings with Ben Bernanke, when he said:

“What we have is creeping nationalization. We have dead men walking… zombie banks.”

And he is 110% correct.

This will not be the last bailout out for the banks. And this will not be the last stimulus package for the U.S. economy. And it won’t just be the U.S. that will be cranking up the printing presses, it will be the entire global banking system.

Yesterday, U.K. Prime Minister Gordon Brown called for a global “New Deal.”

http://edition.cnn.com/2009/WORLD/europe/02/22/germany.financial.summit/index.html

“We need a global New Deal — a grand bargain between the countries and continents of this world — so that the world economy can not only recover but… so the banking system can be based on… best principles.”

And his sentiment was echoed by both French President Nicolas Sarkozy, and Germany’s Angela Merkel.

For the first time in history, virtually all the global central banks will be trying to reflate their economies simultaneously.

If that is not “the perfect storm” for gold… tell me what is?

With gold near $1000 an ounce, traders and investors must realize that it can (and will) make $100-$150 swings, and still stay comfortably within it’s uptrend.

I would continue to take a little off on the rallies up into the upper band of the trading channel, and add a little back on the pullbacks to the lower band of the channel. Use the rise of the 50 day moving average, which is now around $885 as your guide to setting stops.

Bottom line: Gold looks very bullish here. Both technically, and especially fundamentally, with an ongoing, unprecedented global reflation.

Now, let’s take a look at the HUI Gold Stock Index.

Gold stocks are offering an incredible “discrepancy between price and risk” right here, and right now…

The last time we had $1,000 gold, the HUI Gold Bugs Index hit 518. We closed yesterday at HUI 290. There is a huge “valuation gap” presently between the price of gold, and the share price of gold stocks. Rarely, have gold stocks been this cheap to the price of gold.

HUI Gold Stock Index Valuation Gap to the price of Gold

And here’s a 5 Year Chart on the HUI: Gold Ratio

HUI:Gold Ratio

The HUI gold stock index is presently undervalued by over 60% to it’s normal correlation to the gold price. However, given the collapse of hedge funds, and the ongoing deleveraging of the markets, some discount in gold stocks to the price of physical gold should be expected.

The question is — how much?

For the answer, I would simply use the technicals to guide us. The HUI Gold Bugs Index is also in a solid bullish uptrend…

Yesterday’s pullback took us right to the thin edge of support vs. stopping out. Support held, and today we got a strong bounce back rally in the gold stocks.

Technically, we need 3 closes in a row over the 200 dma of HUI 317, to confirm the set up for the next up leg of this rally.

And if we get that… then I think the HUI is going to rapidly close that “discrepancy between price and risk” valuation gap to the price of gold.

Hang tight, because I think we’re getting ready for a helluva ride. Keep trailing stops, with any failure below HUI 285 ish signaling a “technical” failure of this move.

Mo later,

SliderOnTheBlack