LOWER TRADE DEFICIT AND YEN SELLING BOOSTING DOLLAR -- GOLD STOCKS ARE PULLING BACK

JAPANESE ARE SELLING THE YEN... The September US trade deficit showed an unexpected drop. While it's still very high, today's announcement is causing some buying of dollars and selling of foreign currencies. Chart 1 shows the Euro struggling to hold its recent move above the February high. It's also in overbought territory (RSI over 70). Since the Euro and gold have been positively correlated, any Euro selling should also cause some profit-taking in gold and gold shares. The yen is falling the hardest of the foreign currencies because of fears of Japanese central bank intervention. That's also helping the dollar today. Chart 2 shows the yen falling sharply today -- also from a short-term overbought condition (RSI falling from over 70).

Chart 1

Chart 2

XAU INDEX PULLS BACK FROM APRIL HIGH ... The Gold/Silver (XAU) Index is also pulling back from chart resistance at its spring high. The 200-day Commodity Channel Index (CCI) also shows it to be in an overbought area (+100). That combination is causing some short term profit-taking. Newmont Mining, the biggest stock in the XAU, is also pulling back from chart resistance.

Chart 3

NEWMONT MINING BACKS OFF FROM 50... Yesterday I showed Newmont Mining moving up to challenge its early 2004 peak near 50. I said I thought it would go through. And I still believe that it will. Gold and gold stocks are in the midst of a major bull trend. And I remain a long-term bear on the dollar. But the short-term trends are swinging in the other direction. The daily chart shows NEM moving up near its early 2004 peak near 50. And its 200-day CCI line is overbought. Here again, some profit-taking is likely. One of our readers asked yesterday if it was too risky to buy Newmont at these levels. The answer is yes. The same goes for gold stocks in general. I believe that a pullback from current levels should lead to a better buying opportunity at lower levels. I view today's dollar bounce -- and gold pullback -- as just interruptions in their major trends. Before too long, I expect gold to resume its uptrend and the dollar to continue falling.

Chart 4

WHY GOLD STOCKS AND NOT BULLION ... Another reader asked why not buy gold bullion instead of stocks. For several reasons. First, gold stocks move up faster than bullion in a bull market. That makes gold stocks the better way to play a bull market in gold. Secondly, it's easier to buy a stock than a commodity. An investor can buy gold stocks or put money in a gold mutual fund. It's not so easy to buy gold itself. That may change shortly. The New York Stock Exchange is supposed to launch a gold backed ETF later this year. I recently learned that there are two overseas gold bullion ETFs -- one in London and one in Australia. There's also a Canadian gold-mining ETF. But nothing in the states -- at least for now. I'll keep you posted as I research gold ETFs a bit further.