GOLD CLOSES BACK OVER $700 AS PRECIOUS METAL STOCKS SURGE -- BARRICK GOLD HITS NEW RECORD -- VOLUME REMAINS LOW AS MARKET WAITS FOR FRIDAY JOB REPORT -- GOOD NEWS FAILS TO BOOST RETAIL STOCKS -- BIOTECHS CONTINUE TO GAIN GROUND

GOLD SURGES ABOVE $700... There are a couple of reasons why gold may have staged a strong rally today. One is a weaker dollar. The dollar fell against most major currencies today. Another is rising energy prices. Gold often follows energy higher since both imply higher commodity inflation. Another factor may have to do with today's decision by the European and British central banks to hold rates unchanged. Why that caught my eye was a Bloomberg headline that the ECB and Bank of England left rates unchanged "pushing aside inflation concerns". It's the last phrase that's important. One of the factors that slows gold's advance is rising rates to combat inflation. With central bankers around the world halting their rate increases (and the U.S. hinting at a rate reduction), that may give the green light to gold, oil and commodity related stocks. That may also explain why energy and gold stocks were today's strongest stocks. Today's big star was gold.

Chart 1

GOLD ETF HITS NEW 2007 HIGH ... Chart 1 shows the streetTracks Gold Trust (GLD) breaking through its 2007 highs on very strong volume. [The GLD made the big board's most active list]. Chart 2 shows a weekly version of the same ETF. Today's upside breakout puts the GLD in position to challenge its spring 2007 high. Nearby futures prices rose $14 and closed over $700 for the first time in more than a year. The relative strength ratio for the GLD (solid line) is starting to rise for the first time in more than a year and may also be nearing an upside breakout. Gold stocks soared along with gold and were the day's strongest group by far.

Chart 2

BARRICK HITS NEW RECORD HIGH ... Barrick Gold is an important stock in the gold universe for two reasons. One is that it's the biggest gold stock in the GDX and other market indexes. The other is that it achieved a couple of important bullish breakouts today. The daily bars in Chart 3 show ABX jumping over the high hit last spring at 35.58 on very heavy volume. That breaks the big gold leader out of a holding pattern that's lasted for sixteen months. It's relative strength line (top of chart) also shows that ABX has become a new market leader over the last two months. But there's more. The monthly bars in Chart 4 show that Barrick is now trading at a new record high. Combining its strong price action with its large size makes Barrick the top pick in the gold sector. [Please see my Market Message posted earlier today for some other gold stock breakouts that took place today].

Chart 3

Chart 4

GOLD STOCKS ARE IN CHART SUPPORT... The next chart may also shed some light on why gold and gold stocks have started rallying again. It's a relative strength ratio of the Gold & Silver (XAU) Index divided by the S&P 500. The ratio started rising during 2001 when gold bottomed, and reflects the superior performance of precious metal stocks over the last seven years. The ratio's uptrend hasn't been a straight line however. It corrected downward from late 2003 to mid-2005 and again from mid-2006 to this summer. A rising trendline can be drawn under the 2000 and 2005 lows. Chart 5 shows the XAU/SPX ratio starting to bounce off that rising trendline. That suggests that it may be time for gold stocks to start doing better than the rest of the stock markets. That's usually a bullish sign for gold as well.

Chart 5

NYSE INDEX STILL TESTING RESISTANCE ZONE... The market didn't tell us much today about it's ultimate direction. It bounced modestly on light volume. But that's about it. Chart 6 shows the New York Composite Index trading between support at its 200-day average (red arrow) and resistance at its 50-day line (blue arrow). The yellow box also shows the NYSE up against a resistance zone starting with the June lows at 9700 and ranging up the early August peak at 9800. I suspect tomorrow's job report will help resolve the short-term battle between bulls and bears. One of the reasons given for today's bounce was encouraging news on retail buying. Unfortunately, retail stocks didn't get the message. Chart 7 shows Retail Holders falling today on that good news. Their volume pattern isn't encouraging either. Nor was the drop in financial shares. Biotechs continue to boost the healthcare sector and were one of the day's strongest groups. Chart 8 shows the Biotech Index rising to the highest level in nearly three months. Its relative strength line is rising as well. On Wednesday, Arthur Hill showed four biotech ETFs that should benefit from that.

Chart 6

Chart 7

Chart 8