According to Goldman Sachs, gold provided the best returns of all commodities in the past five years when adjusted for volatility and says the rally will continue as options traders signal no change in the metal's relatively low risk.

The Bloomberg Riskless Return Ranking shows the Standard & Poor's GSCI Gold Total Return Index produced a 6.5 percent risk- adjusted return in the five years that ended last week, the highest among 24 commodities tracked by S&P, data compiled by Bloomberg show. Silver, the next-best performer, yielded a risk-adjusted gain of 3.1 percent, while a total-return index for all raw materials slipped 0.2 percent.

Goldman Sachs forecasts gold will reach a record this year. In a Jan. 13 report Goldman Sachs said that gold futures will advance to $1,940 an ounce in 12 months. Morgan Stanley forecasts the metal will climb to a record average $2,175 in 2013. David Einhorn's Greenlight Capital Inc. said in a Jan. 17 letter to investors that the fund continues to hold gold and gold-mining equities because of concern that global fiscal and monetary policies tempt fate. George Soros increased his stake in SPDR Gold Trust (GLD), an exchange-traded fund tracking the metal, to 48,350 shares as of Sept. 30 from 42,800 and added options, according to Securities and Exchange Commission filings. Soros reinvested in gold shares after selling 99 percent of his holding in the first quarter of last year.

Nouriel Roubini, the economist who predicted the 2008 financial meltdown, said last week that the risks that spurred market volatility last year will keep swaying asset prices and the global economy. He listed as persistent problems rising commodity prices, saber rattling and uncertainty in the Middle East, the spreading European debt crisis, increased frequency of “extreme weather events” and U.S. fiscal issues.

In other news, we ran across unconfirmed reports that India may barter some of its gold holdings with Iran, in exchange for crude oil. The report, which appeared in an Israeli website, coincided with the visit of an Indian official delegation to Tehran to find ways to continue the bilateral trade despite the sanctions imposed on Iran. Use of gold as currency may help India get around the proposed freeze on Iranian central bank's assets and the oil embargo that the EU foreign ministers have agreed to impose on Monday. India depends on imports to meet around 80% of its oil requirements and Iranian crude accounts for a 12% share in India's total oil imports. Naturally, this is a step toward re-introducing gold as a major international currency, which is a very bullish factor for yellow metal's price.

To see if the short term picture is just as bullish for the precious metals sector, let’s turn to the technical part with the analysis. This week we will focus on the mining stocks. We will start with the XAU Index and the very long-term chart (charts courtesy by http://stockcharts.com.)

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In the very long-term XAU Index chart, a move above an important long-term support/resistance line is seen. The recent breakdown is therefore invalidated (just like it was the case with previous similar moves), and the recent strong move should be viewed as a bullish confirmation of this fact.

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In the long-term HUI Index chart (proxy for gold stocks), a sharp rally has taken place following the recent fake-down (instead of breakdown) below the 500 level. This is very much in tune with last October's trading patterns which were followed by a sharp rally in which the index rose in excess of 20%. Such a rally appears possible once again.

The next few days could see a small move to the downside, but a reversal will most probably follow. The above chart has very bullish implications and suggests a major move up is in the cards.

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In the short-term GDX chart, the miners have followed an interesting path. The recent decline took miners to the October 2011 level. If the correction is over, then expect a move to the upside similar to the previous one. Calculating the medium-term resistance line brings us to a likely target around $58.

The miners appear to be heading to the $58 level where the declining resistance line and the 50% Fibonacci level coincide. Once this short-term resistance line is reached, a pause in the rally is probable after which an additional period of rally seems likely.

Overall, the situation in miners is a mirror of what we wrote in our essay on January 27th, 2012 on the bullish outlook in the precious metals market:

(…) the breakout in euro above the short-term declining resistance line has been confirmed, which is bullish for euro and bearish for dollar. The situation for the general stock market is a bit unclear for the next few days, but the outlook remains bullish for the weeks and months ahead. Based on correlations, these factors do not disrupt our bullish view on the precious metals sector.

Summing up, the situation in mining stocks remains bullish. The miners' sharp increase has confirmed the similarity with the late October trading pattern, and the implications are bullish from here.

Thank you for reading. Have a great and profitable week!

P. Radomski