A Very Important Day for Gold Stocks?

I have been working on a write-up of Argonaut Gold over the weekend.  I was expecting to post that write-up today, but circumstances have arisen that make other more basic questions more pertinent (by the way, the essence of my soon-to-come post on Argonaut Gold is the stock is cheaper relative to other gold stocks than I first thought).

However, first things first:

This looks a lot like the beginning of August.

Meanwhile the price of gold is up again.  It is almost at $1900/oz.  One of the popular gold related articles I have seen over the weekend is about how pension funds have no exposure to gold at all.  A bit of a buzz appears to be beginning.

Meanwhile, on Friday gold stocks staged a breakout.

Putting all of this together, Tuesday looks like a very important day in gold stock land.

Look, I have written before about how torn I am to own gold stocks right now.  I have sold down everything else in anticipation of the European mess getting worse.  In my actual account I have shorted banks to hedge the market exposure of my remaining oil stocks (I cannot short in the practice account I post to this blog so this account is more exposed than I actually am).  But I have held the gold stocks.  This is partially because it makes sense to me that gold will go up as the Euro disintegrates.  It is partially because, thus far, gold stocks have worked.  But I always hold in the back of my head the recollection of 2008 when gold stocks got hit just as hard (harder?) than the rest of the market.

So what will it be this time?

Clearly, unless things change drastically over the next few hours, North American stock markets are going to be routed on Tuesday.  And since Europe is the epi-center of that rout, it is reasonable to bet that the price of gold will continue to be higher on Tuesday.

Gold stocks can only do one of two things.  They can follow gold and confirm their break-out from Friday, in which case I would argue that this is only the beginning (if gold stocks do decouple from the market then I suspect this will be the confirmation to many that things are different this time and that gold stocks are an inverse correlation to the evolving euro-crisis).  Or they can fall back, demonstrate it was a false breakout, and show that they will fall with the market just like in 2008.   In this case they will likely end up falling hard as all the momentum buyers from last week run for the exit.

Its quite a stark set of outcomes.

And that is why I suspect tomorrow is a very important day for gold stocks.