As smart money will sooner or later flight back into resources-related stocks, there are on the ASX many opportunities to take advantage of this expected flight-to-quality. Sino Gold Limited (ASX:SGX) is an Australian company involved in the exploration, development and production of gold exclusively in China. The company is primarily focused on the development of the Jinfeng Project.
As many other commodities-related stocks, SGX has suffered from the broad decline of the tangible assets those past two months. But it had also declined between March and May, while the equity markets were sharply rebounding. The fact is that Gold prices was effectively retracing from the peak posted above $1,000 an ounce. As a result, there is a strong positive correlation between gold prices and the SGX price development. The chart shows the SGX price action (black bars) and the Gold price action (red line).
Many indicators argue for a strong rebound of the Bullion, in the current context of financial crisis and uncertain business climate. Actually Gold price has soared this week, it posted the biggest gain ever posted in one day on Wednesday, as the credit market turmoil convinces investors to pull their money out from equities and to put it back in safe-haven assets. What is safer than Gold?
An ounce is now trading around $850. It means that Gold has rebounded by 15% in 10 days after it posted a low at $740 on September 11. Regarding SGX, a few positive signals have been triggered and argue also for a further rebound. This may be good vehicle to take advantage of the Golden come-back.
The stock actually lost 66% of its value between the historical high posted in last March, at $8.81, and the recent low posted last week (at $2.95). The stock had been obviously oversold and a retracement has already started.
The MACD just triggered a bullish signal this week, as it crossed above its signal line. So did the Money Flow Index, which is an oscillator that accounts for volume action. It shows that smart money flies back into the stock. When price and volume both move on the upside, it’s a good sign that a bullish momentum is building up, and that a positive trend may be possible.
The stock closed at $4.40 this Friday. A significant retracement of the recent decline (between point A and B on the chart) has already driven above $4.3 (23.6% Fibonacci ratio) as the first objective. However a trend is likely developing: $5.2 then $5.9 would become the main immediate targets (38.2% and 50% retracement ratios).
