Last Wednesday was looking like hell for gold bugs…

Gold prices dropped below $1,600 for the first time since January, gold stocks hit 52-week lows and majors like Goldcorp (NYSE: GG) and Newmont (NYSE: NEM) plumbed new depths.

But then came the reversal.

The XAU – an index that contains many of the larger precious metals players – fell as low as 147 before reversing course and closing 2.5 points higher at 153.46.

[ad#Google Adsense 336×280-IA]That’s the first day in a long time that the index didn’t go down and stay down.

You see, the XAU’s been heading south ever since it hit a high of 230 nearly a year ago. Its current 150 level represents a 35% correction from the top.

Individual gold shares have fared much, much worse. Many have dropped 50% or more, and junior exploration companies have been crushed.

What gives? Wasn’t this supposed to be “The Age of Gold,” the collapse of empires and the beginning of the biggest money-printing operation in world history?

Gold should be soaring…

We should be at $5,000 per ounce…

And companies like Goldcorp should be trading in Google (Nasdaq: GOOG) or Apple (Nasdaq: AAPL) territory.

Yet, they’re not.

In fact, the market cap of all publicly traded gold companies combined wouldn’t equal half the market cap of Apple.

Despite it all, the reversal of share prices last week – on relatively heavy volume – may have been a pivotal point.

In other words, “The Age of Gold” might be just around the corner.

The XAU’s Golden Bull At the Gates

Gold boasts some of the best fundamentals ever.

On those merits, after a 40% to 50% correction, it’s more than ready to join in the fantastic performance that we’ve seen from the S&P 500 over the last six months.

And the charts confirm that.

A two-year chart of the XAU shows the completion of a nearly perfect head and shoulders pattern. That’s a very bearish pattern until the bottom is reached, which is exactly where we are. If that’s truly the case, from here on out, only bulls will run.

Take a look…

Holding out above the 145 level on the XAU is critical. In fact, we need to see the XAU trade back up to the 165 level to confirm that the bottom is indeed in place.

If that happens, the returns on gold shares from the current depressed level could outperform every asset class out there right now.

As I said earlier, the fundamentals of these companies couldn’t be much better. They’re throwing off tons of cash and trading at historically low price-to-earnings ratios.

What’s more, we’re seeing companies starting to acquire smaller players – like IAMGold (NYSE: IAG) did last summer with its takeover of Equinox – use cash and not stock. That implies the company sees its stock as too cheap… a bullish sign if there ever was one.

Bottom line: Don’t expect gold to keep dropping. More than likely, we’re at the bottom already. And if the XAU hits 165, “The Age of Gold” might be upon us.

Ahead of the tape,

Karim Rahemtulla

[ad#jack p.s.]

Source: Wall Street Daily