-- Posted Thursday, 22 February 2007 | Digg This Article
Excerpt from the Gold Discovery Letter
by Eric Hommelberg
February 22, 2007
Part I: Managing the Price of Gold – Absurd Idea or Not?
It sure has been a roller coaster ride the past several days for gold and its shares…Gold down sharply on declining inflation worries, gold up sharply on rising inflation worries, well, the mainstream gold coverage has become a joke lately. Please forget about rising oil prices and increasing inflation worries (sure enough they will add some fuel to the fire), the thing is that physical demand for gold over powers the ability for those entities wanting to keep a lid on the price of gold.
This week’s price action tells it all. A battle royal was being fought at the $670 level, an event clearly telegraphed on Friday February 17 when the gold shares (HUI) were bleeding red ink despite the impressive $9 rise in gold. For those in the know it was a signal that gold would be attacked this week and so it did happen again indeed. Gold made a scary nosedive on Tuesday February 20. Although most mainstream gold analysts fail to report these blatant manipulation efforts (which have been going on for years) things are changing. Seven years after GATA’s inception the widely respected Mr. Russell of the Dow Theory Letters finally seems to agree with GATA, he told his subscribers this week:
"My thinking is that central banks and others have, so far, held gold back with derivatives and massive short sales. I doubt that this can continue."
Although Mr. Russell isn’t the first market analyst endorsing GATA’s claims (some high regarded market analysts like John Embry, James Turk, Frank Veneroso, Peter Grandich, Doug Casey joined the GATA bandwagon already for quite a while) there’s still a long way to go before GATA’s view will be mainstream view.
The World Gold Council for example denies any kind of gold suppression. In an interview with the Financial Times on January 15, James Burton, chief executive officer of the World Gold Council, remarked that he had "seen no evidence" that central banks were working together to suppress the price of gold.
But as James Turk stated in his open letter to the Finacial times (a reply to this interview) the fact that the price is being artificially suppressed is beyond question. The body of evidence established by the Gold Anti-Trust Action Committee is overwhelming, and is based upon – among other available facts – testimony of Alan Greenspan before the US Congress and a self-published admission by the Bank of International Settlements. The full scope of the gold price suppression scheme and the supporting documentation is freely available to the public at www.GATA.org.
Now critics of the gold manipulation theories wonder why a government would want to suppress the price of gold?”
Well, you could easily ask the opposite as well, why wouldn't a government want to suppress the price of gold? A sudden increase in the price of gold would set off all kind of alarm bells such as high inflation expectations, less appetite for the almighty dollar, waning confidence in world's financial system etc. These ideas aren’t weird at all since the price of gold is being watched like a hawk by government and FED officials.
Former FED president Paul Volcker said in his memoirs (referring to the dollar crisis of the 70's):
"Joint intervention in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake. Through March, the price of gold rose rapidly, and that knocked the psychological props out from under the dollar.”
The US government tried to prevent a dollar collapse (partly) by gold sales before. The Wall Street Journal reported in Jan ‘05 (referring to the dollar crisis of the seventies) :
WSJ
Jan 17, 2005
"Worried the falling dollar was undermining its anti-inflation efforts, the Carter administration announced a multi-part support package on Nov. 1, 1978: The Treasury would use gold sales and foreign borrowing and draw on its reserves with the International Monetary Fund to defend the dollar. At the same time the Federal Reserve raised its discount rate a full point." END.
So there it is, The US Government used Gold sales in order to support the falling dollar. Seems like dejavu all over again.
Now why do I come up with these gold manipulation remarks? Well, the answer is simple, if you know what GATA knows you’ll realize that the jig is up for gold since the central banks are running out of physical gold in order to prevent a rapid rise of gold (the CB’s only own half the gold they say they have). Sure enough they will try every now and then to smash the price of gold but in the end they will fail just like the London Gold Pool failed.
So when central bank selling dries up (some central banks became net buyers already) the only logical outcome would be much higher gold prices. So with this in mind the only proper thing to do is to do nothing at all, just sit tight on your beloved gold shares and laugh at sudden sell-offs as we experienced this week.
In part II of this Gold/HUI update we will discuss the current technical conditions and why there’s much more upside potential coming months for both gold and its shares.
NOTE: readers interested in a detailed GATA background can review my piece GOLD & GATA
Part II: HUI – Preparing for Launch Soon - Update
As discussed in Gold/HUI update part I we shouldn’t be scared about sudden sell-offs in gold since gold’s current bull run hasn’t run its course yet. The obvious orchestrated sell-offs (like the one on Tuesday 20, 2007) are designed to spook the speculators out of their existing long positions so the commercial short sellers can cover their existing short positions at lower and more convenient price levels.
These blatant gold sell-offs are becoming short lived whereby yesterday’s reversal was without doubt the most spectacular one over the last six years. Gold went up $22 after a $11 down day! Well, better get used to it! Volatility will kick in big time and yes, sudden sell offs as we’ve witnessed on Tuesday February 20 will be part of the game coming years.
So after this spectacular roller coaster ride in gold you might wonder what to do next. Are we in still in ‘BUY’ territories as described in my previous piece “HUI – Preparing for Launch Soon!”? Should we wait? Sell?
Well, the answer is short and simple: Yes, we are definitely still in ‘BUY’ territories. As you have noticed a lot of juniors are breaking out these days from a recent down trend hence the many break-out ALERTS you are receiving from us these days. It’s a general phenomena across the entire junior section since the CDNX venture index just broke out above the 3000 mark and is on its way to new highs (needless to say that current seasonal strength won’t harm either)
My piece “HUI – preparing for launch soon!” of January 21, 2007 already suggested to be in ‘BUY’ territories (HUI trading at 318 at that time) so let’s review that piece and see what the charts are telling now:
Relative Gold chart
Relative charts are a powerful tool in order to pick major bottoms in gold (and HUI) therefore providing the investor with unique ‘BUY’ opportunities.
The rGold chart is a chart which divides the gold price against its own 200 dma. So if gold trades exactly at its own 200 dma then the rGold chart will display a value of ‘1’.
Now when the rGold value drops below ‘1’ (gold dropping below its own 200 dma) then the odds are you will be facing a bottom rather sooner than later. Simple fact is that during this entire gold bull market the rGold value never dropped below a value of 0.95.
During the second week of January the rGold value dropped below 1 again and we notified our members that the gold correction could be very well nearing its end.(see Gold – Correction nearing its end?)
Now let’s take a peek at the updated relative-gold chart:
This relative gold chart clearly says:
· Gold is nowhere near a major sell yet!
So with gold on the move how do the gold shares perform? Are they still lagging the price of gold? Do they still have some catching up to do?
As stated many times before the gold shares do have a strong correlation with gold which simply means higher gold share valuations as a result of higher gold prices.
The chart below tells it all:
So we do see a strong correlation indeed but still the HUI seems to be lagging gold. in other words, the HUI still has some catching up to do which is clearly visible when we zoom into the latter part of the chart:
So how can it be that the HUI lags the price of gold?
The answer is simple, sometimes the gold shares do run ahead of gold and sometimes they lag the price of gold. So the gold shares move from undervaluation against gold towards an overvaluation against gold.
This cycle continues to repeat itself over and over again and is visualized perfectly by the Gold/HUI ratio chart.
When the HUI clocked a value of 370 in May 2006 while gold traded at $620 the Gold/HUI ratio was 620/370= 1.67. This reflects the lower range (overvaluation of gold shares vs gold) of the gold/hui ratio over the last 12 months. Currently the HUI is trading at 354 while gold is again at $677 so current gold/hui ratio level is 677/354=1.91. This reflects the higher range (undervaluation of gold shares vs gold) of the gold/hui ratio over the last 12 months
So during the last 12 months the overvaluation of gold shares vs gold was reflected by a gold/hui ratio < 1.8 while the undervaluation of gold shares vs gold is reflected by a gold/hui ration exceeding the 2.0 mark. The chart below tells it all:
This chart tells us:
· Gold stocks are nowhere near a major ‘SELL’ yet!
· Gold/hui ratio chart says we’re in ‘BUY’ territories for gold shares now!
Summary:
· Gold’s fundamentals continue to point towards much higher gold prices the years ahead
· HUI currently still undervalued against gold
· Gold/HUI chart says HUI (gold stocks) is (are) still a ‘BUY’ right now.
Conclusion:
Sit tight on your shares and enjoy the ride
As said above many stocks are breaking out from their recent down-trend. Over the last two weeks we have notified our members on several powerful break-outs from some of our ‘watch-list’ stocks.
Most of the issued alerts generated a stellar return exceeding 20% in short time only. If you would like to enjoy our new alert service then join us today. Subscriptions are available as from $30 a month only. Sign up info can be found HERE.
Best Regards,
Eric Hommelberg
The Gold Discovery Letter/
The Gold Drivers Report
www.golddrivers.com
-- Posted Thursday, 22 February 2007 | Digg This Article
