-- Posted Monday, 7 May 2007 | Digg This Article
What about you? Tired of seeing your gold shares failing to regain their 2006 ‘highs’? Losing confidence that gold shares (HUI) will fail to break its long-term resistance at 360? Thinking about throwing in the towel after another failed break-out attempt lately?
Although current bearish sentiment is understandable since no-one likes to see their beloved gold-shares fail to break-out over and over again better times seems to be shining through for both gold and its shares. Please remember that the biggest up-moves do occur upon sentiment reaching extreme levels of bearishness. We saw that happen over and over again. We saw it happen it 2003 when the HUI seemed to have lost its battle to overcome its long term 150 resistance, we saw it happen again in 2005 when the HUI seemed to have lost its battle to overcome its 250 long term resistance level and these days are no different since it seems the HUI has lost its battle to overcome its 360 long term resistance.
In both previous cases (2003/2005) when the HUI seemed to have lost its battle to overcome its long term resistance (150/250) many analysts were calling for a retreat towards 100 and 200 HUI levels. Now looking back we can conclude that exactly the opposite had happened since the HUI broke out towards 250 from 150 in 2003 and towards 400 from 250 in 2005.
Now will we see a repeat of 2003 and 2005?
Sure enough we don’t know since no-one can read tomorrow’s news papers but if history could be of any guide than a break-out out of current resistance area could easily result in a HUI trading above 450 levels before year end!
What is important here is to keep ‘the big picture’ in mind. As stated above we’ve had a long consolidation in 2003, we’ve had a long consolidation in 2005 and now we’re facing a long consolidation in 2007 again.
Now why do you think the gold shares finally did manage to break out in 2003 and 2005? In other words, why do you think the HUI is trading now at 350 and not at 150 as in 2003?
The answer couldn’t be more obvious. The HUI is trading at higher levels since 2003 due to the simple fact we’re in a bull market for gold and its shares. We are witnessing a generational bull market in gold and the end is nowhere in sight. Please remember that bull markets like these tend to end in euphoria/mania and needless to say we are far away from sentiment like that yet! The last time the gold market was hit by euphoria/mania was in 1980 when people were queuing in lines for the banks in Toronto in order to buy gold. It was during that time that 5% of all invested money was in gold and gold shares (less than 0.5% these days). Now that was mania, again, we are nowhere near such sentiment these days.
Ok fine you’ll say, the big picture, but where exactly do we find ourselves in this so called ‘big picture’ today?
Well, good question, again no-one can predict the exact duration of any bull or bear cycle but one of my favourite tools concerns the DOW/GOLD ratio in order to determine gold’s primary trend. It’s a tool which has proven to be extremely useful in the past and adored by many veteran gold analysts eg Richard Russell and John Hathaway. Indeed, the DOW/GOLD ratio has proven to be an accurate tool when it comes to identify major turnarounds in gold. Please take peek at the chart below and judge yourself:
As you can see the DOW/GOLD chart flashed a 'buy' for Gold again in the year 2000 and 7 years later Gold is up by a stellar 170% off its lows indeed. The DOW/GOLD chart tells you to hold on to your Gold until a new bottom has been reached in the 1 - 5 area. Simple right? Well, if it were all that simple why don't we hear that much about it ?
The answer is obvious since the DOW/GOLD ratio chart isn't useful at all in order to predict yearly price movements. Next year’s readings could very well clock higher values as current year instead of expected lower values thereby losing confidence as being a reliable indicator. Unfortunately that's the same analogy as denying that higher temperatures will arrive in summer based on a single day temperature drop in spring. The problem is that the DOW/GOLD cycle has a wave length that's so long that we humans have a hard time to figure out where to position ourselves into this cycle.
Indeed history does suggest the DOW/GOLD ratio to bottom periodically in the 1 - 5 range. The Dow/Gold ratio topped in 2000 far above 40 and is heading down now (currently at 18.5). If the DOW/GOLD ratio can live up to its own expectations than we can expect a new DOW/GOLD bottom within this decade or shortly thereafter.
So that’s the ‘BIG PICTURE’ view, a steady rising gold price towards the end of this decade. This view is shared by Neal Ryan, director of Economic Research at Blanchard and Company. In a research note of April 26 he said:
Ryan said that his company recommends a long-term trading strategy for metals investments rather than a day-trading strategy.
"The key to participating in this market is to take a position, buy on market weakness and have a long term outlook of three to five years," Ryan said.
"The only time you're going to hear from us that we're bearish on the price is when we think the run is through....sometime in 2012 or further."
Another industry insider who favours the DOW/GOLD chart is former Newmont's president Pierre Lassonde.
Referring to the DOW/GOLD chart Lassonde certainly raised some eyebrows 18 months ago when he predicted a gold price exceeding $1000. In an Australian TV interview he said:
Gold will have three zeros after its price - it is just a matter of what figure precedes the zero's.
Now fast forward to today, why are we at such a critical juncture here? Well, sure enough as said above gold’s consolidation period since May 2006 reminds us to the ones of 2003 and 2005 but far more importantly is this:
Gold is on the verge of clocking its highest monthly average ever! Gold almost clocked its highest monthly average in April but extensive ECB selling pushed it back below the $680 mark.
Why the ECB stepped up its selling program?
The reason for doing so couldn’t be more obvious since the Euro is challenging its all time high of 1.36 clocked in December 2004 and some officials are getting worried for a relentless rise against the dollar and the yen.
So how to prevent a relentless rise against the dollar then?
Well, selling gold in order to prop up the dollar and some vocal statements out of Washington would normally do. On April 21 the Europeans got what they wanted:
Europe gets U.S. help in bid to tame euro
Reuters, Sat Apr 21, 2007
BERLIN (Reuters) - European finance ministers got help from Washington on Saturday as they renewed an endeavor to prevent the euro's rise getting out of hand.
In an interview released overnight, U.S. Treasury Secretary Henry Paulson said that he still believed in a strong dollar -- confirming a line Europe was striving to convey to markets which keep betting on further euro rises versus the dollar and yen.
Will Paulson’s statement (and the recent increased ECB gold selling) be sufficient to halt the recent Euro’s rise?
Not according to Stephen Jen, a currency strategist at investment bank Morgan Stanley, he commented:
Whether that would prevent the euro rising further on was unlikely, but it coincided well with a new bid by the Europeans to calm traders' ardor for the currency. END.
Furthermore Jen expects the markets to push the euro higher despite the declarations out of Washington and Berlin, but markets might now be wary of pushing the euro above $1.40, a level that might stir central bankers more seriously.
"If $1.40's breached it could get very interesting," he said.
[NOTE: it goes far beyond the scope of this article to discuss the ongoing manipulation of gold by central banks but readers interested could take a peek at my pieces ‘Gold & GATA’ and ‘Managing the Gold Price – An Absurd idea or Not?] ]
Sure enough the ECB can’t keep up with this pace of selling (they sold 89 tonnes in last 7 weeks) and once this selling pressure dies gold is ready to go. So gold clocking a monthly all time high by the end of May isn’t something that should come as a surprise. It really doesn’t need that much in order to do so since a close above $681 will do! Now please take a peek at the chart below which plots all monthly closes since 1970.
The chart above doesn’t need any further explanation, no matter how you slice it, an all time monthly average high is as bullish as it can get.
Now please don’t think by reaching new monthly highs gold is entering ‘real’ highs. In contrary, gold is still cheap in 2007 dollars compared to its all time high of $850 reached in 1980. The chart below tells it all:
As the chart above indicates gold is nowhere trading new ‘real’ highs yet, in order to do so it should be trading above $2000 levels..
OK, so far the ‘big picture’, but what about current situation, what can we expect towards year end?
Well, as shown above, gold is on the verge of clocking new monthly highs which would be an extreme bullish event. Furthermore the current situation reminds us of the ones in 2003 and 2005 where gold and its shares faced long consolidation periods before moving up rapidly.
In 2003 it took ages for the HUI to slash its resistance at 150-160, in 2005 it took ages for the HUI in order to slash its resistance at 250 and now in 2007 the HUI has been struggling in order to slash its resistance at 350-360 for ages again thereby leaving many gold investors in a mental state of depression.
The very same thing happened in October 2005, sentiment was as bad as it could get during these days just like it is today and many gold advisors were calling for a top indeed.
To give you an impression of sentiment back then please read what I wrote on October 21, 2005:
HUI – Not Dead Yet
October 21, 2005
Sold your gold shares this week? Afraid of the high COT open interest numbers? Too many analysts calling for a major top? So therefore there must be a top? Well, since nobody can predict the future maybe they're right. Sure enough the HUI - crash of this week was a scary one and yes, the HUI could drop even a bit further from here but the question arises if this will be a major top indeed. Should we prepare for another down-cycle here or could this be the last short correction before taking out its long time resistance at 250? Again, nobody can predict the future and neither can I but the relative Gold/HUI charts are telling me that we're nowhere near a major top yet and that there's plenty of upward potential left. This piece examines the relative Gold/HUI charts and compares present situation with the one of July 2003. The similarities are striking and the conclusions stunning.
Now why do I come up with this?
Well, as stated above the similarities of 2003, 2005 and 2007 are striking indeed and it’s my strong believe that if the HUI could manage to slash its current resistance level of 360 another up-leg towards the 450 mark is in the cards.
Now let’s go back to the charts of 2003 and 2005 (published in ‘HUI – Not Dead Yet’)
Now that history books of 2003 and 2005 are written we can conclude that the HUI 2005 break-out was very similar to the HUI 2003 break-out indeed since the HUI managed to rocket all the way up from this 250 level towards the 400 mark. This represents a 60% increase in 8 months only (HUI 2003 run-up represented a 66% increase in 5 months only).
You get the picture?
If history could be of any guide for us then we could be witnessing a stellar up-move in the HUI once current resistance levels at 360 are being breached. These are the type of moves you don’t want to miss and the time for this to occur is approaching fast imo.
Now let’s take a peek at the HUI 2007 chart which visualizes the 360 resistance:
As you can see the HUI is struggling for almost 10 months now in order to overcome its resistance area. The good thing however is that the HUI is clocking higher lows ever since it rocked bottom in June 2006 and is approaching its resistance area again these days. Although the HUI managed to break-out briefly for one single day it didn’t manage to hold its gains due to crushing gold prices. But after a brief dip towards the 50 dma the HUI bounced back and is preparing itself again for another attack at its long-term 360 resistance.
Does it guarantee a break-out soon?
No, it doesn't since no one can read tomorrow’s news paper but the thing is that the downside potential is limited from here while the upside potential (after break-out) could be well rewarding.
If the HUI succeeds in breaking out, what could be considered as a reasonable target?
Well, from a technical point of view a break-out of current wedge formation justifies a HUI target exceeding the 450 mark. Remember that previous break-outs (2003 and 2005) resulted in HUI rallies of 60%!
In case the HUI is successful indeed in breaching its 360 resistance level coming weeks, in what time frame could we expect these new targets to be reached?
Again, hard to tell but previous break-outs (2003 and 2005) resulted in HUI rallies of 60% within a 5 till 8 months time frame..so a HUI trading above 450 levels by year end isn't really something that should surprise us.
Now how could you participate in such a potential new up-leg? Well, sure enough one could participate through big producers eg Newmont which almost guarantees similar moves as the HUI.
The fact however remains that the biggest rewards will be coming from juniors making discoveries. We just started adding new promising juniors to our Discovery portfolio who are on the verge of drill testing their outstanding properties. A combination of good drill results and a turnaround in sentiment (HUI making new highs) could be a receipt for pleasant surprises to the upside. Readers interested in our news letter (The Gold Discovery Letter) can find subscription-info HERE.
Readers who aren’t interested in a paid subscription but willing to do their own research can enjoy all interesting company news and best performing companies HERE. It’s FOC.
- HUI's trading pattern of late shows strong similarities with 2003 and 2005 before break-out
- HUI break-out 2003 at 150 yielded a gain of 60% in 5 months time.
- HUI break-out 2005 at 250 yielded a gain of 66% in 8 months time.
- HUI currently struggling to overcome its resistance at 360
- HUI break-out above 360 could result in HUI trading above 450 levels by year end.
- Gold on the verge of clocking all time monthly highs!
- Gold clocking an all time monthly average high could spark an increase of interest.
- Short term anything can happen since some officials are getting worried about a potential relentless Euro rise. So officials trying to talk the euro down (or talk the dollar up) can be expected these days since the euro is challenging its all time high.
- In case the dollar catches some support indeed it won’t be for long since its fundamentals are pointing towards much lower levels.
Comments are welcome at:
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The Gold Drivers Report
-- Posted Monday, 7 May 2007 | Digg This Article