-- Posted Monday, 22 May 2006 | Digg This Article
By: Peter Degraaf
There’s a lot of anxiety out there. I’ve received many E-mails from subscribers who are quoting cyber-net guru’s as predicting silver might come down to 8.50, others who are suggesting that gold will find support at 525.00.
Still others are predicting that a countertrend bounce in the US dollar will hurt gold. I even saw one article recently, written by a widely followed chartist who suggested that it is ‘time to go fishing’.
I HAVE SOME GOOD NEWS! Good news for ‘gold bugs’ that is! The current shakeout in gold and silver prices is just about over! The next rally is just around the corner!
Included in this article is a chart that measures the strength of gold mining stocks versus gold bullion. It is the XAU Philadelphia Exchange index of 12 major precious metals mining companies,(including Newmont and Goldcorp), divided by the latest gold price.
Close examination of this chart reveals that whenever this calculation ($XAU:$GOLD), computed at www.stockcharts.com reaches below .21, it is time to buy precious metals and PM stocks. Conversely, when it arrives above .25, it is time to sell. You will notice that for the past two days it has slipped below .21
You may ask: what is preventing this number from going even lower? The answer is that it could go lower, as no one can predict the future. We do however have some clues that give us an indication that the odds are better than 50/50 the tide is about to turn, and the bottom is ‘in’.
I have marked the chart with the letters A, B, C, D. These letters are next to so-called ‘upside reversals’. A reversal happens when the chart pattern during the day, first goes lower than the previous day, but closes higher. Some people call it a ‘selling climax’.
I have also included in this article a chart of the daily gold price, as well as a chart of the HUI index of unhedged gold mining stocks, also with the letters A – D included, so the reader can compare what happened following a ‘reversal’ in the XAU/Gold chart.
This is where it gets exciting! In June of 2003 the chart pattern fell below .21 (A), the gold price was at 375.00 , silver was at 4.50 , and the HUI index was 132 . From the point where the reversal took place, the index, as well as gold, silver and the HUI, rose for almost 6 months! In May of 2004 the index once again fell below .21 , marked ‘B’. You’ll notice another ‘reversal’, and the index, along with gold, silver and the HUI then rose for 6 months!
Then, in May of 2005, marked ‘C’, the chart pattern dropped all the way down to .19 and we had to wait till June for the reversal, but once it came, the index, as well as the PM and HUI rose for 7 months!
This is where it gets EVEN MORE EXCITING! This is where history becomes today! It is May 2006, the index is below .21 , and we had a reversal on Friday May 19th. The RSI (Relative Strength Index – at the top of the chart), is below 30 which is where it turned up during A, B and C. All of the pieces in the puzzle are in place for a powerful rally, which, if history has any predictive pattern for the future, (and I humbly suggest that it has), should last 6 or 7 months.
One of the problems facing investors and traders is the fact that they often read articles written by people who compare today’s gold and silver action to that of the 1980’s. I remember those days, as I have dealt with the metals since 1962. There are several reasons why the comparison is flawed. IT’S A WHOLE NEW BALL GAME!
When Roger Bannister trained to run the mile in under 4 minutes, there were ‘experts’ who said it could not be done. Doctors warned him that he might damage his heart. It was an amazing feat, as Roger had to surmount not only a physical barrier, but a mental barrier as well. As soon as he broke the record, runners all over the world began to run the mile in less than 4 minutes. They no longer had to face the mental barrier.
Let’s compare this to the current situation in gold. Gold needs to trade at over $2,100.00 an ounce, (adjusting for inflation), just to match the $850.00 level of February 1980. Silver needs to trade at $120.00 to match the $48.50 of 1980. The barriers are gone! This is very important!
The amount of money in circulation today (frequently precisely quoted by Jason Hommel), is far greater than the amount that was available for purchasing the metals in 1980! Just as important from a fundamental point of view, is the fact that never before during the 44 years that I have been trading the markets, has there been such an overhang of short positions, coupled with a reluctance on the part of central banks to supply physical metals to the market. These facts have been well documented by GATA, by John Embry, By Adam Hamilton as well as the brilliant Theodore Butler.
One final note. Have you noticed that all of these buying points came in May or June? This is May, going on to June! I don’t know about you, but instead of going fishing, I am backing up the truck! While we could see a bit more weakness, and as we are closing in on the Memorial Day weekend, the action could be delayed for a few weeks, but I’m ready! Hope you are too!
DISCLAIMER: Please do your own diligence. The writer and the publishers are not responsible for your trading decisions.
Peter Degraaf is a successful on-line trader who sends occasional E-mail alerts. He offers a 60 day free trial. He also sends out a free E-mail message to people who are confused by some of the terms used. It is called : Explaining the terminology. Contact him at ITISWELL@COGECO.CA
-- Posted Monday, 22 May 2006 | Digg This Article
