-- Posted Tuesday, 12 September 2006 | Digg This Article
Honest Money Gold & Silver Report
Introduction
Due to the recent fall of gold and silver, and the precious metal stocks, we thought we would attempt to offer whatever assurances we can, knowing there are many an investor shaken by the recent downside action.
Coupled with the news media, always ready and willing to sensationalize any news story to garnish quick profits, and a volatile mix has been concocted. The elite collectivists who can sway the ebb and flow of the tides, can be seen readying their trolling nets, in search of bounty – other’s bounty, which soon becomes the spoils of conquest.
There appear to be but a few choices to describe the recent market action in the precious metals sector, which has also spread like a contagion across the broader spectrum of the commodity markets in general.
- The golden bull market is turning into a bear market (not likely)
- The retest of the June lows we have been waiting for is here (most likely)
We cannot think of any other choices aside from the above two to explain was is transpiring, although there are various sub-scenarios of the above two, regarding the exact unfolding of the events via not only price action, but the time or length of the move as well.
Back on October 26, 2005 we penned the article: Gold: Stage One or Two? which at the time was the topic de jour. Here is what we had to say, including a couple of charts that were provided at the time.
Price Action
“What other markers or indicators might there be that gold is entering stage two of its bull market? Well, when all is said and done, what matters the most is price action. So, let’s look at a chart of the price action of gold to see what it is saying.
The chart below is the price of gold from 1985 to 2005. Notice to the far left of the chart the highest price, which was back in January of 1988, at approximately $500 per ounce.
Now look to the far right of the chart. You can see the price is approaching the $500 level again for the first time in twenty years.”
London Gold Fix 1985 - Present
“Stand back if you will, and take the entire chart/picture in at one time. What does the formation of the entire chart look similar to?
It starts out high on the left, travels down, bottoms out, and then moves sideways, and finally up – approaching nearly the same height as on the left.
This is called a cup formation. One of the most powerful chart formations is known as a cup with a handle. The handle is usually sideways action to the right of the chart (present price action) just before the price breaks out above the rim of the cup – the highest level reached on the chart, i.e. $500 per ounce.
From this long-term chart, it is obvious that the price level of $500 is important if the gold bull is to stay intact. When the price breaks through this level, stage two will most likely be starting.
When $500 becomes support rather than resistance – stage two will be here.
The Price Level
Below is a chart of gold from 1975 to 2005. Notice the spike high up to $800 per ounce on the left hand side of the chart. Follow the price action down to the first bottom near $300 per ounce. Note where gold then rallied to - $500 per ounce.
From here, it then fell back to the $300 level. It then rallied back up to the same $500 price level. For the next 18 years, the price has never risen back to the $500 level – until now, as we are getting closer by the day.”
London Gold Fix 1975 - Present
“This is why the $500 level is of significance. Once this level is breached and becomes support – stage two is here. Make no doubt about it.
We may very well be on the verge of breaking into stage two – a transition appears most likely from stage one to stage two. However, that doesn’t mean that the coast is all clear, and that an intermediate term correction cannot still take hold of the ship.
Markets do not just move in one direction – even powerful bull markets. There is an ebb and a flow to the markets, between buyers and sellers, as that’s what makes a market – differences of opinion. All moves get corrected, in either direction, sooner or later.
Perhaps we are in stage two – perhaps not. Time will tell as it always does. If you want to know for sure that stage two is occurring, the crossing of the $500 level and the change from that level being resistance to support – will undoubtedly indicate stage two.”
Against the Crowd
At the time that was a fairly controversial opinion, as everyone was focused on the upside – not on the downside. We penned another article on April 4, 2006: Gold & Silver: Whither They Go that contained the following chart:
XAU Gold & Silver Index
Events
Well, since then we had a new high put in place by both gold and silver, and the HUI Gold Stocks Index, a subsequent short term correction, followed by a breakout by the HUI out of a symmetrical triangle formation that then reversed down, and has been heading down ever since.
Boring action it has not been. More like taking a high speed elevator ride while somebody fools with the up and down button, leaving your stomach behind at the scene of the crime.
So what’s it all mean? Well, as we said earlier – either the bull market continues on ahead, or changes from bull to bear. Our vote is the bull continues on.
Next issue: then what is unfolding with the recent violent downside action? Our bet is the test of the June lows, with a little set-up and help by the elite market collectivists, who have been known to moonlight as market interventionalists. Poor souls - they just can’t seem to get enough, as if there’s a hole in the bucket – like grains of sand through the hour glass.
It Is What It Is
Another idea we would like to offer is that the bull market is in effect until it isn’t, and as of now it is. Furthermore, the recent price action is not without precedent, as the above charts showed and the following illustrates.
HUI Gold Bugs Index
From our website we posted the following chart early this morning trying to offer some encouragement to fellow investors.
HUI Gold Bugs Index
The vertical blue lines indicate times when the 200 dma of the HUI Index was breached to the downside going back to 2002. As can be seen, such was not a rare occurrence, nor should it be expected to be. For a bull market to remain sustainable it must undergo intermediate term corrections.
The Move
The next chart is an updated version of one we posted in our market wrap this weekend.
It’s a weekly chart of the HUI Index with the fib retracement levels from the May 2005 intermediate term low of 165.61 up to the recent May 2006 high of 401.69.
The rise from 165.71 up to the high of 401.69 is a gain of 235.98 points (401.69 -165.71 = 235.98) which is a 142% increase (235.98 divided by 165.71 = 142%).
The most critical point in ALL of this is that we have not had an intermediate term correction of the precious metal stocks since May of 2005.
As shown above, the rise off the low to the top of 401.69 was a total of 235.98 points. A 50% retracement of that gain is equal to the 283.70 price level (50% of 235.98 = 117.99 and 401.69 minus 117.99 = 283.70).
The other fib levels are shown on the chart:
A bull market is in effect until the series of higher highs AND HIGHER LOWS is broken. The last intermediate term low was 165.71 made in May of 2005. Until that low is broken and a lower low occurs – the bull market is.
HUI Index Weekly Chart
Does that mean we should all hold our positions unless or until 165.71 is breached? No it doesn’t mean that. Each individual investor must decide for themselves what their comfort level is with their holdings, what their risk tolerance is, and what their overall financial situation is. Only you can decide what is best for you. What good is it to make money or profit if you can’t sleep at night?
The fundamentals for gold and silver are obvious:
- US Savings rate almost non-existent
- Over issuance of paper fiat debt-money
- US deficits expanding at alarming rates
- World debt levels increasing at alarming rates
- Over issuance of credit via structured finance and derivatives
- The purchasing power of all fiat paper money constantly eroding
- The purchasing power of the US Dollar constantly eroding towards worthlessness
The technical indicators for gold and silver are still intermediate and long term positive.
Intervention
Lastly, interventional analysis undoubtedly shows that large players have and are intervening in the precious metals markets, as well as oil and other commodities.
This is self-evident from the derivative positions in these markets held by various financial entities, on both the governmental and private level. In our weekly market wrap we presented a table of all these derivative positions: totaling approximately 3 TRILLION DOLLARS.
However, no one entity or group of entities can control the markets as if they were omnipotent. They can sway the markets and direct them here and there to a degree, which at times can be quite significant, as we have just seen, and may see more of.
But the market is much LARGER AND MORE POWERFUL then any one investor or group of investors, as the market is the sum total of ALL investors.
From the day that markets first existed, there have always been the elite moneychangers who try to gain more then their fair share, which for a time they often do – but in the end the price they pay is far greater then they had planned.
Primary Trend
The primary trend of the market is a law unto itself and cannot be denied: just as the fates cannot be denied – even by the gods and those who desire to be gods. Zeus himself must obey the three sisters of fate.
Intermediate and long term we remain bullish on gold and silver. When such changes we will so state. It is what it is – until it isn’t – and as of now: it is.
Special Treat
Below we attach some charts from our dear friend Alexandra Siena. As you can see, Alex is a chartist extraordinaire. We are fortunate that she shares her work so freely. Thank you Alex. We will not comment on her charts, as they are self-explanatory.
Conclusion
The gold and silver bull market is intact. Presently an intermediate term correction is testing the June lows. Prices may be volatile both to the upside and downside short term.
Prior to any meaningful intermediate term advance, further downside (an upside) action will occur. Enough technical and emotional damage has been done that TIME is required to work off the overhead supply and resistance that has resulted therefrom.
We suspect an intermediate term move up to begin by the New Year.
The gold bull IS, until it isn’t – and as of now: IT IS.
Come visit our new website: Honest Money Gold & Silver Report
And read the Open Letter to Congress
COMING SOON: A REQUEST FOR AN AUDIT OF US GOLD RESERVES
-- Posted Tuesday, 12 September 2006 | Digg This Article
