-- Posted Thursday, 16 August 2007 | Digg This Article
Thomas Z. Tan, CFA, MBA
Since my last blog in August 2006, I have received many feedback and comments from a lot of viewers. I want to thank you all here and they are very educational to me. It has been exactly one year since my last blog and none of my previous views have changed. With the market turmoil the last several weeks (especially today on August 16, 2007) with both gold and especially HUI, I want to provide my latest thoughts on this particular market and sector.
Let me first comment on the gold consolidation as of today which has disappointed many PM investors. As we know, gold peaked back on May 8th 2006, and it has gone through a long consolidation phase for 15 months since. This process is long, but there are several things we should also keep in mind here.
First of all, if you look at the gold (or HUI) chart since last May, there have been two bottoms, the 2nd one happened last October. So even lack of spectacular up move, gold has been on an uptrend since last October (at least for now if gold doesn’t drop below $560 and HUI below $270). This uptrend is hardly noticeable since it is almost flat with a slight upward skew, but the same thing happened during 2004-2005 period too when gold tried to overcome the key resistance of $450. If we use the last October bottom for gold & HUI, the correction period is actually very short, only 5 months (from last June to last October).
Secondly, if you look at the past 7 years of gold bull market, there have been 3 major resistances: $325, $450 and $700. Each barrier has taken a long time for gold to break, e.g. it took 20 months for gold to break the $450 key barrier.
Third, the previous run from $450 to $730 was too spectacular, too fast, and the up slope was too steep. This was accomplished in only 7 month time, too short. With such a good run, it is normal for the market to have a long breath and take its time to build a good foundation for the next move up. It is the balance and symmetry between price momentum and time.
Lastly and most importantly, if you plot the monthly close chart from the 1970s to now, gold has never gone higher than $700. Even gold reached $887 on an intraday basis in 1980, which has never been reflected in the monthly close chart (by the way, the weekly close chart shows gold below $800 in 1980). The same thing also happened to the $730 price peaked last May. Both are reflected as $690 resistance in the monthly close chart. If using monthly chart for long term perspective, gold has never exceeded and stayed above $700 mark for over a month.
This explains why gold faces such a difficulty to surge decisively over $700 recently because gold has never done this in its entire history. Above $700 is an unchartered territory for gold from a long time perspective. I can imagine that $700 actually provides the largest obstacle for gold to overcome. It shouldn’t be a surprise that gold spends about the same time now trying to overcome $700 as it did to $450. We also shouldn’t forget that once gold broke $450, we saw an explosive move to $730, a 60% gain (about 40% gain from $325 to $450 at the previous run). If we use the same analogy, we shouldn’t be surprised to see that once gold breaks $700 decisively on a monthly chart, gold will have a field day with similar explosive up move to reach 4 digits.
I have seen before this kind of shakeout and bottom testing in May 2005 (when gold was above its previous bottom but HUI was testing its old bottom again). This is the typical capitulation to shake out all the weak apples and hammer out any remaining confidence in investors. As trading in any market, we need both patience and a strong heart, especially with gold, especially during market turmoil like now. Also don’t forget if this gives you more confidence that, we are holding gold, the last currency standing in the World, and HUI as long term option to gold never expired. We are not losing time value on these gold options and quite opposite we gain time value since each day the miners are getting one step closer to production. This is much better than holding some asset “back” securities marked to black box computer model (not to the market) with assumptions such as delinquency rate can jump 4 times from 5% to 20% in one month. We have no clue what the future cash flow looks like on those ABS products if there is any. But at least we have gold. Even with what has happened during last several weeks, I am still expecting this consolidation phase to end soon, and the 2nd half of 2007 will be a good up market for gold, silver and HUI. Next year in 2008 too. Buying dip and hold have been a good strategy during last 7 years in this gold and mining market, so don’t panic. A great opportunity and turning point might be right in front of us.
Disclaimer: The contents of this article represent the opinion and analysis of Thomas Tan, who cannot accept responsibility for any trading losses you may incur as a result of your reliance on this opinion and analysis and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions.
-- Posted Thursday, 16 August 2007 | Digg This Article
