-- Posted Thursday, 11 May 2006 | Digg This Article

I know of no way of judging the future, except by the past.”                

-   Patrick Henry

Whew!  I think this best describes the wonderful ride I’ve been on ever since returning to the bullish side of metals and mining in the spring of 2003. I believe it’s very fair to say I was very bullish throughout the ride, except for stepping aside for the few short corrections and leaving the bullish camp on copper far too soon.

With gold hovering around $400, I kept stating that $500 was only a question of when, not if. Around $500, I said the same for $600. When $600 was breached, I stated gold should test key resistance between $650 - $700.

Hello $700!!!   Now What?

Before proceeding, let’s you and I do the following:

Breathe in, and out. Breathe in, and out.

It’s been an exhilarating ride that has astounded us. Now that we caught our breath, let’s try to plot a strategy that makes sense going forward.

A significant sharp correction is lurking out there. It’s highly likely to come out of left field and at its depth, should end up giving cause to question if the bull market is over? Don’t ask me to pick the time, date and price because I’m out of the short-term trading game (and those who have tried up until now have been run over by this mega bull).

But knowing history tends to repeat itself, I’ve called upon the good works of one of the best technical analysts I’ve ever known, Mr. Frank Barbera. He and I go way back (and I mean way back) to the good old days when America had a real, honest-to-goodness financial cable show called The Financial News Network (FNN). Frank was the assistant to FNN’s technical analyst, John Bollinger. Frank then went on to provide technical analysis on a southern California financial program for many years and now manages money and writes a newsletter called “GST MarketFAX” (P.O. Box 2708, Palos Verdes Peninsula, CA 90274 fbarbera35@hotmail.com).

In his May 9th issue, Frank made some very worthy observations below:

In our view, today’s action in Gold and Gold Stocks looks to be climactic  “blow off” activity, with Gold gapping higher in what could be a late stage “exhaustion” gap. Volume in the gold stocks is presently at record levels and amplifying the already seriously overbought condition. In studying Gold, I note that back in late 1979, between November 26th, 1979 and January 21st, 1980, Gold experienced a massive “blow off” advance which took the price from a reading of $390.30 on 11/26/79 to a high of  $825 on 1/21/80. During that period of time, Gold advanced $434.70 per ounce or  111% in price in a period of just 36 trading days. During that period of 36 trading days, Gold closed higher 27 of the 36 days for an advancing days ratio of 75%.  Today, since March 24th of 2006, Gold has advanced from a reading of  $563.50 to a current value of $702, a gain of $138.50 or 24.57% over a period of 32 trading days thru today’s close. So far, Gold has advanced 24 of the last 32 trading days for an advancing ratio of 75%.  In  looking back at the long term history of Gold rallies, we find that this type of highly concentrated advance is exceptionally unusual and extremely difficult to sustain.

Above: the most robust portion of the 1979 to 1980 ‘Blow off’ in Gold gained ground 27 out of 36 trading days, in the process lifting the metal from $390.30 on 11/26/79 to a closing high of $825 on 1/21/80. At present, this market is up 24 of the last 32 days advancing the same .75% of the time.

Realizing the gravity of the current short term over-extended condition in Gold, we went back to December 1974 on our computer, and asked the computer to give us a list of every gold rally that spanned more than 30 trading days without undergoing a 5% correction on a closing basis. While the data on this screen was slightly different, the current rally nevertheless ranks as Number #4  ‘all time’ using the percentage of Up-Days in each advance. The point here, is not to compare the % gains, (as the blow off in 1980 capped off a secular bull market in Gold which had lasted 12 years) but rather, the amount of time spent rallying during each advance.

In the table above, I show the Top Ten most concentrated advances in the history of the Gold market with the current rally coming in at a ratio of .682, using the March 10th low as the starting point.  The average duration, in terms of trading days for the Top Ten longest rallies in Gold, has been a period of 50.30 trading days, with today representing day 41 in this advance. Put another way,  if this Gold rally expires at “the average” duration of 50 days, then at Day 41, we are currently 82.60% of the way complete for the rally. In my work, I note that the more concentrated the % of advancing days is for a given market, normally the more rapidly the move will come to an end. Only two of the Top Ten most concentrated rallies for Gold ran beyond 50 days. In addition, the average gain for the Top Ten most concentrated rallies in Gold was 24.01%, wherein the current market is already up 28.86%. In looking at  the full table of data from our computer run (shown on Page 2) some may notice the two longest Gold rallies of which, one lasted 118 days, and another lasted 105 days. A point to be made on these instances, they were both very early on in Bull markets and both came in close proximity to prior major bear legs.

In the case of the 2002 advance lasting 118 days, it followed the major basing action of 2001 and 2002, with 2001 representing THE bottom of a 20 year bear market. At no time during this advance, were Gold prices historically over-extended as they are right now.  Similarly, back in 1977, the advance lasting 105 days from June of 1977 to November 1977 followed directly in the heals of a four month, 11 decline in Gold,

which itself was still in close  proximity to the even larger bear phase of  1975 to 1976 when Gold tanked from $187 to $102, a nearly 50% decline lasting nearly 2 years (see chart below).

In fact, when we looked back thru some of Gold’s most extended and most concentrated advances, we found that all of the “long advances” beyond 60 days developed in the wake of fairly substantial previous declines or extended consolidations. Put another way, none of these markets were anything like 37% above the 200 day moving average on Gold, as is seen at the present time.  Only the “super spike” in 1980 was comparable in that regard with a tremendous blow off to 133% above the 200 day average marking the final high.  Remember, that same advance, which had managed to move to a position well above the 200 day average by virtue of a long building (and correcting) parabolic price structure, capped off in a total of just 51 days, and by that framework the current advance is 41 days along, on a similar parabolic structure.

In fact, as can be seen on the chart on the previous page, with today’s close just over $700, the price of Gold has now moved fully into the bulk of the resistance area of the former highs going back to 1980. This should be a very difficult level for Gold to sustain, and an area from which  a major multi-month correction is set to begin.  So just how extended is the Gold market at the present time ? Well, over the weekend we spent some time looking at Gold using Monthly RSI’s. Normally, we look at Daily RSI’s, and on occasion, will look at a Weekly RSI. The greater amount of time built

into the RSI gauge, the more difficult it is for a market to achieve a particular overbought or oversold level. Put another way, it is much easier to hit oversold readings on a 9 day RSI, which is a short term gauge, than say, a 9 week RSI, let alone, a 9 month RSI which would take a large move in prices to move the indicator (up or down) even a little bit. With that in mind, look at where we closed on the 9 MONTH RSI today ….a reading of +90.47. Guess what ? Back in 1980 we saw the 9 Month RSI sustain itself above +90 for two monthly readings, a reading of +90.88 on 12/31/79, and a reading of +94.14 on 1/31/80.  When it comes to +90 type readings on the Monthly RSI, -- that is all she wrote. Following the peak in January 1980, Gold then crashed from the low $700’s (excluding a two day spike to $850) to the low $500’s, for a decline of $200/oz or roughly 26% in two months, and by March of 1982 was down to +30 (oversold) on the RSI with prices near $340. To be clear, we do not expect that type of extended bear market resolution for this market in the months ahead. In fact, in a healthy bull market, the 9  Month RSI would normally pull back to around neutral territory of +50, which would likely equate to a decline back toward the low $500’s as was seen between January 1980 and March 1980. In our view, this type of sharp corrective action is likely very much in prospect in the months immediately ahead and should yield another major low in the Gold market, likely over the summer.

While I do believe gold is eventually going to take out the old high around $875 and when the correction comes, the ultimate bottom may not be anywhere the near the low $500’s Frank envisions, I never-the-less think Franks’ work is extremely worthy of your time. I would urge you to consider subscribing to his newsletter just as I have Bill Murphy’s. Both have been invaluable to me.

Okay, whether we have a serious correction starting tomorrow, in a few days or weeks, or go straight to the old highs and then correct hard, the bad news is, the easy money is over. The good news is, we’ve haven’t come close to the speculative frenzy that is all but certain in the mining shares before it’s all said and done (more on this later). So in terms of gold, not only hasn’t the fat lady sung, but she’s not even close to entering the building.

Silver – Any correction in gold is all but certain to carry over into silver, albeit it’s likely to even be more vicious in silver thanks to thinner trading conditions. But like gold, we’re at worse in the 4th or 5th inning of at least a 9-inning game. The silver ETF has made playing silver a much easier proposition and has given it the liquidity it has long needed.

Platinum and Palladium –  Quietly and with little or no fanfare that has been common in the gold and silver market, Platinum has hit $1200 and palladium has broken out of a long slump with a vengeance. And unlike gold and silver, consolidation is more likely versus a correction. Platinum continues to benefit from a worldwide tightening of automotive emission controls, as well as increased LCD glass manufacturing. In addition, results from clinical trials and laboratory tests in Europe are now suggesting that a number of platinum-based compounds will be potentially important for the future of cancer treatment.

Copper – Warning! Warning! Warning! The person about to speak about copper has a track record on copper that’s been P-I-T-I-F-U-L I think that’s a fair assessment, especially since I actually turned bearish at $2.98, only to see prices rise another 20%. At the beginning of the year, it appeared the supply and demand balance was likely to become more balanced and therefore envisioning a $3.88+ price seemed far- fetched. Hold on I need to take both feet out of my mouth. While the news from the industry has since suggested supplies are tighter then thought just a few months ago, I can’t bring myself to think buying copper now can be profitable 6-12 months from now. But remember, I’ve absolutely stunk in this arena for far longer than I could have ever imagined.

Uranium – It remains the no-brainer metal and $75 is a question of when, not if, in IMHO.

U.S. Dollar Index – I’ve coined the phrase “the only one who doesn’t know the U.S. dollar is dead is the U.S. dollar.” I think we caught the top http://www.grandich.com/docs/alertGL_04-04-06.pdf .  The only question now is, how long before we test critical support at 80 on the U.S. Dollar Index and how many bounces it takes before we break below and the world gets a sell signal on the U.S. Dollar?

Oil – With all the geopolitical tensions, hurricane season upcoming and the fact that it’s easier to find a needle in a haystack than an oil bear, my gut keeps telling me we could be witnessing a significant top being put in around $75. But rather than be the “lone wolf,” I’ll just stand aside and be a live chicken versus dead duck.

Mining and Exploration Shares –

Has Their Time In The Sun Finally Arrived?

Back in 2001, at the depths of the metals and mining depression, those in the industry still breathing would have likely died from a heart attack if someone had shown them metal prices come May 11, 2006. It would have been beyond comprehension and any fantasy at the time. But here we are and yet, despite some big gains in some stocks, I think it’s fair to say the lower we go down the mining share food chain, the less overall gains we’ve witnessed versus the expectations one could have had given the performance of the metal prices themselves. Because my work centers in the junior resource market, I’ve experienced some of the frustration I continuously hear from retail investors and even professionals about how overall, the junior resource market hasn’t come close to reaching a fever pitch given the metals performances.

I believe that’s about to change. The second half of 2006, and especially 2007, is setting up (in my biased but humble opinion) to be the speculative frenzy most have been patiently waiting for. But first, let’s start at the top of the mining share food chain as like “Reagan economics,” the trickle down effect is expected.

Back in late 2004, I began to point out in my writings and appearances on ROB-TV that we should see a dramatic pick up in mergers and acquisitions within the mining industry. In 2005, the combined value of gold deals in Canada alone was over $16 billion (Cdn) up from under $4 billion in 2004. I then said as 2005 ended that 2006 should be even bigger than 2005. Barrick’s takeover of Placer Dome and the just-announced bid for Inco from Teck Corporation has set the stage for even more fireworks.

Because the mining industry is relatively small compared to most others, it’s been a “good old boys” network. Teck’s unsolicited (and I believe unwelcomed by Inco) bid for Inco has removed the gloves and IMHO ignited the start of a feeding frenzy. How can companies like BHP, Anglo American, Rio Tinto, Newmont and others not feel compelled to act?

It’s not all rosy in these folks’ boardrooms these days despite record smashing metals prices. Many of them have not been able to translate higher metal prices into much higher profits, thanks in part to higher energy costs, skilled labor shortages, and seemingly ever-increasing hostile work environments outside of North America. In addition, there just have not been enough new discoveries and development of major ore bodies to fully replace what these big guys have grown accustomed to producing. Therefore, like the oil companies did back in the 80s when oil prices skyrocketed, you can expect mining companies to be aggressively mining on Wall Street and Bay Street for the foreseeable future. This in turn, should lead to reaching out to smaller producers and advanced-stage exploration projects held by juniors.

In a recently published report, New York-based international economic consulting firm KRW International, described how a major paradigm shift has occurred in the attitudes of institutional investors toward the junior natural resource companies. They stated, “major financial institutions have finally begun to shift their orientation from one that disparaged the resource market as one inhabited by quirky gold bugs, survivalists, old-timers and those not wise enough to recognize the unchallenged appeal of technology and other sectors investors came to know and love in the 1990s… today, these institutions appear to be slowly realizing the rise of commodities, metal and energy is not likely to be a short-term phenomenon, but rather one that will endure so long as growth and demographic trends continue at anywhere close to present levels.” They went on to note that they can see “a distinct change in rhetoric within institutional research.” In addition, they stated, “…large financial institutions don’t move quickly. Once they do they try to make the most of their effort. Therefore, as these institutions begin to perceive value in the resource sectors, and to augment their staff of bankers, analysts and other professionals with relevant expertise, these people will need to do deals and move the product necessary to justify their existence.” 

Bottomline –

While a significant correction or even an intermediate top could take place at any time, the end to this secular bull market in metals is far from over. Geopolitical tensions, bullish supply versus demand trends and the end of the reign of the U.S. dollar, all should underpin the precious metals for the foreseeable future.

A feeding frenzy has begun among the major metals producers and it should work its way down to the junior resource market. Until the time when your neighbor is telling you he sold Microsoft, Intel or Google for some exploration stock he can’t spell (or even tell you where they are exploring), it’s okay to go in the water, albeit small-craft warnings will come and go.

The above was sent out at 9AM EDT this morning.  An update is appended below:

GRANDICH LETTER SPECIAL ALERT
THURSDAY,MAY 11, 2006
1:00 P.M EDT

Following up to my special alert earlier this morning, http://www.grandich.com/docs/alertGL_05-11-06.pdf an overbought/oversold indicator of mine that I've used since before the 1987 stock market crash, has given the most overbought reading ever for both copper and gold.

Knowing that I'm going to trigger the "nuts" out there to call and email us, I'm going to suggest that risk in gold, silver and copper is now equal to, or much higher, than reward in these markets for the near term. The long awaited sharp correction is within hours or days away at the most.

This doesn't change my long term outlook.

View this alert online at
http://www.grandich.com/docs/alertGL_05-11-06a.pdf

-- Posted Thursday, 11 May 2006 | Digg This Article

Peter Grandich is the Managing Member of Grandich Publications, LLC (www.grandich.com).
The company publishes The Grandich Letter (first published in 1984) which covers the metals and mining industry, follows world markets and economies, and covers the Canadian markets from an American prospective.

Grandich also provides a variety of corporate finance and development services to publicly-held companies.

Peter Grandich is also the Managing Member of Trinity Financial, Sports & Entertainment Management Company, LLC (www.trinityfsem.com), a Registered Investment Advisor in the State of New Jersey. Trinity provides investment advisory services to individuals, small to mid-size businesses, professional athletes and entertainers.

Peter is a long-standing member of The New York Society of Security Analysts and The Society of Quantitative Analysts.

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