• An unlikely scenario is a decline all the way to the very long term upcycle trendlines (XAU's chart dated 10-20-04 is the most recent very long term upcycle chart) in place since October/November 2000, which wouldn't be a dramatic difference from a decline to the long term upcycle trendlines, since this long term upcycle is only about 6 months old (began 5-10-04) versus the previous long term upcycle that lasted well over a year (7-26-02 until 12-2-03 for HUI/NEM and until 1-6-04 for the XAU). This scenario is unlikely because a long term cycle high should occur well above the previous one (at 258.60 for HUI on 12-2-03, at 50.28 for NEM on 12-2-03, at 113.41 for the XAU on 1-6-04) before a decline to the very long term upcycle trendlines occurs. Should this unlikely scenario occur it would mean that the XAU would decline to about 85 versus 90 if it declined to the long term upcycle trendline. Therefore, there isn't a dramatic difference at this point in the long term upcycle between it's uptrendline and the very long term upcycle's trendline, which means that, if a major correction occurs in the next few weeks, it should be a great entry point for gold/silver stock (and gold/silver) investors as well as for traders of course.

• Gold/silver stocks are very volatile and one can experience huge declines if they buy them at the wrong time, but gold/silver stocks have been outstanding investments since they began a secular Bull Market/very long term upcycle in October (NEM/XAU)/November (HUI) 2000. HUI rose about 70% each year in 2001, 2002, 2003 for example. A number of gold/silver stocks are up more than 1000% (more than 10 times) since the Bull Market began. (CDE, HL, PAAS, SSRI, WTZ, for example).
  

• The major benefit of a major correction is that it would allow this long term upcycle to be a long healthy one, similar to the previous one that had five major corrections and lasted well over a year (7-26-02 until 12-2-03 for HUI/NEM and until 1-6-04 for the XAU).
  

• Buy and hold for most investors/traders (until the long term cycle high in probably about 6-12 months) makes a lot of sense unless you're a nimble trader. Nimble traders have a good chance (using my system) of increasing returns by trading intermediate term cycles that typically last 1 to 3 months for an entire cycle up and down. Most traders/investors are much better off buying and holding long term upcycles.
  

• XAU Implied Volatility, which usually factors in early in the session, fell -0.21% to 28.060 on Friday 12-3 from 28.120 on 12-2 versus a +0.62% rise in the XAU on 12-3, which is a modest (0.25-0.50%) +0.41% rise in fear (-0.21% + +0.62% = +0.41%. The XAU wall of worry grew by 0.41%, therefore fear rose by 0.41%) that portends strength/an uptrend (probably early) on Monday 12-6 (fear is usually contrarian and therefore normally portends strength, until it reachs an unusually large level (> 6% increase) where it becomes non contrarian). That strength/uptrend could follow a gap down as discussed in previous updates (I left the discussion in toward the bottom). I've noticed that XAU Implied Volatility usually factors in during the first few hours of a session, but cycle channels/trendlines are the most important consideration. It tends to indicate a trend/tone rather than necessarily up or down for that session. The XAU Put/Call Ratio is another very important indicator that may disagree with XAU Implied Volatility. If XAU Implied Volatility indicates strength and the XAU Put/Call Ratio portends weakness typically strength followed by weakness will occur but these indicators must be used in concert with cycle channels/trendlines (very long term, long term, intermediate term, and short term).

• The XAU Put/Call Ratio is at 0.98867 for the December expiration as of 12-3. The XAU Put/Call Ratio was at 1.03065 for the final November expiration value as of 11-19. The XAU Put/Call Ratio was at 0.85989 for the final October expiration value as of 10-15. If it rises 6% or less it portends strength following likely early weakness (indicated by XAU Implied Volatility). If it falls 6% or less it portends weakness. At unusually large greater than 6% moves the XAU Put/Call Ratio becomes non contrarian, so a greater than 6% rise portends weakness (unusually large rise in fear) and a greater than 6% decline portends strength (unusually large rise in complacency).
  

• A major indicator (NEM Lead Indicator) portending weakness (but all indicators and cycle channels/trendlines must be considered collectively, not in isolation. Think "system.") in the XAU on Monday 12-6 (and probably much of this week) is the fact that NEM underperformed the XAU in 12 of the past 17 sessions with one tie, but started to outperform late last week: 12-3 NEM +1.11% vs +0.62% for the XAU, 12-2 NEM -2.76% vs -3.28% for the XAU, 12-1 NEM -0.38% vs -0.04% for the XAU, 11-30 NEM -3.78% vs -2.98% for the XAU, 11-29 NEM +0.66% vs +0.15% for the XAU, 11-26 NEM +2.34% vs +2.48% for the XAU, 11-24 NEM -0.99% vs -0.46% for the XAU, 11-23 NEM -2.11% vs -2.30% for the XAU, 11-22 NEM +0.45% vs +0.52% for the XAU, 11-19 NEM +1.11% vs +1.26% for the XAU, 11-18 NEM -1.86% vs -1.84% for the XAU, 11-17 NEM +0.71% vs +1.54% for the XAU, 11-16 NEM +0.66% vs +1.48% for the XAU, 11-15 NEM -1.55% vs -1.38% for the XAU, 11-12 NEM +2.18% vs +2.44% for the XAU, 11-11 NEM +0.50% vs +0.50% for the XAU, 11-10 NEM -1.37% vs -0.78% for the XAU. The first chart shows how the gap between NEM and HUI/XAU  has widened dramatically the past 12 sessions.

• There's an early warning system in place! The NEM lead indicator chart dated 12-2-04 below (first chart) reveals that NEM has dramatically underperformed in recent weeks as can be seen in the wide gap between NEM and HUI/XAU. When NEM underperforms HUI/the XAU for a few months then the long term upcycle that began on 5-10-04 will probably be in trouble, as was the case during the last few months of the prior long term upcycle that ended on December 2, 2003 (HUI/NEM)/January 6, 2004 (the XAU) and began on July 26, 2002. 
  

• The negative correlation between gold and the USD is now very high. It's -87% on 12-3 (-84% on 11-26) for the past 180 days for gold, according to Moore Research Center, Inc. For silver the negative correlation with the USD is only -61% on 12-3 (-55% on 11-26) for the past 180 days. Silver's negative correlation is much less than gold's because it's more of an industrial metal than gold is, hence it has a more positive correlation with US economic strength and a strong US Dollar.

• The reliable non contrarian (in terms of their trading activity) gold commercial traders are short gold. They are clearly positioned for gold weakness with only 106,555 long futures and options contracts versus 313,043 short futures and options contracts (data as of 11-30-04).
  

• The notoriously contrarian (in terms of their trading activity) gold speculators are correctly positioned for gold strength with 202,731 long futures and options contracts versus only 39,602 short futures and options contracts (data as of 11-30-04).

• The gold commercial traders added 6258 long futures and options contracts and added 1139 short futures and options contracts which portends strength this week (non contrarian indicator), but the addition of 1139 short contracts indicates they expect some weakness. The most important consideration in timing any market is the cycle channels/trendlines (see charts below).

• The gold speculators (hedge funds and other speculators/traders) sold 1734 long futures and options contracts and added an unusually large (> 10% incraese in the number of short contracts) 5329 short futures and options contracts which normally portends strength this week (contrarian indicator), but the unusually large degree of shorting points to weakness. The most important consideration in timing any market is the cycle channels/trendlines (see charts below). 

• The reliable non contrarian (in terms of their trading activity) silver commercial traders are short silver. They are clearly positioned for silver weakness with only 15,279 long futures and options contracts versus 106,040 short futures and options contracts as of 11-30-04.

• The notoriously contrarian (in terms of their trading activity) silver speculators are correctly positioned for silver strength with 71,930 long futures and options contracts versus only 2575 short futures and options contracts as of 11-30-04.

• The silver commercial traders added 2022 long futures and options contracts and added 2926 short futures and options contracts which portends weakness (non contrarian indicator) this week, but the most important consideration in timing any market is the cycle channels/trendlines (see charts below).

• The silver speculators (hedge funds and other speculators/traders) added 1489 long futures and options contracts and covered 704 short futures and options contracts which portends weakness this week (contrarian indicator), but the most important consideration in timing any market is the cycle channels/trendlines (see charts below).

• The reliable non contrarian (in terms of their trading activity) USD commercial traders are clearly positioned for US Dollar strength with 18,867 long futures contracts versus only 863 short futures contracts as of 11-30-04. Last week they added 549 long futures contracts and covered 37 short futures contracts which portends USD strength this week (non contrarian indicator), but the most important consideration in timing any market is the cycle channels/trendlines (see charts below). Because the total number of contracts held is small I'm not considering unusually large changes (>10%) to be contrarian (I'm not using/noting unusually large changes here).
  

• The notoriously contrarian (in terms of their trading activity) USD speculators are correctly positioned for US Dollar weakness with only 6412 long futures contracts versus 21,274 short futures contracts as of 11-30-04. Last week they added 1094 long futures contracts and added 2184 short futures contracts which portends USD strength this week (contrarian indicator), but the most important consideration in timing any market is the cycle channels/trendlines (see charts below). Because the total number of contracts held is small I'm not considering unusually large changes (>10%) to be non contrarian (I'm not using/noting unusually large changes here).

• The remainder of the bullets didn't change from last week, so you may want to skip down to the charts. I left them in because they address the very important long term upcycle buy signal discussion and other very important "big picture" information as well as information about my system/indicators. Also, it's a good idea to leave them in because some people are reading this for the first time.
  

• I know some of you have difficulty grasping some of the technical work that's part of my system. Well, I have great news for you. By far the most important part of my system, the basis and crux of my system, are the cycles (very long term (about 35 years for an entire cycle up and down), long term (1 to 3 years), intermediate term (1 to 12 months), short term (days/weeks), very short term (hours/days), intraday) and their channels/trendlines (see the charts). If you can't deal with the detailed technical work you can simply use cycle channels/trendlines on the charts in order to time gold/silver stocks or any other market. You also have to keep in mind that cycles tend to become more parabolic/sharply rising or declining over time.
  

• The fact that HUI, NEM, and the XAU are in very long term upcycles since late 2000 (see NEM and the XAU's very long term upcycle charts, my charting service doesn't go back that far for HUI) and the fact that HUI, NEM, and the XAU are in long term upcycles since May 10, 2004 (see latest charts) are by far the most important factors. Therefore, one really just needs to use cycles and their channels/trendlines in the charts in order to time gold/silver stocks (or any other market). The indicators and COT data are more for finetuning entry/exit points (more for traders).
  

• Keep in mind that my "Trade The Cycles" system is relatively new and only reached a well developed stage (with a good understanding of cycles and the three indicators, the NEM Lead Indicator, XAU Implied Volatility, and the XAU Put/Call Ratio, as well as the Commitments of Traders (COT) data) in 2003. Therefore, my application and understanding of the system is still somewhat on a learning curve. My system/research/analysis is relatively new and will probably continue for years. The cycle channels/trendlines in the charts are the basis/crux of my system and help greatly to provide a comfort zone for most I think.

• The intermediate term cycle buy/sell signals my system uses are straightforward. Straight trendline intermediate term cycle buy/sell signals occur when trendlines connecting short term cycle highs or lows are broken and confirmed by sufficient follow through (1 to 2%). See the charts for examples. Parabolic trendline intermediate term cycle buy/sell signals only occur very near the top or the bottom of the long term cycle channels.
  

• Usually when the parabolic trendline intermediate term cycle sell signals occur, the intermediate term upcycle has at least begun to roll over (rate of ascent begins decreasing) and it's possible the intermediate term cycle highs are in, but often higher highs will occur.
  

• Once the parabolic trendline intermediate term cycle sell signals occur, traders should look to take profits in the near future. The topping process (cycle rolling over), if the highs aren't already in as sometimes is the case (such as 8-20 for HUI/XAU), begins after the parabolic trendline sell signal.
  

• There tends to be choppy sideways action (the intermediate term cycle flattens out/rolls over) for a few days to a week near intermediate term cycle highs (see highs near the top of long term upcycle channels), but every cycle is different. Taking profits in 2-3 stages probably makes sense. The intermediate term cycle highs that occurred on 8-20 for HUI/XAU occurred just before the parabolic trendline intermediate term cycle sell signals, whereas NEM managed to make a slightly higher high at 44.84 on 9-1 than it's high at 44.74 on 8-20 following it's parabolic trendline intermediate term cycle sell signal.

• Those trading intermediate term cycles (probably the shortest timeframe the vast majority should trade, the majority should trade long term cycles that last 1 to 3 years for an entire cycle up and down) should never (unless you're trying to pick a top which is impossible to do consistently) sell prior to parabolic trendline intermediate term cycle sell signals and can begin to sell afterwards or simply wait for the straight trendline intermediate term cycle sell signal IF it doesn't result in a stop that's too loose (trendline may sometimes be too flat to wait for it to break down).
  

• Trading short intermediate term cycles typically will result in being long about 2-4 weeks and being in cash and/or short for about 1 to 3 weeks.

• With my system, I only begin looking for an intermediate term cycle high after the rate of ascent slows (the intermediate term cycle starts to roll over), which occurs after parabolic intermediate term cycle trendline sell signals (occurred on 10-4 for HUI/XAU).

• To keep things simple, investors and traders basically buy near the bottom of the channel(s) and sell near the top depending on which timeframe you're investing/trading, using parabolic (more for traders) and straight trendline cycle buy/sell signals (see charts) with straight trendline cycle buy/sell signals confirming parabolic trendline cycle buy/sell signals. For example, intermediate term cycle highs occur near or at the top of the long term upcycle channels (NEM did in late May, mid July, and on September 1) and intermediate term cycle lows occur near or at the bottom of the long term upcycle channels. It helps immensely to understand the nature of cycles with cycle highs usually occurring after dramatic spike moves (cycle trendline turns nearly straight up) and cycle lows usually occurring after dramatic plunges (cycle trendline turns nearly straight down).

• I want to make sure everyone understands what I mean by an intermediate term (1-12 months for the entire cycle up and down) cycle. An intermediate term (months) cycle lasts anywhere from 1 to 12 months and usually lasts 1 to 3 months for the entire cycle up and down. An intermediate term downcycle refers to the down portion of an intermediate term cycle, typically only lasts a few short weeks, and many times lasts less than two weeks.

• A trendline for an entire cycle is comprised of various segments, which, when combined, form a parabolic shape. That's why I talk about "the straight trendline since the May 10 long term cycle low" or the "parabolic/sharply rising uptrendlines for HUI/XAU since late July."

• With the XAU Put/Call Ratio I calculate it prior to the open and compare it to the prior session's value, with a rise up to 6% portending strength and a decline up to 6% portending weakness. At greater than 6% moves the XAU Put/Call Ratio becomes non contrarian probably because something's up which causes so many traders to buy puts or calls. It's kind of a voting machine. When there's enough votes for weakness (many puts being bought) then weakness/a downtrend usually results and vice versa.
  

• For XAU Implied Volatility, as I do weekly in my updates, I compare the prior session's change with that of the XAU and come up with a delta that's used exactly as discussed above.  For example, if the XAU rises 2% and XAU Implied Volatility falls 1% that's a +1% change/delta which is a significant (0.50%-1.99%) rise in fear that portends strength. The XAU wall of worry held up well during the prior session which portends strength. If I had real time XAU Implied Volatility I could do that calculation just prior to doing a trade. The next best thing I use now intraday is VIX (S & P 500 Volatility Index) since NEM is in the S & P 500. I get real-time VIX from ASKResearch.com for $25/month. I have no affiliation with them except I'm a subscriber.
  

• These indicators portend trends/a session's tone rather than plus/minus for the session. Even if both indicators portend weakness for a particular session, there could be a large gap up at the open followed by a downtrend most of the session, potentially closing higher for the session, in which case the indicators still worked properly. They portend a tone/trend (weakness or strength/downtrend or uptrend) rather than wether that session will close with a gain or a loss. Gaps up or down are very common with gold/silver stocks. Also, more strength is likely in an intermediate term upcycle than an intermediate term downcycle if an indicator portends strength for example. Of course, one must know support/resistance levels using long term cycle, intermediate term cycle, and short term cycle channels/trendlines.

• When timing cycle lows, wait for a substantial plunge into the target range. Then there usually is a significant but relatively modest rally/very short term upcycle followed by a decline again, which, if a higher low occurs, probably means that the intermediate term cycle lows are in. One can also wait for an intermediate term cycle straight trendline buy signal, but sometimes gold/silver stocks will "run away from you" if you wait for that buy signal. Basically, if the plunge takes HUI, NEM, and the XAU close to the bottom of their long term upcycle channels, you can buy if you're confident in those channels. What helps a lot also is that NEM usually/almost always leads, so watching NEM is usually like having a window into the future. After the intermediate term cycle lows are in there should be (usually is) a few hours or even a few days of sideways action. Something to look for. Cycles tend to start out relatively flat (flat rising troughs/bottoms uptrendline) and become more parabolic/sharply rising over time, usually culminating in dramatic spike rallies at cycle highs.

• The deltas or changes in the COT data are the important thing to look at, because they reveal the trading activity of the commercial traders versus the speculators. The notoriously contrarian (in terms of their trading activity) gold/silver speculators have been correctly positioned for gold strength in recent months, but are poor traders as evidenced by their tendency to enter huge trades at the wrong time (go long in a huge way near the top or short near the bottom). This has occurred at least 3 times in recent months. The reliable non contrarian gold/silver commercial traders made correct huge trades in recent months at least 3 times. So, the gold/silver commercial traders are far superior traders than the gold/silver speculators are, which is what has allowed them to maintain their large net short position for a long time, despite gold/silver's Bull Market/very long term upcycle since 2001 (gold/silver stocks since late 2000).

• A very important point to make for buy and hold investors and long term cycle traders is: The best time to buy is when HUI and the XAU are near their Bull Market/very long term upcycle trendlines (in place since November 2000 for HUI/October 2000 for the XAU). That is, buy near a long term cycle low (HUI long term cycle low at 163.81 on 5-10-04). Long term cycle lows occur at the very long term upcycle trendlines (see the long term charts below). Of course, you also need to determine those trendlines for whatever gold/silver stocks you're investing in/trading, but if HUI/XAU are near their Bull market/very long term upcycle trendlines, then most gold/silver stocks should be very timely/be close to their Bull Market trendlines.
  

• The next best time to buy is when HUI and the XAU are near their long term upcycle trendlines (or maybe the bottom of their long term upcycle channels, there can be a difference early in the cycle) in place since the 5-10-04 long term cycle lows. Those trendlines are at 187ish for HUI and at 89ish for the XAU (11-12-04) versus closes on 11-12 at 241.86 for HUI and at 108.59 for the XAU.
  

• I believe most investors should trade long term cycles, because they give far too much back between long term cycle highs and long term cycle lows. HUI fell 36.66% from it's long term cycle high at 258.60 on 12-2-03 to it's long term cycle low at 163.81 on 5-10-04, which means that many gold/silver stocks fell considerably more than that, some more than 50%. However, one can do very well (putting it mildly in many cases) with simple buy and hold (secular Bull Market/very long term upcycle lasting about 15 to 20 years) in most cases with gold/silver stocks, assuming reasonably good stock selection.

• I've added a new cycle to my system called a long intermediate term cycle that's comprised of two or more short intermediate term cycles. On May 10, 2004 and in late July 2004 long intermediate term cycles began for gold/silver stocks and the metals. The typical (short) intermediate term cycle lasts 4-6 weeks in it's entirety (from cycle low to the next cycle low) for gold/silver stocks and a long intermediate term cycle typically lasts about 3-6 months, but more research and observation are required. 

• Something to keep in mind is that gold/silver stocks tend to follow the major averages largely because NEM is in the S & P 500 and is therefore traded by index funds and other funds that correlate highly with the S & P 500.
  

• Reliable lead indicator NEM (down 18.62% as of 8-13-04 from the 50.28 long term cycle high on 12-2-03) outperforming HUI (-26.59% as of 8-13-04 from the 258.60 long term cycle high on 12-2-03) and the XAU (-22.55% as of 8-13-04 from the 113.41 long term cycle high on 1-6-04) correctly portended strength.
  

• Reliable lead indicator NEM confirmed that a parabolic trendline long term cycle buy signal occurred in May when a straight trendline long term cycle buy signal occurred on Thursday 8-19 (see NEM charts). The XAU confirmed that a parabolic trendline long term cycle buy signal occurred in May when a straight trendline long term cycle buy signal occurred on Friday 8-20 (see charts). HUI has yet to confirm a long term cycle buy signal, but it's a foregone conclusion given that NEM and the XAU have done so.
  

• NEM's straight long term cycle buy signal that occurred on Thursday 8-19 was accompanied by very high volume of about 8 million shares and NEM trended up the entire session into the early part of Friday 8-20's session, so the straight long term cycle buy signal on 8-19 was confirmed by sufficient follow through on very high volume. NEM rose 4.16% on 8-19 which is a very big day for NEM which tends to have lower volatility than many gold/silver stocks because it has the largest market capitalization of any gold/silver stock to my knowledge.

• The relatively flat start to this long term upcycle since 5-10-04 implies that it will be a long one, possibly longer than the prior long term upcycle that lasted from 7-26-02 until December 2, 2003 for HUI/NEM and until January 6, 2004 for the XAU. Also, the fact that the very long term upcycles for HUI, NEM, and the XAU have all turned up and increased in strength is a major positive which implies that the gains seen in this long term upcycle are likely to exceed those in the prior long term upcycle during which HUI rose 178.6% from it's long term cycle low at 92.82 on 7-26-02 to it's long term cycle high at 258.60 on 12-2-03.
  

• NEM (Newmont Mining) again proved to be a reliable lead indicator by flashing a straight trendline long term cycle buy signal on 8-19 one day before the XAU did, and by outperforming the XAU and HUI since the long term cycle highs, it correctly portended strength.
  

• Much less extreme long term cycle lows occurred than was suggested by their very long term upcycle trendlines. The very long term upcycle trendlines have turned up (See NEM and the XAU's very long term upcycle trendlines, my chart service couldn't do HUI's) after less than four years, which is surprising and has very bullish implications for gold/silver stocks and of course the metals, and has very bearish implications for the US Dollar (USD) and the US economy. This is consistent with a post bubble very long term US economic downcycle that began in 2000.
  

• I'll have to find out when the prior gold/silver stock very long term upcycle first went parabolic/turned up, but the major averages' very long term upcycle from 1982 until 2000 didn't go parabolic/turn up until 1995 which was more than 12 years after the start of that cycle. 1995 was the first time that the major averages turned up in their prior very long term upcycle.

• Silver may lag gold it appears, at least from a very long term cycle standpoint, but I need to do more research. Silver experienced a very long term cycle low/Bear Market Bottom in late 2001 about 6 months after gold did for example. I consider gold's very long term cycle low/Bear Market low to be in early 2001 (Aprilish) rather than in 1999 because the 1999 low was followed by a huge spike and quickly returned to a downtrend/Bear Market behavior, which means that the very long term cycle buy signal was never confirmed by sufficient follow through. Gold didn't begin acting like it was in a Bull market until after 2001's very long term cycle low, hence the Bull Market in gold didn't begin until early 2001 while silver's Bull Market began in late 2001. Gold/silver stocks led the metals, beginning a Bull Market in October/November 2000 (see the four year charts).

Joe F. Rocks!

-- Posted Monday, 6 December 2004 | Digg This Article