-- Posted Tuesday, 18 December 2007 | Digg This Article | Source: GoldSeek.com

Below is an extract from a commentary originally posted at www.speculative-investor.com on 16^th December 2007.

What to do?

In the 26th November Weekly Update, with the HUI at around 430, we wrote the following:

"Our expectation is that the upward trends in gold and gold stocks will resume following the completion of a fairly normal correction, but at the same time we are constantly on the lookout for developments that could turn a normal correction into a large one. Unfortunately, prices tend to move so quickly in the markets these days that selling after evidence emerges that things have changed for the worse will often result in selling near a short-term bottom. This means that precautionary steps need to be taken when prices are relatively high.

The current situation provides a good opportunity for investors to take some precautionary steps because the HUI has rebounded to within 4% of its all-time closing high (448) and to within 8% of its all-time intra-day high (463). These steps could include: a) doing some selling near current levels with the aim of buying back if the HUI subsequently re-confirms its upward trend by closing above 463, and/or b) buying some March-2008 GDX put options with the plan to immediately sell them if the HUI closes above 463."

In other words, if you were too heavily exposed to gold stocks then the right time to have taken corrective measures -- by raising cash or buying insurance in the form of put options -- was about three weeks ago when the HUI was within 4% of its all-time closing high. It is, in fact, generally the case that the best time to take steps to minimise downside risk is when everything looks great and risk management doesn't appear to be necessary. This is the time when insurance is cheap. On the other hand, when danger appears to be imminent -- following a clear break below obvious support, for instance -- the cost of insurance will typically be quite high.

As noted earlier in today's report, if the gold sector quickly loses another 10% or so then it will be at the sort of oversold extreme that should be bought. Actually, the exploration-stage end of the gold universe is ALREADY at such an extreme. While the HUI has only just breached support and is still a very long way above the panic low of August, the exploration-stage stocks are in roughly the same situation now as they were at the height of the August panic. The difference is that they reached an ultra-depressed condition in a mad rush during August whereas they have reached a similar condition via a slow and arduous decline over the past couple of months. For investors with substantial exposure to the gold (and silver) explorers, August was like having a tooth pulled whereas the past several weeks have been like Chinese water torture.

The small gold/silver stocks could weaken further if the gold-stock indices continue their declines over the next couple of weeks, particularly since we are now in the midst of tax-loss season. However, many small-caps have that 'sold out' look about them and managed to resist the downward pull of the big-cap gold stocks during the final two days of last week. It's possible, therefore, that we have finally reached the point where the upward pressure exerted by the buying of longer-term value-oriented investors is offsetting the downward pressure exerted by the general public's towel-throwing (most members of the investing public are not longer-term value-oriented investors, even if they think they are).

Our view, then, is that investors should avoid getting caught up in the depressed sentiment permeating the junior resource sector of the stock market and should continue to accumulate exploration-stage gold stocks, focusing on those stocks with very under-valued proven resources. One likely candidate is discussed below under "Updates on Stock Selections". We expect that these stocks will fare very well if the gold-stock indices rebound during the first quarter of next year, even if the rebound proves to be the counter-trend variety (a rebound within the context of an intermediate-term decline).

If the HUI drops back to the mid-300s within the next 2-3 weeks then it will make sense to exit any insurance positions (put options, etc.) at that time. Alternatively, if the HUI makes things difficult by rebounding immediately then an opportunity to purchase new insurance positions -- GDX June-2008 put options, for example -- could arise early in the New Year.

Regular financial market forecasts and analyses are provided at our web site:
http://www.speculative-investor.com/new/index.html
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-- Posted Tuesday, 18 December 2007 | Digg This Article | Source: GoldSeek.com

Regular financial market forecasts and analyses are provided at our web site. We aren’t offering a free trial subscription at this time, but free samples of our work (excerpts from our regular commentaries) can be viewed at: http://www.speculative-investor.com/new/freesamples.html

E-mail: Steve Saville

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