Getting more bullish technically
November 27, 2004
As gold has broken through the old 16 year high of $430, one must now come to one of two conclusions: we are witnessing a false break out and subsequent reversal, or we are in new technical ground of a major upward move. Here is my current take on the situation.
If this is indeed a point of correction or reversal it is logical that certain technical indicators including the pronouncement by the media and the gold advisors should reflect a healthy dose of skepticism. From what I can muster, this is what I continue to see. The following are some of my points.
1) The dollar chart. Even with the apparent break at most technical significant points, most market timers have been predicting a significant bounce or even reversal by the greenback. To me, this is a possibility since a concerted push on the dollar could force a good short covering rally in the currency even if it is a technical relief. Still, this would most likely start to push the price of gold upward against the heretofore strong currencies such as the Euro or the Yen. A break out in these currencies would only add to the bullish chart technical pictures that has been confined, to a degree to the dollar. My belief is that soon, gold will begin to rise against all currencies as the disease of the paper monetary system begins to infect all of the world's currencies. It is very possible that when the dust finally settles trust in a nation's paper will have disappeared.
2) The persistent buying of puts in the XAU and gold future options. As contrasted to the unusually heavy buying of calls in the stock market over the past few weeks, the gold complex has consistently brought in a lot of put buying. This smacks of a heavy skepticism towards gold and silver. For instance, at correction turns in the metal, I have found that calls will be around 6 to 8 times the puts, but during the past few weeks, the ratio has been around 1:1/2 to 1 at best and on some days there are more puts than calls in the future options markets. Even more significantly, the ratio of calls to puts in the open interest which several years ago reistered 3:1 calls over puts is now nearly even. This shows again the market belief that there is very little conviction in gold. This same hesitation now exits in the XAU and even recently NEM calls and puts. There seems to be no anticipation of a strong rise in the gold shares. Again in the stock market we have an entirely different reading as the put call ratio is at a level found at market tops.
3) The lackluster action in the junior stocks. This subject has been receiving increasing space by many of the gold analysts as they try to interpret the lagging of these stocks. It is also a point of bearishness by many gold holders as they wonder why their stocks are lagging the move in the metal.
My take is a little more radical than most analysts. First, since most of these companies are Canadian based, their price is reflected in Canadian dollars, and because of the nearly 50% rise in the C. Dollar over the past number of months, the price of gold in Canada has actually gone down. But many of the exploration projects are in the USA or overseas where the Canadian dollar's strength actually benefits their cost structure. But most importantly to me is my belief that this skepticism reflects the lack of conviction that gold is going to stay up here. Please note that the tops in gold have come when these stocks have greatly outperformed the larger companies, not underperformed such is now occurring. You can be certain that we WILL have a spectacular binge in this area before gold has a really meaningful correction.
Also, if you can go back to the sell off beginning last December you will remember that most of the gold shares regularly had a panic sell off in the shares. This was highlighted by large gaps down and intraday swoons on extraordinarily heavy volume. Had these shares remained down, you might conclude that the gold move was over, at least for a long while. But since then the shares have behaved very similarly to the same kind of decline of 2002 where the HUI eventually rose over 100% off the bottom. In layman's terms this is called a "shake out." Look up the declines in 1987 and 1990 in the stock market where most people can recall the frightening 508 point day that proved to be the bottom of a 13 year bull market move. Whoever bought NOT sold that day and held on, made on average about 800% on their purchase going in to the top. Selling panics can be more often than not, buying gifts. I believe that is the case today in the gold share market.
Like some other gold advisors, I believe that the extraordinary moves will be found in a basket of exploration companies. The fundamental condition of declining production and the difficulties of locating large finds are best suited to these hungry and motivated companies. Again, if you can go back to 1990, you will discover that the technology companies that eventually exploded later in the decade, were selling in the pennies also.
4) Finally. You will be aware that most of the gold advisors are still attempting to predict how to trade this market. The main problem here is that it has done a great disservice to their readers, for it plants strong doubts in the move up. As a result, I believe there are a lot of sold out bulls at this point awaiting the marching orders by their general. The most difficult thing for the human race is to admit that one is wrong. All you have to do is to read what the advisors are saying now and what they really said 6 months ago. They are usually two different stories.
Please note that if you read Barron, IBD, The WSJ Journal, The New York Times, Business Week or the like, you will need a magnifying glass to see any mention of gold or silver, and a microscope to find anything really positive. These views confirm all of the above. Again, when you see a chart of gold on the front page of the NY Times, you can sell everything, take part of your winnings, go away for 6 months and then come back to try to figure out where to get back in.
Clearly, to me, this is the landscape of a a bull market in its absolute infancy. Where will this current leg end? It is anyone's guess, but I firmly feel the surprise will be on the upside. Just go back and look at the first part of the 1970's bull move (which this one is very different from) and notice that gold went from around $40 to $120 corrected to $90 and then doubled. In other words, it went up almost 5 times from its bottom. I occurred during the backdrop of the last bear market in stocks. I believe that WHEN the stock market begins to reassert its bear move, the gold complex will benefit accordingly. One suggestion is to keep your eyes fixed on the very short-term interest rates that have begun to rise persistently. Our economic system is predicated upon borrowing short and lending long. As the spread narrows, a danger light will begin to flash. Given the refusal of the capital and housing markets to turn prudent even after the drop in 2001 and 2002, I still believe that we will have a real panic along the way. There will not be a soft landing for this bloated speculative market.
My belief is that the investment market like the casinos will do everything it can to take your money. You must have a firm understanding of what is transpiring and a cyclical view of the economy. There will be no excuses for those who subscribe to Lemetropole and other excellent sites such as "financialsense.com" and "jsmineset. com" to be tricked out of their investments.
Chuck Cohen
ikiecohen@msn.com |
