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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: yard_man who wrote (6532)	1/30/2004 1:13:39 PM
From: ild	Read Replies (1) \| Respond to of 110194

Date: Fri Jan 30 2004 12:44 trotsky (gold stocks) ID#377387: Copyright © 2002 trotsky/Kitco Inc. All rights reserved what a sorry looking performance - this doesn't exactly inspire confidence thus far. we need to see the up-trend-line regained in the XAU ( between 96 and 97 pts. ) , and then we need to see the resistance at 101.50 surmounted. for now, i'd settle for the trendline. all that said, i also think the downside potential is limited here, and it seems highly likely that we'll see at least one more attempt this year to revisit the recent highs - but it's by no means certain that they'll be blown away. note that during the '74 bull market, the gold stocks topped out over 6 MONTHS before the gold price did , and during the final rally from 160 - 200 ( which would equate to a 120 dollar rally in the PoG today ) all they managed was to put in a secondary, lower high. from early '75 to late '76 a correction drove the PoG down by 50% ( from 200 to 100 ) , and many gold stocks basically collapsed back to their 1969-71 lows ( DROOY e.g. lost nearly 90% in that correction ) . of course the rally that commenced thereafter was a big consolation ( DROOY from $2.50 to $52 for instance... ) . an interesting sidebar here is that when the PoG began to move up again in '76, many gold stocks initially did not react, and some actually went further down. e.g., DROOY made a new low in '77, after the PoG had already risen by 50% off its lows. the rally only began to truly infect the gold stocks in late '79 - with the PoG already 100% ABOVE its '74 high, many gold stocks only began to scratch at their resistance from the '74 high. however, things went basically parabolic then, and they rocketed straight up for a few months. note that contrary to the '74 experience, most gold stocks peaked 8 months AFTER the gold price did in 1980. e.g. ASA reached $55 in January of 1980 with the PoG at $850, but went to $90 in September of 1980 with the PoG at a secondary top at $720. similarly, DROOY reached about $35 at the peak in January, but $52 at the secondary peak in September. the important points here are: 1. even in a secular bull market the sector is prone to extremely painful, long lasting corrections. and 2. the important tops are ALWAYS signalled by some sort of divergence - and the bigger the divergence, the more important the top. and 3. a rally in the gold price, even a strong one that makes new highs for the move, is no guarantee that the gold stocks will follow and also make new highs - and vice versa. this of course contradicts Mr. Sinclair in what i believe to be an extremely important point. he argues that the gold stocks will follow the PoG higher NO MATTER WHAT ELSE HAPPENS. the 'what else' could e.g. be a strong decline in the broader stock market. historical evidence proves beyond a shadow of doubt that this is simply not true. gold stocks, similar to all other stocks,are inter alia a discounting mechanism - they lose this ability of discounting coming upturns or downturns in the PoG only in the mania phase of a bull market, or the 'throes of despair' phase of a bear market. furthermore, their performance depends also on the overall liquidity situation - this is why they can e.g. not escape a crash in the rest of the stock market, even when the PoG jumps higher during such a crash ( see the '87 experience ) . in an MCHVIE ( a term coined by BoB Bronson: "mass-correlated, hyper-volatility, illiquidity event" ) they will be sold regardless, as market participants need to raise cash every way they can.