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The past six weeks or so
have been quite challenging for gold and gold-stock investors as the
anticipated normal bull-market pullback has been underway in earnest. The
psychological landscape in the gold world is quite different today than it
was back in early February.
Six weeks ago gold and gold
stocks were flying high and greed reigned supreme as folks salivated at the
tantalizing prospect of $400 almost in reach. As a maverick contrarian
speculator, I am not ashamed to admit that the gold euphoria was making me
nervous at the time. In fact I wrote the original “Golden Bull Buy Signals” essay on
February 7th to warn our clients and subscribers of the gold greed.
It feels like ancient
history today, but six weeks ago gold was approaching $380 and the popular
HUI unhedged gold-stock index was trading above
150. Earning undying hate and endless malicious flames from the gold
fanatics who will brook no resistance to their plans for utter world
domination, I dared to utter the following heresy…
“Because gold and
gold stocks have run so far so fast in recent months, and gold is far above
its new uptrend channel, and gold-stocks are bumping the top resistance line
of their own new uptrend channel, I believe it is reasonable to expect a
healthy pullback in the coming months. This pullback could conceivably
drag us all the way back down to the 200dmas, today around $325 on gold and
125 on the HUI. This will be terrifying for gold and gold-stock
investors not expecting it, but for those who are the buying opportunity will
be immense at the next interim low.”
While I am constantly
forced to absorb a tremendous and relentless amount of flak for daring to be
a contrarian, I have no regrets about trying to trade the markets accurately
to help our clients and subscribers earn profits to finance their personal
dreams. It is never easy being out on a limb and being considered crazy
by the thundering herd, but contrarianism by its very nature is black-sheep
limb-walking.
In both the February and
March Zeal Intelligence newsletters published for our subscribers, I warned about
the growing probability of a gold pullback and the need to ratchet up
stop-losses and be psychologically prepared to be stopped-out of our
positions temporarily. If a pullback is almost certainly approaching
there is certainly no sense allowing it to eat up one’s hard-earned
speculation profits!
Thankfully this strategy
proved correct, and we were blessed with realized final gains of 38%, 33%,
59%, 41%, and 30% on our outstanding gold-stock positions! In addition
to these five reasonably healthy wins, we did suffer one 16% realized
loss. Overall thus far in 2003 we have been blessed with a 31% realized
return in our official Zeal Intelligence stock trades, all in gold and silver
stocks. It pays to not ignore the pullbacks!
Today as gold has plunged
back down under $335 and the HUI under 120, gold and gold-stock sentiment is
no longer drowning in unbridled greed. Gold and gold-stock investors
and speculators need to carefully ponder the last six weeks and learn a
priceless lesson that will serve them incredibly well in the future…
No bull market moves up in
a straight line, there are always periodic pullbacks when sentiment waxes too
euphoric. Conversely, no bear market moves down in a straight line,
there are always periodic bear-market rallies when sentiment grows too
fearful. Financial markets are not linear over the short-term!
Next time you find yourself
in a situation where it seems like practically everyone is greedy or
practically everyone is scared, make sure you have
psychologically prepared yourself for this contingency so a loud warning
klaxon blares in your skull. It doesn’t matter whether you
traffic in gold, or stock indices, or bonds, or pork
bellies, but when the vast majority of your peers are greedy or scared it is
time to prepare for a short-term countertrend move.
Thankfully though, now it
finally seems like the chronically impatient and pathologically greedy
“gold to da moon in the next 10
minutes” lunatics have crawled back into their holes and vacated the
scene. Gold and gold-stock sentiment seems much more reasonable these
days. Miraculously, there are even rational discussions about gold
emerging on Internet gold forums, with ice-cold logic and reason drowning out
the euphoric madness so common six weeks ago.
With this appealing
emotional backdrop, with much of the anticipated gold and gold-stock pullback
from the short-term overbought levels out of the way, this week seemed like
an appropriate time to update and revisit our “Golden Bull Buy Signals”
charts. We have been blessed to “prudently steel ourselves to
expect the coming squall and ride it out with minimal discomfort” as I
suggested in the original essay.
The long-awaited Golden
Bull Buy Signals are shaping up rather nicely and the ideal moment to leap
back in to the gold and gold-stock fray in fresh new speculations is rapidly
approaching.
The charts graciously bear
the tidings of this exciting news. First we will examine the Golden
Bull Buy Signals in gold itself and then in gold stocks. Because gold
stocks are ultimately nothing more than leveraged plays on the metal itself,
the most important pieces to the speculation-timing puzzle lie within this
Ancient Metal of Kings.
If for some reason I was
forced to park all of my hard-earned personal capital into only one single
investment for the next decade, it would most definitely be physical gold under my own
immediate physical possession and control. The gorgeous chart above
reveals why. Gold’s awesome uptrend channel since early 2001 is a
textbook-perfect picture of the early stages of an immensely powerful secular
bull market!
Once again it is absolutely
crucial to realize that no bull market rockets up in a straight line until
its final terminal bubble climax stage near the very end. Normal
pullbacks are to be expected and welcomed as fantastic speculation and buying
opportunities, not perplexing events to be feared.
There have already been
about five major gold rallies in our young gold bull market to date, all
numbered above, and subsequently five major pullbacks right after these very
rallies. Provocatively, and indeed in tell-tale bull-market signature
fashion, each major gold pullback only managed to bludgeon gold down to a higher
low. The very definition of a bull market is a series of higher lows
and higher highs in any given price over a year or longer.
While Wall Street employees
and government bureaucrat sycophants still refuse to acknowledge the new bull
market in gold for selfish political reasons, pretty much everyone else is
beginning to understand the reality of the new gold bull shown in such
crystal-clear terms on any gold chart today. A new gold bull is no
longer a mere hypothesis, but a fire-tested indisputable fact. Hallelujah!
Since the gold bull is for
real, investors and speculators really only have one strategic way to play
it. All long-term investors need to do is buy gold, wait a few years or
more, and sell it at much higher prices. Piece of cake!
Tactically-minded long-term investors can farther increase their overall
returns by trying to buy gold after its pullbacks rather than near the tops
of its periodic major rallies.
Gold speculators are not as
concerned about the long-term as much as short-term trading. All the
speculators need to do is buy gold after the pullbacks and hold it for a few
months until gold surges higher and short-term gold sentiment once again
waxes a bit too greedy. Then they can ratchet up their stops as we do
at Zeal and prepare to get stopped-out or they can outright sell if they are
confident that the latest interim high has already been reached.
These strategies are merely
variants of the core essence of all investing and speculating, the ancient
wisdom of Buy Low Sell High. As this essay is about the Golden Bull Buy
Signals, for the sake of this discussion we are concerned about where and
when exactly to Buy Low.
As in the earlier version
of this essay welcomed with such vehement popular derision, I still find
myself entranced by gold’s 200-day moving average, the heavy black line
on the graph above. In the entire gold bull market to date,
gold’s mighty 200dma has proven to be rock-solid support. Indeed,
as discussed last time, the 200dma for gold runs parallel with and forms its
technical lower support line.
In the graph above it is
readily apparent that every single time the price of gold touched or even
closely approached its 200dma, it was an ideal time to buy for both long-term
investors and gun-slinging speculators. Today gold’s 200dma is
running around $329, so we are getting tantalizingly close to this
long-awaited Golden Bull Buy Signal once again. If you seek to add to
your own gold positions, you may wish to carefully watch gold relative to its
200dma for the buy signal which could be triggered very soon.
On a side note, it would
not surprise me if gold falls a bit below its 200dma this time around. A
lot of traditional technicians, including me, want to see the Ancient Metal
of Kings head down and bounce off of its old $325 Maginot Line nemesis that
relentlessly confounded us to the upside for so many years. If we could
get a $325 bounce it would be a powerful bull-market confirmation, proving
that heavy old resistance is now evolving into solid new support levels for
gold. I hope it happens!
Provocatively, gold closely
approaching its own 200dma is not the greatest Golden Bull Buy Signal
advertised in its bullish chart. There is another buy signal that is
more subtle and requires much more patience to wait for, but it is more
powerful and immediate and therefore more appealing to short-term
speculators. It is flashed when gold’s 50-day moving average,
shown in red above, converges with its 200dma.
This exciting event has
only happened twice so far in our young gold bull to date, and both episodes
are noted with red arrows above. It is interesting to observe that both
of the most powerful gold rallies to date, rallies 3 and 4 combined as well
as our recent awesome rally 5, both emerged out of a convergence between
gold’s 50dma and 200dma.
This moving-average
convergence Golden Bull Buy Signal seems to emerge because gold tends to
consolidate its gains in a sideways trading pattern for a time after each new
interim all-bull-market high is achieved. One of these convergence
zones is highlighted above with a red-shaded oval. This sideways
consolidation allows gold-market players to grow comfortable with new price
levels and build the base necessary to launch the next major gold rally.
While there is certainly no
guarantee that gold will loiter long enough to allow its 50dma to converge
with its 200dma this time around, if we do happen to witness this awesome buy
signal in the coming months it may be the best indication that a major new
gold rally to new heights is imminent. Interestingly, gold’s
50dma has already apparently topped and has turned south indicating that this
awesome Golden Bull Buy Signal could indeed be triggered again in the coming
months.
If gold was to plunge to
$325 before this pullback ends and its next major rally takes it up 12%-25%
as in the past, we could be looking for the next interim tops somewhere
around the $365 to $405 range before the end of this year.
With $400+ gold being a
high-probability bet within the coming months, it is hard to believe that
only 2 years ago we were languishing at the depths of bearish despair around
$255 and the prophets of doom declaring sub-$200 gold imminent were coming
out of the woodwork! How times change. If today’s gold
action ever makes you feel down, all you have to do is remember how you felt
in early 2001 and it will make even the worst gold pullback feel fantastic.
Speaking of languishing,
gold-stock behavior continues to confound and
confuse many. As I have worked with our private consulting clients
around the world in the recent months, it has become increasingly evident
that a major source of concern is the gold stocks. The primary bone of
contention is the fact that the HUI was not able to achieve new levels in
early February much better than its June highs, even though gold was over $50
higher. What is going
on?
Like many gold-stock
investors and speculators, I too have been pondering and puzzling over the
apparent lagging of gold stocks relative to gold during the latest gold
breakout. I have to admit that I don’t find it particularly
troubling, however. I have had a working theory for a couple months now
that I initially shared with our Zeal Intelligence subscribers in early
February that may help explain this apparent anomaly.
While this theory is
discussed in depth in the February issue of Zeal Intelligence, in a nutshell
I think that gold stocks were way overbought last summer. Gold broke $300 and then $325 for the first
time in years in rapid succession and the euphoria surrounding these
noteworthy events was enormous. The near vertical rise of the HUI as
gold approached $325 was breathtaking, as is quite evident in the graph
above.
At the time some folks even
thought that a gold-stock bubble had been born, but thankfully that
didn’t prove to be the case. The reason we can be so confident
that there was no gold-stock bubble is also apparent in the chart. After
this vertical gold-stock rally gold stocks didn’t totally collapse and
begin a long bear market like the NASDAQ, but they began to carve a
successive series of higher lows validating their concurrent bull market with
gold itself.
I believe that gold-stock
investors should mentally erase gold’s trading last summer above the
HUI top resistance line shown above. Sentiment was extreme, greed was
everywhere, and gold stocks simply became overbought and ran up far too fast
too soon. This was inherently unsustainable of course, and the HUI was
forced to consolidate sideways for over a half year after this spectacular vertical
rise.
If you imagine the chart
above with everything over the HUI resistance line erased, a typical
bull-market pattern emerges with no anomalies. The recent early
February HUI highs were within its uptrend and were indeed much higher than
its old resistance levels around 120 during its breakout last summer. Last
year’s awesome gold-stock rally simply overextended itself and it
needed to wait for gold to catch up.
The HUI’s
mega-rally that topped last summer ended up implying magnificent gold-stock
to gold leverage of around 10-to-1. This extreme level of leverage can
be appropriate for certain junior gold mines at certain times, but it is
probably quite excessive for an entire index including major mature gold
producers.
In contrast, if we measure
the HUI’s implied leverage on the
all-important underlying gold price from November 2001 to January 2003, it
weighs in on the order of 5-to-1. This means that a 10% rise in gold
during this time period would translate into a roughly 50% rise in the
HUI. This level of gold-stock leverage is much more reasonable and much
more sustainable over an entire bull market than 10-to-1 leverage.
So perhaps the apparent
lagging of gold stocks to gold recently is nothing to fear as it is merely
illuminating the outrageousness of last summer’s vertical gold-stock
ascent so early in its bull market. Vertical ascents and bubble blowoffs are to be expected at the end of major bull
markets after they have run for many years, not way back in the early initial
stages of a bull like we sojourn through today.
As the chart above shows,
the HUI is running up nicely within its gorgeous uptrend pipe, carving higher
lows and higher highs. The slope of the entire graph is much more
reasonable and in line with gold’s advances to date than the left half
of the chart ending at the mega-HUI spike of last summer.
Interestingly the HUI also
exhibits the same Golden Bull Buy Signals we witnessed above in gold
itself. Any time the HUI approaches or bounces off its 200dma it is a
good solid buy signal. Like in gold, however, an even greater buy
signal is flashed when the HUI’s 50dma
converges with its 200dma as highlighted in the graph above.
In terms of the first
lesser buy signal, the HUI today is definitely well into buy territory!
For the first time in the whole bull market to date the HUI recently pierced
its 200dma to the downside, frightening many. While only time will tell
whether this breakout to the downside will be short-lived or sustained, I
suspect that the HUI is pretty close to its ultimate interim lows
today.
This downside breakout is
actually not too surprising in light of the incredibly distracting market
noise of the war. It is hard to remember a time of such similar
widespread confusion across all the financial markets as we are witnessing
today. Just like September 11th, major geopolitical developments can
sometimes spawn funny market behavior, but they can
never alter the already existing underlying primary trends. After the
initial euphoria over Washington DC’s annexation of Iraq wanes, odds are that all
major existing financial market trends in all major markets will continue on
their old courses unmolested.
The second and more
powerful Golden Bull Buy Signal for the HUI, when its 50dma converges with
its 200dma, hasn’t happened yet. I suspect it will be triggered
in the near future, however, as the HUI’s
languishing under its 200dma today is really dragging down its 50dma rapidly
as is evident above. As the two converge both investors and speculators
can eagerly look forward to an ideal time to deploy fresh new gold-stock
positions after being stopped-out in the recent pullback.
We are closely watching
both gold and the HUI and will be loading up on fresh new trades for the subscribers to our premium
Zeal services when the opportunity feels ripe. We have been greatly
blessed to ride all the major gold and gold-stock rallies up in this bull
market to date and we are eagerly anticipating deploying our capital for the
next upleg.
In the meantime, gold and
gold-stock investors should zealously ignore the distracting war noise and
focus on the crucial underlying fundamentals and technical trends. We
have suffered through an anticipated sharp gold and gold-stock
pullback, but these are normal in all bull markets and are nothing to
fear.
The coming
investment and long speculation opportunities in both gold and gold stocks as
this pullback ends will be simply awesome! The powerful Golden Bull Buy Signals are relentlessly approaching.
Adam Hamilton,
CPA
March 21, 2003
So how can you profit from
this information? We publish an
acclaimed monthly newsletter, Zeal Intelligence, that details
exactly what we are doing in terms of actual stock and options trading based
on all the lessons we have learned in our market research. Please consider joining us each month
for tactical trading details and more in our premium Zeal Intelligence
service at … www.zealllc.com/subscribe.htm
Questions for Adam? I would be more than happy to
address them through my private consulting business. Please visit www.zealllc.com/adam.htm for more
information.
Thoughts, comments, or
flames? Fire away at zelotes@zealllc.com. Due to my staggering and perpetually
increasing e-mail load, I regret that I am not able to respond to comments
personally. I will read all
messages though and really appreciate your feedback!
Copyright 2000 - 2006 Zeal
Research (www.ZealLLC.com)
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