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Gold/Silver/Gold Stocks
- I want to start out with my best stuff. Yesterday
I made the following comment to my clients: "Most of you have absolutely
no business owning gold stocks, or any other stock, at this point in
time". I got e-mails from the grave on that one. The not so subtle gist
of their collective message was how the hell could I say something like that
after I've been telling them to sit tight for so many years? A smart man
would say that he had a senior moment and let it go at that, but I've never
been one to choose the easy way out. First you need to understand what we're
up against. The Dow is at or close to the tipping point and when this
steaming, heaping pile of garbage finally rolls over, it will take everything
paper with it. That includes gold stocks; at least for the first six months
or so! That's what happened during the Depression, for different reasons mind
you, and I believe that is what is going to happen now. It appears the gold
stocks are already showing the strain. Take a looks at the weekly chart of
the HUI below:
Given the bullish behavior
of physical gold over the last month, it's difficult to understand why gold
stocks are having such a tough time. I have been saying to my clients for
weeks that I want to see what happens the day gold has a strong move up and
the Dow sells off. On Friday the market gave us our first indication: the Dow
was down 56.80 points, gold was up $8.90, and the HUI was down 0.69. Not at
all what you would expect is it?
The chart above is not completely bearish in that
the series of lower highs is complemented by a series of higher lows. In a
bull market, the odds normally favor an upside
explosion but I do have my doubts. A sinking ship initially pulls everything
down with it. Gold stocks will escape the down draft but at a cost. That cost
could be a 25% to 50% decline in value over a three to nine month period. That's
what happened during the Great Depression and I think we have a better than
average chance of seeing that happen now. Now this is where my clients get
confused: in one breath I'm tell them I will sit through it and in the next
breath I'm telling them that most of them don't have any business owning gold
stocks. On the surface, it appears that I am a wee bit off. Let's see if I
can shed some light on the situation. Consider the following:
- I own all
my stocks in the Canadian or Peruvian markets and they are denominated
in Canadian or Peruvian currency,
- I hold
nothing in the United
States,
- I have sat
through every correction but one since March 2001 1, and
- I think I
have a decent grip on human nature.
If the US market collapses tomorrow, and
the dollar along with it, I will not feel it like the average American will. Also
I know, as much as I can know anything, that my
portfolio will increase +/- 1000% by the end of 2010 so I can handle the
decline mentally. It's discipline! Most investors make a career out of buying
high and selling low. Most will succumb to the pressure and sell precisely
when I would be adding on. I prefer to spare the average investor the
aggravation and have him go to cash, and some gold coins, and take a seat on
the sidelines. There is no shame in that. In a collapse, the one who loses
the least usually wins. Notice I said you should hold gold coins. Won't gold
get caught in that same down draft? Let me answer that with an emphatic NO!
Gold is the only real, true store of wealth and when the droppings hit the
fan, people will flock to it. Let's
take a look at gold's weekly chart:
When compared to the HUI, it's a much healthier
picture. Gold recently took out the November 2006 highs and has closed above
both the 644.70 and 664.20 resistance levels 2. This now becomes
support. Further resistance will be found at 686.20 and then 728.60 and the
latter number is what stopped the last significant rally back on May 11,
2006. I am convinced that we are going to rally to a minimum of 775.00 and we
may even test the all-time high of 887.50. Also, try not to lose sight of the
fact that we will experience one more 7% correction along the way. When and
at what price is anybody's guess? For what it's worth, I suspect the 728.60
could produce such a correction. What will I do about it? Sit tight, that's
what! As you can observe, gold is a long way from being overbought. What
would happen to gold if the stock market were to turn down with a vengeance? It
will continue its bullish trajectory with little or maybe even no
interruption. Gold is to be accumulated, both on the way up as well as at the
bottom of significant corrections. Gold is not to be sold or traded. Unless
you are one of a handful of people in the world who really know what they are
doing, gold is not to be traded.
How about silver? How does gold's poor cousin fit
into the equation? Well, I like silver more and more with each passing month,
but I won' get carried away with it until I see the "transition". Remember
when I told you that gold stopped being a commodity and became money? Well
silver has to do the same thing. Silver had a bigger handicap in that it
started out the bull market as an industrial metal. Once it closed above
9.16, it transformed itself into a precious metal. Now I want to see the
conversion into money. For that to happen I want to see a close above 20.73
and that just happens to be my upside target for this leg up in the bull
market. Take a look at the Point & Figure chart for silver:
As you can see, I'm not the only one who has high
hopes for silver. There is a bullish price target of 21.50. I like these
charts because they deal strictly with price and eliminate all the market
noise. Before I close, I would like to give you the magic numbers for silver:
These are all the numbers you really need to know. Everything
else is nothing more than polite conversation suitable for cocktail parties. I
am extremely bullish gold and silver here and for the next three months.
Fx
Market
- The US dollar is the currency that you love to
hate and one has to be careful that emotions do not get in the way of sound
investment decisions. With that in mind I would like to look at the
historical chart for the US dollar:
 
Try as I might, I can't find much good to say about
the US dollar. About the only good thing I can say about it is that it hasn't
fallen off the proverbial cliff… yet. The dollar hit a low note at 80.50 in late 2004 and
then spent a year in rally mode, scaling the heights up to 92.50 twelve
months later. We`ve now spent 14 months putting in
a series of lower highs and lower lows, trading as low 81.90 on December 11,
2006. On Friday the dollar closed at 84.75.
I'm not going to give you a hundred reasons why the
dollar has to fall. Suffice it to say that there are just way too many
dollars and way too much debt on every level in the United States
for the dollar to survive in its present state as the reserve currency for
the world. All the major players are aware of the situation and the task at
hand is to organize an orderly retreat inflicting as little damage as possible
on the "innocent" central banks who are major holders of all things
green. With that in mind, let's take a look at the dollar's support and
resistance numbers:
I'll be blunt. I see no way on God's green earth the
dollar can rally above 86.50 and it probably won't test 85.62 although that
chapter is still open… barely. In fact, the dollar couldn't close above
85.08 as of today. There is very little upside risk. As far as I can see, it
is all to the downside. The first significant resistance will be 83.50, then
82.01, and finally 80.50. I believe the dollar will fall through 80.50 this
year and will not stop until 75.38 at the very least. Once the 80.50 level is
violated, we'll find out who is going to be left holding the dollar bag as it
should become a bit chaotic.
1
I exited the gold stocks in May 2004 and bought back in in
September 2004. I used that sale to exit juniors and shift to blue chips. The
question of timing was mostly luck and I won't do it again.
2
All the numbers in bold print are the magic numbers I've mentioned in my last
two gold articles. Every time we close above one of them, I add on to my gold
position.
Enrico Orlandini
Website : Dow Theory Analysis
Dow Theory Analysis S.A.C.
Lima, Peru
Phone:
001-51-56-973-5599
Email: ebo@dowtheoryanalysis.com
For those of you interested in receiving
information on the Funds we manage, please feel free to e-mail us at ebo@dowtheoryanalysis.com and we will respond as soon as possible.
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