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October 27, 2006

Bullies Without Spinach
by David Petch

The name of the initial commentary has to do with a comparison of Popeye to governments. With spinach (in our case gold), Popeye can knock his enemies on their heinies. Without spinach (again gold in our case), his adversaries turn the tables on him.

We still are amidst the doldrums without winds of excitement in the sea of gold stocks as they drift aimlessly, sometimes a puff of wind brings airs to the sail, only to see them gently brushing the mast. The current focus is on the US elections and until this passes wind J things are likely to continue drifting sideways. As we have been mentioning, this current environment for picking up cheap precious metal stocks from current sellers is like selling lemons to a near scurvy pack of sailors in the middle of the ocean.

There is a total dislocation of western nations with the true value of gold that is viewed as a barbarous relic. As mentioned a few weeks ago, the Central Bank of Canada is lucky if it has one ounce of gold in it, maybe two and that is all dependent on how many bankers have gold fillings. North Americans have truly had the spoils of the world the past fifty years and this has caused their economic defenses to be lowered. Citizens of China and India have lived impoverished lives relative to ours and are just getting a taste of our "good life". They have seen blood and are willing to work beyond belief in order to obtain a better lifestyle, yet alone maintain their current status. The comparison of North America to Asia is like a boxer who with a phenomenal career who is set to fight an up and coming younger fighter who is training to the point of near death to perfect his combinations and become untouchable.......we all know how this generally ends as it occurs so often in real life.

Making comebacks on the global scale after a major knockout blow has been delivered is not something that can be done over the course of 10-12 months of picking oneself off the mat and going back to hard training and exercise to win the title back. Economic trends on the global scale can take decades to reverse. The US had the spoils of pumping 9 million barrels/day at its peak in 1971 which has been declining year over year ever since. Asia has been building economic ties rather than building military bases, something, which builds more friends than destroying them. As European banks continue to sell gold onto the market, Saudi Arabia, India and China continue to accumulate more which will just create a greater global shift in power in the coming years.

One thing that does concern me in 10 years or so is the fact Canada and the US have little to no gold in their vaults that is theirs. Fort Knox has not been audited in 50 years and government officials will not allow one. In the pharmaceutical industry, audits of suppliers and companies are required for compliance. Failure to allow an audit is the automatic issuance of a non-compliance rating and a facility may be shut down. Being transparent about certain issues is important, especially honesty on the global scale of economies. Since the US government will not allow an audit, one has to assume the gold has been used for "other things", such as being dumped on the market for the past 20 years to suppress the price etc. etc. With no gold in their vaults but rich reserves in the ground, mining companies in the future may become nationalized to "restock" government inventory.

The bull market in precious metals must run through all the psychological phases before it finally reaches the desk of major government officials that they must do something. When a government begins to react about things the public is already doing, the bull market has pretty much run its course. This is the way bull markets work: governments only listen to people when it comes near election time and when the problem is on their desk. Most politicians have no ability to use cognitive abilities to "look into the future" and realize what problems lie ahead so the ship can be navigated around the rock. The following thread is a good parody of the European and North American governments about the problems that lie ahead and how they fail to change course. Rather they stubbornly go forward on arrogance: http://www.youtube.com/watch?v=brNX4xqlXJE . Strange as this may sound, governments have aided in creating what likely will be the strongest bull market for precious metals in history. I do not like to talk politics, but the text to this point was required to illustrate the attitudes of those in governments and why this bull market could stretch longer than any of us can imagine or rise to heights we only can dream of. With that being said, on to analysis of the AMEX Gold BUGS Index.

Upper and lower Bollinger bands are all curling inward towards the index, suggestive the current move up is a corrective move which will subsequently be retraced into late December. Short-term stochastics have the %K above the %D after recently breaking above a down trend line. There is no crossover of the %K beneath the %D, so the trend is still up. For those not familiar with the technical methodologies I employ (particularly Glenn Neely's interpretation of Elliott Wave, called NeoWave), refer to the following thread: http://www.safehaven.com/showarticle.cfm?id=5809.

Figure 1

Red lines on the right hand side represent Fibonacci price projections of upward trending wave price action projected off of subsequent lows. Green lines on the right hand side represent Fib price retracements of the decline from May 2006 until June 2006. Areas of line overlap form Fib clusters, which indicate important support/resistance levels. There is a Fib cluster at 348, which will likely impose significant resistance on the current up-trending wave. Fib time extensions of wave [1] are shown at the top of the chart, with the most recent Fib date of October 13th being passed. This date coincided with the HUI breaking to the upside. Seeing gold get slaughtered on Monday, while the HUI broke to the positive bodes well to suggest the upward trend has legs. Moving averages are in a phase shift currently (155 day MA above the 200 day MA above the 50 day MA), suggestive that short-term and longer-term market sentiment is balancing to reach similar levels before the next powerful upleg begins. Full stochastics have the %K above the %D, suggestive the upward trend has up to another 3-4 weeks of upside before reversing to the downside.

Figure 2

The weekly HUI is shown below, with Fibonacci time extensions of wave I shown at the top of the chart. The next Fib turn date is December 22nd, 2006. The chart is in semi-log format to capture the potential move that lies ahead during the course of the next 3-4 years. The lower 55 week MA Bollinger band is at 206.7, up from last week's reading of 202.2. Every major turning point in the HUI has been marked with the lower 55 week MA BB curling down. Currently, the lower 55 MA BB is still rising with no indication of curling down. Full stochastics have the %K beneath the %D, with no signs of a reversal. Due to the nature of weekly charts, the settings often "lag" market tops and bottoms; they do however confirm when a trend starts and completes. The Fib date of December 22nd is interesting because is seems all the ducks will be lined up around this date. On this basis, watch for mid to late December to mark the launch of the next phase of the bull market in the HUI.

Figure 3

The mid-term Elliott Wave chart of the HUI is shown below, with the thought path denoted in green. The entire pattern has a corrective structure, including the recent move off the early October bottom. The base of wave C is labeled as ending with an expanding triangle, which is confirmed by the current move up failing to break above the (b)-(d) trend line in a shorter period of time that it took to form. The next chart shows the "big picture" for how this corrective phase fits into the higher Degree count and what other possible interpretations exist.

Figure 4

The long-term Elliott Wave count of the HUI is shown below, with the preferred count shown in colour and the alternate count shown in circled grey. Wave I had a clear five wave impulsive structure, with wave II shown ending in April 2005. Generally, wave II should take the same amount of time as wave I, so this labeling scheme is suggestive that the time of this bull market is going to be compressed. Compression will result in a parabolic move similar to what was witnessed in 1970-1980, except this will dwarf it in comparison. Should the preferred count be correct, then the ENTIRE pattern should be complete by 2011 at the very latest. The alternate count, which has a time equivalency of wave II to wave I falling on December 22nd (as per Figure 3), has a running correction labeling scheme. This labeling scheme is [W]-[X] and currently in [Y].II, which appears to be developing a non-limiting triangle (preferred or alternate count). If the alternate count is correct, then the bull market in the HUI is going to run until 2015-2016. It is impossible to discern which count is correct, but will be clearly defined by 2008 based upon future wave structures that develop. Running corrections always have the subsequent wave of identical Degree being the longest wave of the impulsive structure in price and time.

Figure 5

I will update the US Dollar Index tomorrow. As a side note, the S&P 500 Index broke to the upside, so expect a possible move to 1450-1500. If one does not have calls at this point, it is too late to participate in this rally. Again, do not short the market unless one wishes to part from their money. A shorting opportunity exists in the future, but not at this point in time.

David Petch
TreasureChests.info

Treasure Chests is a market timing service specializing in value based position trading in the precious metals and equity markets, with an orientation geared to identifying intermediate-term swing trading opportunities. Specific opportunities are identified utilizing a combination of fundamental, technical, and inter-market analysis. This style of investing has proven to be very successful for wealthy and sophisticated investors, as it reduces risk and enhances returns when the methodology is applied effectively. Those interested discovering more about how the strategies described above can enhance your wealth; please visit our web site at http://www.treasurechests.info.

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