I have been giving considerable thought to the reasons for the recent underperformance of the gold stocks relative to bullion and believe I have found the answer. As many readers will be aware I have been of the view that the gold breakout would be accompanied or followed by a breakout by the stocks, even if both then went on to test support at the breakout point before turning higher again. In the event, as we all know, the stocks failed at last winter's highs and gold, and especially silver, then suffered a sharp reaction.

The ongoing severe US dollar bear market, is, or should be, a central theme for all investors in dollar assets, whether they are domestic or foreign. In this regard it is especially important that US investors do not allow themselves to be lulled into a false sense of complacency, due to living in a large country that is almost a continent, and into thinking that a plunging dollar doesn't matter - IT DOES MATTER. All investing is an opportunity cost game, and if the currency of your country is plunging it means that your international purchasing power is dwindling. Think of it this way: if your son or daughter went to live in another country for whatever reason, and you wanted to leave your money to them, you wouldn't be too happy about, say, half of it vanishing because of the dollar falling.

So when we talk about gold being in a bull market, it's important to be clear what we mean by that, specifically, a bull market in terms of intrinsic value or a bull market solely in terms of price. Gold is currently priced in US dollars, and, as the dollar has been falling steeply gold has been in a dollar bull market, but what about against other currencies? The short answer is that it has been flat, or rising gently, since the beginning of this decade, against most other currencies. Have a look now at the charts for gold in dollars, and then in Euros, both from the start of 2000 and compare, and you will see what I mean.

What this boils down to is that, so far, gold has only been in a gentle bull market, in terms of intrinsic value - and by this I mean the price that global investors as a whole are prepared to put on it. The REAL bull market, involving a massive increase in investment demand, hasn't even got off the launch pad yet. A corollary of this is that gold mining companies' receipts, what mining companies are receiving for their product, have not risen all that much in real money terms since the start of this decade. Bearing this inconvenient fact in mind, have a look now at the charts of the HUI index first against the US dollar and then against the Euro, and then double back and look at the charts of gold against the 2 currencies - see what I'm driving at? In terms of real money, and I'm not talking about the Euro here, but rather the value that global investors are prepared to place on an asset, gold stocks have advanced out of whack with gold itself - and this argument does take into account the effect of gearing, i.e. a relatively modest rise in the POG results in a much greater rise in the stocks, because mines' fixed costs are relatively static, and so the benefits of a higher gold price should go straight through to the bottom line.

The underperformance by gold stocks relative to bullion these past months has served to partially correct this imbalance, although these charts suggest that, theoretically at least, there is still some way to go. It is very clear from these charts that the real driver for gold stocks will be an intrinsic bull market in gold driven by increasing investment demand. Given the increasingly tattered state of the worlds' fiat money systems, with currency debasement, competitive devaluation, and the creation of a plethora of financial instruments designed to suck money out of people in exchange for intrinsically worthless IOU's, this surge in investment demand for gold is regarded not as a matter of "if", but "when".

When gold and silver plunged last week, our trading stop at 218 was triggered. The stop was placed at this level to protect from the worst consequences of the recent high in the HUI turning out to be a double-top with the highs of last winter. Many traders will not need to be reminded what happened after gold itself double-topped last spring. A double-top here is not considered likely unless the broad market caves in, more about which lower down the page, more likely is that we are seeing a large consolidation zone similar to that which occurred in 2003, to be followed to a breakout to new highs. While the index could bottom right where we are now, and we will need to watch out for this, there is a good chance it will back off to the long-term trendline shown on the chart which is currently at about 195 - 200, where there is also general support. This is regarded as a buying area with quite close stops, as a clear closing break of the trendline would then be expected to lead to a decline to support in the 150 - 160 area. Obviously, the safest buy signal is a breakout above the former highs evidenced by a move above 260, but entering at this point would involve paying considerably higher prices.

Changing the subject somewhat, the post Republican election victory rally in the broad stock market has been hailed as a potential new bull market. But again, it depends on what you mean by a bull market. Locally it may be, but try looking at it in Euros and you almost need a magnifying glass to see this rally. The long-term Dow and S&P500 charts show an ominous massive Head-and-Shoulders top slowly approaching completion in both, with the neckline on the Dow being up-sloping and the neckline on the S&P500 being flat, which fits with Dow Theory, according to which the biggest stocks are the last to top out. A severe decline is expected to follow breakdowns from these formations, which, interestingly, are hidden on the straight index charts.