Below are excerpts from the above titled commentary that appeared at Treasure Chests on Monday December 5, 2005.

A Case For Bullion

Further to the above, and before we get into some of the finer details we wish to cover in coming to our conclusions, while not wanting to scare anybody, but at the same time maintaining a completely forthright presentation of the facts as we see them, if we are currently enthralled in what history will undoubtedly prove to be some degree of a 'Grand' or 'Millennial' scale topping process, with the scope encompassing the 'human experience' as it were, purely from a long-term investment standpoint, it strikes us that all this playing around with paper is becoming increasing questionable. That is to say while there undoubtedly exists the potential for precious metals shares to broadly outperform the metals starting sometime next year once the next Primary advance impulse in the group gets underway, a point which we now think can in fact be precisely identified for you (more on this below), one must wonder if the greed associated with striving for these leveraged gains is wise considering the degree of risk. Therein, you should know that in the end, those who successfully exit 'the game', which in the broadest sense is 'the paper game', with meaningful percentages of their wealth in tact will 'win'. This of course brings us back to owning increasing percentages of physical gold in your portfolios, thereby providing assurance your wealth will be preserved no matter what pricing mechanisms are in place.

Such concerns are of growing importance to us these days because of what one could consider 'forgotten understandings' by the so called 'educated' (think corrupt authorities), and in a larger sense simply due to plain ignorance amongst the investing population. A good example of this is that history has taught us 'Grand' (paper based) cycles end with a 'thump', a thump the likes of which has not been heard since the Dow crash in '29 to '32, where it lost 90 percent of it's value. Let that figure settle into your brain a bit longer before we move along - 90% of its value. Again then, the last time we felt a 'thump' of this magnitude, it was the Supercycle Degree crash in the Dow during the 30's, taking the primary measure of paper wealth in the world at the time down to the very depths of desperation. This is why you heard so much about people committing suicide and jumping out of buildings. That is to say, due to the severity of this correction, where we have yet to witness anything as dramatic to this day, and is why society's response thus far has been relatively muted, most of this paper lost its entire value. The 'tech wreck' at the turn of the millennium was nothing in comparison, where it was only enough to create an Intermediate Degree 'blip' on the screen in terms of Wall Street's total market capitalization. (See Figure 1)

Figure 1

Source: The Chart Store

As you can see above, and counter to our concerns expressed on these pages, in a more practical sense the paper world is far from dead, where as you know from recent undertakings, precious metals stocks should have much further to go, especially considering sentiment on the part of the general public (see yellow bars) is approaching comparative historical lows, whilst the metal is vexing 23-year highs. If the North American consumers were not so broke, we might actually think this factor to be extremely important. As it stands today however, we will simply categorize this condition as a 'factor'.

We think such a view is appropriate because this is not your dad's gold market, even if you're in your eighties. Therein, consumers are so highly indebted today both in terms of the aggregate population, along with incomes, that when times get tougher, with a cloud of unpaid bills hanging over their heads, given the choice between paying down debt or buying gold, it is our view most will likely pick the former first. So, with such a large percentage of the population in this predicament, and not that other sources will not keep bullion prices firm (think foreigners and central banks), precious metals stocks in particular could be hit very hard, especially when the broad market begins it's 'nose dive' and margin balances must be paid. (See Figure 2)

Figure 2

Source: The Chart Store

Be that as it may, and in returning to the primary point we wish to make in our argument favoring owning increasing percentages of your wealth in physical bullion as opposed to paper, we wish to point out that as time passes, and demand grows, even if one does make superior (after tax) gains in gold stocks, this does not necessarily mean you will be able to protect that wealth in tangible form, and that such assets could be subject to total loss in the end. This is of course a lesson we leaned just above.

Compounding this understanding is that when central banks and governments get into the gold accumulation stage, certain jurisdictions could outlaw gold investment and ownership as a matter of 'national emergency' while they replenish their coffers, leaving all those not properly participating out of luck. This of course makes the rationale you should have decreasing percentages your assets in paper once a Grand Cycle fall gets underway that much more material, where the last events of this magnitude were complete washouts for most citizenry. Aside from holding cash, as long as it was still negotiable, and assuming yours had not been completely consumed in hyperinflation, without a doubt gold was the best place to have held wealth, where in fact it is on this very premise societal reorganizations are normally founded. Puff on that for a while.

The Problems With High Cost Producers

The primary variable giving high cost producers trouble at present is primarily 'energy' related, where in one way or another, the costs of rising oil is making it impossible for these low margin operators to make any money at current appreciation rates in the metals. If the metals were to begin rising faster, obviously things would look different, and as noted above, we fully expect this to be the case later in 2006 as politicos and US central monetary authorities unleash an accelerated currency debasement agenda due to Presidential Cycle considerations. But, until then, and allowing for lags, as with other examples, high cost producers like GSS will likely continue to suffer in terms of their share prices. Here is a quick snapshot of crude to give you an idea of why GSS has been suffering as of late. In this respect, you should know that sophisticated traders, and programmed computers, are weighing oil prices in their decision-making as much as the price of metals. (See Figure 3)

Figure 3

Furthermore, with crude oil up some 47 percent already this year, natural gas up over 100 percent, along with labor demands remaining firm, it's no wonder investors are not willing to give prospects for high cost miners the benefit of the doubt. About the only good news we have in this department is the current count in crude is suggestive of one more corrective leg down, but then of course we could be looking at a 'running correction', where the B wave could extend to 80. (See Figure 4)

Figure 4

And then there is the whole 'credit bubble thingy', which we touched on above, where because of sheer mass in this regard, growth prospects in the world are very much negatively affected. In fact it could be argued that until the States begins an accelerated debasement of its currency sometime no later than summer of 2006, over all global conditions will likely remain relatively subdued. This understanding is derived from an examination of global freight rates, as measured by the Baltic Freight Index (BFI), where after in excess of a 50 percent drubbing earlier this year divergent to continued strength in oil, rates remain mired at lower levels. To give you a feel for what we are talking about, here is the Baltic Dry Index (D1) with crude overlaid on the plot, providing a clear picture regarding the divergence that currently exists, but also showing how a pop in oil prices now could cause shipping rates to close this divergence in an unpalatable manner with regard to cost structures. (See Figure 5)

Figure 5

Source: Investmenttools.com

Perhaps this is why gold has been in rally mode of late, potentially signaling global money supply growth rates are sufficient to expect continued price accelerations. It's either that, or as mentioned above, credit bubble considerations will cause the divergence between inputs and freight rates to close in a negative fashion. Of course this would be a bit early in the grand scheme of things, not that a good old fashion 'scare' is out of the question in coming months. Here to, this would not be good from a liquidity standpoint at the onset of such a sequence, meaning until increased money supply growth rates kick in later next year, equities in general could come under pressure. Last time we checked, precious metals stocks fall into this category, so it appears at least for now, high cost producers are damned if oil prices rise or fall, depending on the timeframe one wishes to examine. (See Figure 6)

Figure 6

Source: Investmenttools.com

Further to the above, it should be noted that if the D1 cannot exceed recent highs in concert with rising crude prices one should consider this a very scary development. This is why you can rest assured we will continue to watch this story closely in coming weeks and months. And the fact is that from a technical perspective, prices could break either way at this juncture, but as mentioned above, we are expecting a resolution higher, taking out recent highs at the 38 percent retracement mark. (See Figure 7)

Figure 7

Source: Investmenttools.com

Of course what we expect and what actually happens could be two different things, but as long as Treasuries hold together while the Dollar is rising we see little risk of interest rates rising to any large degree, which is of course the big 'wild card' out there right now. In this respect, one must consider that in a normal market environment, one where participants were not financial 'basket cases' already, interest rates would be much higher with the accelerating price gains we are experiencing at present. That is to say, did you notice recent gains in growth rates of finished and intermediate producer prices? Someone will have to pay for that eventually, or companies will be forced absorb these cost increases, which of course brings us back to the core theme of this piece.

And while such considerations are important from a macro perspective, undoubtedly investors are more interested in knowing how these factors all come together, and that indebted / high cost producers (like GSS) can little afford out of control increases in carrying costs now in addition to constraints they already face. Indeed, it could be argued that with rising oil prices along side of such a condition, and it should be noted the two go hand in hand, that this could be a 'death blow' to some operators, where we would look for marginal companies that are facing significantly lagging revenues, like in the precious metals sector right now, to suffer considerably. As you can see below, D1 has made considerable strides higher in a generally declining rate environment, but it appears that if bond yields were to begin rising for real, that we should expect much softer pricing in the future as pressure comes out of the pipe in the global economy. (See Figure 8)

Figure 8

Source: Investmenttools.com

Well, that was an enlightening exercise, no? Here comes another one, where we will start with a plot run many times before, but not lately due to the fact we needed to see if the structure would hold during a correction in the oils. Sure enough, it did, and what this now tells us is that while further corrective price action could hit energy stocks at any time, the balance of evidence suggests they will generally continue to outperform precious metals stocks to the extent a 'zero premium' will exist between the two in the end. Based on the appearance of the structure, which as you likely know is a 'head and shoulders pattern', we could see this condition present as early as this coming summer if share prices of the miners really snap lower. Further to this, and although we fully expect larger degree structural supports to hold for precious metals indexes, if general price weakness in equities were to hit the tape concurrent to this definitional relationship tracing out a bottom, the entire sector could get hit hard, with high cost producers positively pummeled. (See Figure 9)

Figure 9

Putting some numbers into this appraisal so that you have a better idea of what we are talking about, GSS run against oil, never mind gold for now, yields a structural relationship that should be no surprise to you after reading the above. But, if this move were to actually trace out, such a development would certainly blow a few circuits in the gold community. That is to say if oil is able to make it up into the 80 area in coming months, GSS could be trading below a buck, possibly as low as 80 cents if the full measure runs its course. This of course assumes gold will not begin rising faster than oil on a more permanent basis, which seems doubtful at this point for reasons already covered above. (See Figure 10)

Figure 10

Of course there are numerous ways the aforementioned variables / relationships may progress in coming months, where you can be sure we will continue to measure movements and adjust our trading strategies accordingly. In fact, you maybe interested to know it's this kind of work that aids us in identifying trend changes in the various markets we cover at Treasure Chests, which in turn allows us to specify 'swing trading' opportunities for our subscribers. You may also be interested to know we understanding you can invest your hard earned savings into what could be viewed as an exceptional growth opportunity by a consensus of intelligent observers, only to be proven wrong if macro conditions are not conducive to releasing said growth opportunities, and where disappointment and financial losses may be the result.

This is why we go that extra mile to ensure you are receiving the best service possible within our abilities.

We invite you to visit our site and discover more about how our approach to market analysis and investing could potentially aid you in realizing your financial goals into the future. And if you have any questions, please feel free to drop us a line, where we will be sure to get back to you with an answer to your query as soon as possible.

Until the next time, good investing all.

Best of the season and a prosperous 2006.