For gold bugs the past year has been one of frustration. After enjoying a spectacular run in 2002 into May when the TSX Gold Index rose just over 60%, the Philadelphia Gold & Silver Index (XAU) about 60%, and the Gold Bugs Index (HUI) rose 120%, those highs now seem to be just wishful thinking. For sure some stocks and gold indices (the HUI being one) have made either new highs or at least returned to those highs the TSX gold index remains around 30% below those highs. In between we have had rallies of about 35% and 26% on the TSX Gold Index. Most importantly though a spike low in July 2002 has held and generally stocks and the indices have been hugging above bull trendlines from the 2000 lows.
All of this is actually quite positive. So the best advise to gold bugs is relax. If you are long and willing to go through the ups and downs stay long. If you are looking for the buying opportunity the time we believe is just about upon us. We have important cyclical turns around the end of July (one year anniversary with the July 26, 2002 lows amongst others). The move from those 2000 lows made their peak with the May 2002 highs and what we have been witnessing over the past year or so is a complex correction to that big up wave. The move to May 2002 was just the first big up wave. We are now awaiting the third wave up or as some call it, the second advance.
Our weekly charts of both the HUI and the XAU shows the growing potential for gold stocks. Both indices came off of what appears as multi-year head and shoulders pattern. The target on the HUI is at least 164 while the XAU target is at least 112. While both targets remain unfulfilled, more importantly the head & shoulders pattern has not been breached so it remains valid.
Since making the highs in May 2002 the HUI appears to be forming a large ascending triangle while the XAU is forming a large symmetrical triangle. Both are working their way into the apex of the triangles and as five point reversal patterns should be in their final throes. Both are bullish patterns although symmetrical triangles can sometimes form tops although in this case we doubt it. A potential target on the HUI upon a break out is 214 while on the XAU the symmetrical triangle target is potentially 112, which coincides with the head & shoulders pattern.
The only question remaining is where the indices might bottom. The HUI appears to have solid support in the 130-134 zone while the XAU has support at 70-72 and again at 66-67. These appear to us to be the worst-case downside with the timing of a bottom to occur by the end of July. Breakout points for the two indices are at HUI 160 and XAU 82. The TSX Gold Index breaks out over 174 and especially over 186 with downside support near 160. Gold itself has solid support down to $330 although we cannot rule out a print under that level before we make our final bottom. Only under $315 would this scenario change. Silver remains grossly undervalued with looming shortages. A breakout over $5 will signal the end of the silver bear market and a move towards $6. Targets on gold are from $400 to $430 this year but cannot be confirmed until we break out over $375.
A number of political and economic events are beginning to come together that could cause both a drop in the general stock market and a rise in gold prices. Despite assurances from "Easy Al" (Fed Chairman Alan Greenspan) that he is prepared to leave interest rates low "for as long as it takes" it is becoming clear that the bond market is becoming increasingly alarmed. But bond investors may be concerned about more than just "Easy Al's" soothing assurances. The White House announced that the US budgetary deficit would soar to US$455 billion, a record far surpassing the $290 billion in 1992 of Bush senior. While this may be the White House's new version of "shock and awe" it will still only be about 4% of GDP versus the 6% budget deficits of the early 1980's reached under Ronald Reagan.
But coupled with trade deficits that are approaching $450 billion annually the demands on the bond market may soon turn out to be too much especially as corporations pour into the market to take advantage of low rates and consumers continue to refinance homes leading to ever higher levels of debt in the economy (and by default becoming the only source of new money for expenditure in the economy as savings remain negligible and personal expenditures continues to grow faster then personal income). The bond market has recently plummeted amongst these fears of growing deficits. Japanese selling is helping the fall in bond prices. The soaring twin deficits are an example of gross mismanagement at its worst. Gold prices have a history of moving inverse to bond prices and this collapse in the bond market will also eventually impact the stock market negatively.
While housing prices have remained reasonably firm there are also signs that they are beginning to soften and if long interest rates rise forcing mortgage rates higher this will have a further negative impact on housing prices. This would have huge ramifications for not only households but also the banks that lent them the money (and against a backdrop of record foreclosures and continued high bankruptcy rates due to the high consumer debt).
As we mentioned in a previous article this is having an impact on Freddie Mac (FRE-NYSE) and Fannie Mae (FNM-NYSE) the two giant mortgage lenders. Fannie Mae recently announced drops in profits due to big swings in their derivatives portfolios used to hedge their bond portfolio while Freddie Mac continues to have problems with accounting of their derivatives.
While the US$ has enjoyed a recent respite after a long downfall this should not last for much longer. One thing helping the US$ recently has been the concern of its major trading competitors that their currencies have become too strong. Efforts by them including Japan and the European countries to dampen enthusiasm for their currencies is another form of the "Beggar thy Neighbour" policies of the 1930's that were a major contributor to the Great Depression. Technically the US$ was due for a rebound but is now running into major resistance so even a return to the recent lows and the lower bands of the downtrend lines would send gold higher.
But one of the potential biggest risks lies in the growing scandal over rationale for the war in Iraq regarding weapons of mass destruction (WMD). While of course the real point is that the WMD have not as yet been found and they may yet exist, it was WMD that were the prime rationale for the war and it was premised on misleading and fraudulent information that was used even when it appears it was known to be false. The British Prime Minister, Tony Blair is in severe trouble and is vulnerable as his own party is turning against him. In the US potentially the most vulnerable in the growing scandal is Vice President, Dick Cheney who many regard as the real architect behind the war along with Defense Minister, Donald Rumsfeld.
It may of course turn out that the growing scandal does not have legs but with many now asking questions and with a US election at stake a little over a year from now the intensity on this issue will only rise. This is being played out against the backdrop of growing fatigue and disillusion amongst the US troops in Iraq whose leaves have been cancelled and their stays extended while the Iraqi resistance grows stronger.
Financial mismanagement and political mismanagement is not a recipe for a strong US Dollar, stock market and bond market. But it will transfer into strength for gold and the charts are pointing to an end of the yearlong correction in gold prices and a rise that could be explosive. While all gold and silver stocks should benefit from a rise in prices we do provide a list of our favourites.
|Seniors & Intermediates|
|Agnico-Eagle Mines Ltd.||AGE-TSX, AEM-NYSE||416-947-1212, www.agnico-eagle.com|
|Newmont Mining Corp.||NMC-TSX, NEM-NYSE||416-480-6491, www.newmont.com|
|Placer Dome Inc.||PDG-TSX, NYSE||604-661-1932, www.placerdome.com|
|Goldcorp Inc.||G-TSX, GG-NYSE||416-865-0326, www.goldcorp.com|
|Glamis Gold||GLG-TSX, NYSE||702-827-4600, www.glamis.com|
|Cambior Inc.||CBJ-TSX, NYSE||450-677-0040, www.cambior.com|
|Kinross Gold||K-TSX, KGC-NYSE||416-365-5198, www.kinross.com|
|IAMGOLD Corp.||IMG-TSX||416-360-4170, www.iamgold.com|
|Teck Cominco Ltd.||TEK.B-TSX||604-687-1117, www.teckcominco.com|
|Eldorado Gold Corporation||ELD-TSX||604-601-6655, www.eldoradogold.com|
|Bema Gold Corp.||BGO-TSX||604-681-8371, www.bema.com|
|Northgate Explorations Ltd.||NGX-TSX||604-669-3141, www.northgateexploration.ca|
|High River Gold Mines Ltd.||HRG-TSX||416-947-1440, www.hrg.ca|
|Wheaton River Minerals Ltd.||WRM-TSX||604-696-3000, www.wheatonriver.com|
|First Silver Reserve Inc.||FSR-TSX||604-602-9973, www.firstsilver.com|
|Silver Standard Resources Inc.||SSO-TSXV||604-689-3846, www.silver-standard.com|
|Pan American Silver Corp.||PAA-TSX, PAAS-NASDAQ||04-684-1175, www.panamericansilver.com|