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July 07, 2004

Technical Update of the AMEX Gold BUGS Index
by David Petch

This update is primarily going to deal with the AMEX Gold BUGS Index. All commodities were essentially in a BEAR MARKET for 20 years. The forecast in the behavior of the HUI is easier compared to the S&P or US dollar for that reason. The S&P 500 Index is mirroring the DOW which has been in an up trend since 1760 (back data extrapolation involved); the longer the wave pattern the more difficult it is to assess the thought wave structure that will follow.

The precious metals such as silver are having there above ground sources continuously raided to suppress the metal price. According to silver Guru David Morgan (writer of the Silver-Investor Newsletter), above ground silver supplies will be very tight in the coming year or so. Silver primarily is an industrial metal (most is not recovered from industrial processes) with most being supplied as a result of secondary mining (copper, zinc, lead). The amount of silver globally consumed is growing on a yearly basis, with production trickling. Once the above ground supply has been exhausted, the open market price will dictate how high the price gets. Silver historically has played an important role in established currencies by making up a certain percentage of issued coinage. England removed silver from its coinage in the early 40's and is strictly composed of base metals today, as are most global currencies.

A re-introduction of gold and silver into global currencies is likely to occur to some degree, but it is unlikely that the world is going to revert to such a system in this century. The growth profile and development of humankind is exponential, rather than linear. Even with AIDS and other diseases expected to wipe out significant portions of the human population in the coming 30-40 years, the global population is not expected to top until 2040-2050. Between now and then, there are a lot of undeveloped countries to come online and will require exponential growth. Earlier economies and populations of 5000 years ago grew at a slower pace, and the amount of gold and silver mined could usually keep up with the coinage. A country going off the gold standard is not a phenomenon that only occurred with the US in 1971.

When the Roman Empire peaked, they were forced to reduce the gold and silver content from their circulating currency. The following web site illustrates the main coinage that was initially issued: http://www.roman-britain.org/coinage.htm . As the Roman Empire expanded, trade and payment to their military infrastructure required gold and silver that did not exist. They were forced to lower the grade of their coinage with more brass, copper and zinc. Their currency eventually became worthless. Given the expansion of global fiat currency, the price of gold and silver would have to rise several orders of magnitude to function as in earlier times. It is more likely that countries will have a lower percentage of their currency linked to a certain amount of gold at the start of the next market phase. It will likely decrease to lower levels again as time passes before another unsuspecting generation swells the ranks. The current expansion and maturing of the global economy simply can not function without an expansion of currency. A true gold-backed currency allows an individual at any given time to exchange a denominated dollar for an equivalent amount of gold. Gold was fixed in price at $35/ounce for nearly 30 years before it was allowed to trade freely. The behaviors of gold prices are part of the evolution of our global economy becoming linked. Further extrapolation suggests that countries are likely to have larger pools of gold in the future to back the currency, but in a "non-tradable" sense. It would likely serve why countries keep nuclear bombs.....not intended for use, but for a display of power.

Most of the gold ever mined is still in existence, and is used to preserve wealth. The coming decade is likely going to see erosion of wealth from most individuals, and a flight to preserve wealth will occur. Gold is money, and now that it is available to the global populace to accumulate supplies will tighten. Poor mans gold, or silver is likely to soar more than gold on a percentage basis, given the affordability to most persons in third world countries over gold. The governing factors for any bull market is supply and demand. When demand picks up on limited supply, a bull market in a given item begins.

We have discussed gold, but what about gold stocks. Gold stocks are only worth ~$100 billion dollars, and all the gold ever mined is around $1.4 trillion dollars. The total global debt and money supply is around two logs higher than this. When people try to enter stocks and purchase gold, the door of entry is small, so prices are likely to rise to ridiculous levels near the end of the bull market around 2013-2014. The shares of current large cap companies are likely to expand 10 fold in the coming 10 years to keep up with investment demand. It should be noted that the metal will dominate the latter part of the cycle. Gold and silver stocks are likely to have their peak around 2010-2011 (two years prior to the top in the metal price). If gold reaches above $2000/ounce, then there will be a saturation point for company prices (higher gold prices will not do anything to the share value). The analysis in this article will examine where we currently stand in relation to the AMEX Gold BUGS Index technically, with a final chart showing "You are here" in relation to the expected pattern to develop in the coming 2 years.

The Bollinger bands are converging at an accelerated rate. When the lower 55 MA Bollinger band begins to curl down, an established up trend will be signaled. A further consolidation for another week is likely. Refer to the Elliott wave charts presented later in this editorial. The full stochastics are bouncing off the 30% line with the %K above the %D. This is a bullish development, and basing is unlikely given the overall technical picture.

Figure 1

The 50 day MA is currently offering support to the index, while the 155 and 200 day MA's are nearing convergence. The shorter term stochastics shown below are bearish, suggesting further weakness or consolidation in the HUI. It should be noted that the %K could rise above the %D quickly, based upon the wave pattern present. We will present this chart daily this week to track the changes in the stochastics.

Figure 2

Below is the weekly HUI chart. The Bollinger bands are still converging. The up trend on the weekly chart will be confirmed when the lower 55 MA Bollinger band curls down. This indicator lags the trend by 6-8 weeks. The lower 21 MA BB curling down is suggestive we are nearing the start of the next up leg of the corrective pattern. The stochastics below have been bullish for one month and are likely to continue rising to the top of the 70% channel line. This is around 2-3 months from now.

Figure 3

Below is the short term Elliott wave count of the AMEX Gold BUGS Index (HUI). The triangle has been forming as hypothesized back near the end of May (the severity of the decline and internal wave structure of waves [a] and [b] suggested this). There are many Fibonacci relationships observed between the internal waves of the triangle. Noted in the chart, wave [e] retraced ~61.8% of wave [d] and ~38.2% of wave [a]. There are many other Fib relationships not noted. A contracting triangle SHOULD have many Fib relationships present to consider it a valid pattern. The triangle based upon the wave structure should have a non-limiting triangle classification. This is confirmed by the wave structure currently running to near the apex of the triangle. There are two preferred counts that have the same outcome, just in a different time frame. The light green line has the HUI breaking out from the triangle, testing it, and then advancing minimally to 233 before any correction of significance. The darker green line has the same target with a possible higher target, with a sub-triangle forming in wave [e]. This could extend for another 1-2 weeks. The internal wave structure of each wave in the triangle are corrective........there is no visible or accurate way to label them as impulsive segements in their entireity.

Figure 4

Below is the Elliott wave chart of the HUI showing the entire corrective sequence since December 2002. The end of the triangle will complete wave [W]. which will represent 1/3 of the expected correction. Refer to Figure 7 for the "YOU ARE HERE" diagram to see the expected move. The entire pattern. The pattern for wave [W] is a complex correction with a flat-X-triangle structure. As mentioned, the minimal move will be to 233, prior to a slight pullback, and a continuation of the move up to 280-320.

Figure 5

The longer term Elliott wave chart of the HUI is presented below. Each successive wave of [I] was longer, with the log scale corrections diminishing as the pattern advances. The green line shows the suspected pattern that will develop as wave [W].II completes. An alternate count not presented would have the HUI rising to 230, and declining to 150-160 to form wave [W}. Non-limiting triangles such as the current one we are in often mark the end point of a certain degree pattern. This is our Sherlock Holmes point to confirm with a high degree of confidence the pattern is labeled correctly.

Figure 6

Below shows the "YOU ARE HERE CHART". I am regurgitating the typed information in the chart below. Since wave I lasted approximately 3 years, wave II should last between 1 ½ to 3 years. Wave [X]/OO should last 4-6 months. The top of wave [X] is likely to be in near 280-320. Wave [Y] should be a non-limiting triangle to complete wave II, lasting for one year minimally (probably two years). The minimum length of wave III will be 1.618 x [log(260)-log(35)] x Start point of wave III. If wave III starts at 320, the minimal height for completion of wave III will be 448 on top of 320, or 768. I expect wave III will be around 2 to 2.618x wave I, so the maximum height for wave III is going to reside around 1047 (320+727). There is a lot of variation based upon the final top for where wave III will be, but it is well above the curent levels. I am using a log extrapolation based upon this wave structure, since the move is more likely to be logarithmic rather than linar. The time frame for completion of wave III is going to be 4-6 years years minimally. IT WILL BE MOST PROFITABL TO BUY AND HOLD. Trading in and out of the wave [Y].II that is likely to develop will be futile. The purple line shows the alternate wave pattern that could develop if the HUI turns south by a large degree at 230. If this occurred, wave III would likely reach a higher top, given a longer corrective sequence that would develop.

That is all for today. Updates for the week will include
1) Wednesday -Update the US dollar and S&P 500 Indices
2) Thursday - Update of the TNX, XOI, and commodities
3) Friday - Natural Gas Index

The main focus of today was an examination of where the HUI is going. This article should serve as a reference for the larger degree pattern of where we are going in the next 1-2 years.

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.

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Comments within the text should not be construed as specific recommendations to buy or sell securities. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. We are not registered brokers or advisors. Certain statements included herein may constitute "forward-looking statements" with the meaning of certain securities legislative measures. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the above mentioned companies, and / or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Do your own due diligence.

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