By: Gary Tanashian | Tue, Dec 2, 2008
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Excerpted from the November 29 edition of Notes From the Rabbit Hole (NFTRH10)

I want to call your attention to a bit of analysis and a monthly chart of gold I did on the old Biiwii.com COW (Chart Of The Week) in March. I do so because back then I was getting bearish, which was appropriate given the over bought technicals and the level of impenetrable bullishness in the sector now that gold bugs' long awaited Armageddon had finally visited the financial markets. People were convinced that the yellow metal was going straight to 1500 from severely over bought levels. My thoughts included what I have parroted over and over for years:

"The play in the miners is and has been that if gold declines, it needs to outperform the likes of oil, industrial metals and human hopes for positive economic prospects and the gold miners should be okay, counter-cyclical instruments that they tend to be. But this dynamic is also a factor in our 'buy the corrections only and take some profits on strong runs' mentality."

Well, the gold miners were not okay and in the words of Marcellus Wallace in Pulp Fiction, they were 'a long #$%&'n way from okay' as the contraction in credit set off a frenzied race to cover what had been the trade of the cyclical bull market (2002-2007): short the USD (and Yen), long everything else (especially the commodity and resource bubble linked to the popular 'China Trade').

This is now water under the bridge because the acute phase of the panic ended with October's passing and the retest phase appears to be coming along nicely as well. I am now looking for a decline in the extended and bearishly diverged (MACD, TRIX and other indicators) US Dollar. The daily technicals have eroded and the world's number one debt note remains strenuously over bought by weekly charts.

By the same token, bullish divergence has presented itself in most other markets, which stand to benefit from unsustainable bearish sentiment as the major media the world over have done their job once again. The result being that people sit safely in cash which is right where they're supposed to be from the perspective of those who need a counterparty in waiting.

I am bullish nearly everything except the Dollar and Yen, for a technical rally at least.

As this DJIA chart (courtesy yahoo! Finance) shows, there was a long way down following the initial panic of 1929. But do you see that little hitch upward in the red box? Well, it may not look like much but for many market participants at the time it felt like 'the worst is over and happy days are here again!' Be forewarned. Longer term this chart tells me the Dow has potential to 4,000 as all the chickens born of immoral activity on Wall Street dial us back to 1994 levels. I don't necessarily believe this will happen but neither did I necessarily believe gold would go to 700 after the charts told me of that 'potential'. As shown later in this edition of NFTRH, current portfolios reflect bullish positions in Asia, energy and US stocks. This is for a trade and a trade only.

Is there a true bull out there? Yes, I believe so. This bull lives with the gold miners. Various hockey sticks known as the gold-oil ratio, gold-gyx ratio and gold-human hopes for prosperity ratio provide undeniable evidence of superior fundamentals in the making.

As short term evidence now, post panic, again please review the HUI technicals provided yesterday on the blog: http://biiwii.blogspot.com/2008/11/hui-current-status.html and note that yesterday's low volume, post-holiday action has brought Huey to resistance as noted at around 250. This means we are ripe for a correction, which would be a buying opportunity per the notes on the chart. But this is a very healthy index overall, having been savaged along with the rest of the market during the October panic and November retest phases despite fundamentals that were made ever more positive by the same forces that drove the USD higher. I expect relief in the post-panic broad markets to provide the underpinning for a real BULL market in the gold miners to begin to unfold.

As I always say, the market is full of short term noise and misperception, but that eventually gets sorted out. The playbook has always shown the gold miners as superior investments during economic contraction, not as part of the greed-fueled 'inflation trade' (RIP 2003-2007). There is only one sector in which profit margins are set to expand, therefore there is only one sector where the bull is likely to be a cycle as opposed to a hopeful reaction to fear and panic of unsustainable levels.

More follows for subscribers, including US Dollar technical analysis, gold miner fundamentals and macro-indicators in the NFTRH10.



Gary Tanashian

Author: Gary Tanashian

Gary Tanashian

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