Marketwatch - Precious Metals Stocks Stalemate About to End...
Originally published February 21st, 2009.
A lot of subscribers have been perplexed by the relatively miserable, laggardly performance of Precious Metals stocks in recent days as gold and silver have soared, especially against various major world currencies. This is one thing which is easy to explain - they have been held in check by a massive wall of overhanging supply that dates back to the extensive trading around the current price for much of 2006 and 2007, which we have looked at earlier on the 4-year chart for the HUI index. The restraining influence of this has been aggravated by gold majors reporting surprisingly poor results. The situation remains very finely balanced with both the HUI and XAU indices trading in an increasingly tight range cornered between a rising trendline and an almost flat line of supply that is being steadily eroded. We are at a crossroads RIGHT NOW and this market must tip its hand very soon, probably within days. There are factors in play that could cause it to break either way. Until now we have interpreted the pattern forming in these indices as a bearish Rising Wedge, which implies a breakdown, but there is increasing evidence that it may instead be a bullish "running correction", and if it is then it will break out to the upside, signaling that the bulk of the overhanging supply immediately above the current level has been absorbed. Note, however, that there are circumstances that could yet cause it to break to the downside, as for example, a combination of gold and silver, which are now getting critically overbought, turning down temporarily along with a crash phase in the broad market, which could be triggered by one or several of the unexploded bombs waiting to go off doing just that.
Looking at the 1-year chart for the HUI index we can see that in addition to the convergence of the trendlines already mentioned, the 50-day moving average, which is rising steadily beneath the index, is rapidly converging with the 200-day moving average, which has been falling steadily overhead and until now has had a restraining influence - but with gold's strength in recent days the index has been challenging the 200-day moving average, and may be on the point of overcoming the strong resistance that this average symbolizes. The simultaneous convergence of these trendlines and moving averages points to an explosive breakout very soon. The action of recent days, with the continued rise of gold and silver leading to both the HUI and XAU indices challenging their respective lines of resistance and 200-day moving averages is creating a bullish impetus that lead to an upside breakout soon, and thus the pattern from December is now thought to be a bullish "Running Correction" rather than a bearish Rising Wedge, which was the earlier interpretation. The traditional running correction is a very bullish pattern, because the market actually rises somewhat as it undergoes a corrective process, implying underlying strength. As we have already observed, it has been appropriate for this pattern to form here because of the concentration of overhead supply at these levels. The poor results being reported by the majors, which have been another inhibiting factor, will soon become irrelevant, as the market looks ahead and will soon not be interested in "water under the bridge".
What about the fact that gold is already extremely overbought, as highlighted in yesterday's Marketwatch, especially against currencies other than the dollar? - doesn't this mean that there is a high risk of a reversal, which would result in stocks breaking to the downside? Well it does and it could, and normally that is what we would expect soon. This is why we will hang on to the Put options in big golds that we bought on the site in recent days. However, the present global situation is CATASTROPHIC and we have already arrived at the point where GOLD AND SILVER ARE THE ONLY GAME IN TOWN. Like an idiot throwing water at a chip pan fire, governments and central banks around the world, such as the Federal Reserve are desperately trying to avert disaster by dropping interest rates to zero and creating monopoly money in astronomic quantities to throw at failing banks, institutions and large corporations right, left and center, and in so doing are practicing even more of the incompetence and stupidity that created the mess in the first place. This video, The Crash of 2009 IS COMING TO YOU should make it clear to even the most complacent and obtuse individuals that the United States is facing financial disaster. The taxpayer will pick up the tab for all of this in the form of a hyperinflationary depression. This is the reason why GOLD IS RISING AGAINST VIRTUALLY ALL CURRENCIES. This is why you can almost forget about what the dollar's doing these days.
Speaking of the dollar, the price of gold in dollars got a boost on Friday when the dollar suddenly dropped sharply, backing off from its November highs. The reason for the strength in the dollar index since mid-December is not that would be Treasury buyers are piling into dollars to flee into Treasuries, as was the case last year which fuelled the big dollar spike, but rather that THE EUROZONE IS IN BIG TROUBLE and the European Union may ultimately disintegrate as a result. The Euro is a very big component of the dollar index and it has been very weak recently.
It is worth considering the US Treasury market briefly. We called the exact top in this market on the site in mid-December, since which time Bills and Bonds have completed Head-and-Shoulders top patterns and broken down from these patterns, and in the case of Bills have in recent days rallied back towards the "neckline" of the pattern before turning lower again. US TREASURIES ARE DOOMED for the simple reason that the United States thinks it can go on manufacturing money out of nowhere and get stupid foreigners to pay for it all by buying Treasuries. While there is no denying that foreigners have been played for suckers for years, and have warehouses full of atrophying US dollars, debt and other rubbish to show for it, they are slowly beginning to wise up, a process that has been greatly assisted by having been fleeced on a grand scale by the sub-prime mortgage scam, so that the prospect of countless trillions more of crisp new Treasury issues heading their way is going to meet with a diplomatic but firm "thank, but no thanks.". That means that the Fed and the Treasury are going to have to monetize this new debt - buy their own rubbish - which means creating more money in order to pass the cost off on to the US taxpayer via inflation. WELCOME TO THE ERA OF HYPERINFLATION. Is it any wonder that gold and silver, the traditional stores of value in times of crisis, are taking off against all currencies? Hot new degree course topics for business students around the world will surely be "The Weimar Republics of Germany and the United States, 1920 and 2009", and "Zimbabwe and the United States - from riches to rags". So US Treasuries are the ultimate sucker play - zero yield and a bear market to boot - why not save yourself the trouble and walk out into the street and stuff your money straight down the drain?
We will now return to the consideration of tactics for trading Precious Metals stocks at this juncture, with reference to the 1-year chart above. A buy or sell signal will be given depending on which way it breaks out from the rapidly converging trendlines. However, in taking positions stops should be placed below the lower trendline if it breaks out upside, and above the upper tendline for any short positions opened if it breaks down. Note that new short positions are generally not advised if it breaks down as we are in a major bullmarket in this sector. Rather after perhaps several sharp down days in a row, we would be looking to buy aggressively and close out Puts.
We sold out most of our positions about 10 days ago, which were largely silver stocks in which we had for the most part made good gains, having bought them near the lows in November and December and thus captured most of the advance to date. Selling out has provided us with the chance to redeploy into the stocks that currently look the strongest, and a new list is in preparation which will be actionable immediately should the indices break out upside. This list will be posted on the site shortly. Note that the list will of course include some of our old favorites, which were only sold to sidestep a possible reaction. An additional factor that may need to be taken into account in regard to small silver stocks is the increasing political risk in Mexico which is likely to become increasingly unstable and chaotic in the wake of the economic collapse of the United States, with silver mining companies possibly becoming vulnerable to the kidnapping of employees and extortion.