By: John Mackenzie | Wed, Apr 27, 2005
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This is the most important M2 of 2005 for Precious Metals Bulls (PMB's).

Figure 001: HUI Genesis

On November 13th of 2000 the AMEX Goldbug's Index, the HUI placed a pivotal bottom precisely @ 36.01 on the close for that day. After a 20 year Bear Market Decline, Mining Equities reached the trough on what had been an abysmal two decade long retreat for both Gold and Gold Shares. The HUI had fallen 182.96 points from its 1996 inception high @ 218.97 in May of 1996. This drop constituted an 83.55% decline under the Clinton/Rubin/Summers "Strong Dollar" regime.

Conversely, GOLD, the Precious Metal and World Currency's Price performance during this period formed a very similar looking chart. GOLD traded from a high in February of 1996 @ 415.00 to a low of just over 252 in August of 1999 and again back testing this low @ 256 in both February & April of 2001. 352, 333 and 314 became approximate resistance points for the reversal in GOLD & GOLD Shares. It is important to note, we do not consider this important reversal a Bull Market in both Gold & GOLD Shares as many suggest, quite the opposite. We view the real beginning of this Bull Market to occur when GOLD retraces 50% of its entire Bear Market losses, presently @ 552.

Figure 002: HUI 1996 - Present

The above symmetry in congruent with a reversal that will build out a lengthy 5 wave structure as we move to 2014, we can observe the initial wave, wave 1 from the November 2002 bottom @ 36.01 on to the significant peak on March 2nd, 2003 @ 256.84.

These data points represent Price on a "Closing Basis". For the High price of $256.84 and the Low price of $36.01 on the HUI, the retracement levels are:

38% level = 172.48

50% level = 146.43

62% level = 120.37

Since the March 2003 high we have seen closing lows @ the following Levels:

May 7th, 2004 @ 168.80

June 14th, 2004 @ 177.78

July 23rd, 2004 @ 175.07

We closed on 180.56 on April 15th, 2005. The 168 to 180 range has been strong support and well within an acceptable margin for the 38% retracement above @ 172.48.

The entire reversal in GOLD corresponded with a massive expansion of Credit, Monetary Aggregates an exploding growth in Federal Deficits.

GOLD performed very well, as it should in times of Inflating Credit and Monetary Malfeasance propagated by the Federal Reserve System and Central Banks Worldwide.

With a London fixing low @ 252.85 in 1999 to the December 2nd, 2004 fixing @ 454.20; GOLD rose 201.35 or 79.6% in price. In terms of "Value" it increased significantly more, but this concept is for another edition.

Presently GOLD is range bound between the 410 and 442 levels; we expect this to change shortly with another push downward on Metal's prices.

Figure 003: HUI Wave 1 Peak

Wave 1 peaked on Tuesday December 2nd, 2003 @ 256.84 and again retested the high on Monday, January 5th closing at 256.20. Wave 2 began at the Initial high on December 2nd, 2003 and has continued to the present. These corrections typically last between 18 to 20 months; bringing us to month 17, underway until May 3rd, 2005.

June 3rd would complete the front month (month 18) and August 3rd, 2005 would close the cycle of Wave 2's corrective move down. These durations are guidelines for an approximate end to fall within this window based upon precedents in similar market psychographs.

GOLD enjoys uncertainty.

The same can not be said for the Mining Equities, the paper equivalent, a gold mining share is not gold. It is a stock first and gold second. A gold mining share is NOT a substitute for the physical metal. It represents a claim against gold in the ground and not the gold in the ground. Equity ownership has a multitude of risks that are associated with all stock investing. Stocks represent assets, cash flow, debts and liabilities. Risks abound on many fronts: monetary, geopolitical and environmental. Climatic changes associated with Global Warming are beginning to pose risks as well. The spectrum of risk is diverse and should not be discarded merely because the net output is GOLD.

Physical gold is THE ASSET; the only financial asset that is not simultaneously someone else's liability, as long as you retain possession the asset is essentially risk-free. We have always preferred the Metals over the shares and yes, with risk is reward, but we tend to view uncertainty as the primary driver going forward and systemic risks aligned at every turn.

Although there are correlations to price behavior between Mining Equities and the Broad Market Averages that clearly illustrate the 'Liquidity Risks' associated with a downdraft in Equities (See NEM October - December 1987) they are now downward sloping, They remain relatively high in terms of 'Cause & Effect', north of 80% at present, but clear divergences are beginning to build. This will be very bullish longer term for GOLD and potentially, Gold Shares, if the markets do continue to function as a proper clearing mechanism.

Mining Equities do produce spectacular returns in time, but exhibit extreme volatility with respect to retracements. The Chart in Figure 004 represents the Wave 2 downward correction underway since December 2nd, 2003.

Figure 004: HUI Wave 2

We have not observed the retracement thru the 38% level @ 172.48, since May 7th, 2004 @ 168.80. Since May 7th, 2004 @ 168.80 low, the HUI put in two additional and higher lows June 14th, 2004 @ 177.78 and July 23rd, 2004 @ 175.07.

Figure 005: HUI Hourly, March 24 to Present

The Chart in Figure 005 is not bullish in formation. It suggests the potential for a retest of the lows and has essentially met 'price rejection'

We would prefer to see the HUI move across the 196 Level with significant Volume for retest of the 200 level and above, but this has not occurred.

The Federal Reserve has stated it sees greater inflationary pressures within the Economy should have a positive effect on both GOLD and SILVER Mining Equities. This effect is missing in action.

The Commitments of Traders (COT/CTC) data the past seven weeks points to a substantial rise in short interest. It is an infrequent to see the Open Interest on the Short Side of the COT data rise without a significant correction in both the Metals and the Shares.

Since March of 1995, the Commercials have held a net short position as a percentage of open interest of more than 44% on three occasions. Two of these occurrences, in April of 2004, foretold a Substantial decline in the price of GOLD. The third time Commercials exceeded this level occurred last week. In April of 2004 the Price of GOLD declined from 433 to 371.30.

This is significant and coincides with my 'Senticators'; the Gold Advisors, they 'cheerlead' tops.

Figure 006: HUI Hourly, March 24 to Present

Figure 006's symmetry is of concern as it projects the potential for a further decline in Gold Shares.

The 50% retracement level @ 146.43 opens upon a breach of 38% retracement level @ 172.48, the hourly symmetry does not point to this yet; further analysis is required to adjust timeframes properly in order to project a proper Risk/Reward setup.

One of the more interesting events within the Precious Metals Sector is the COT or Commitment of Traders. It signifies the positions (long & short) of various market participants as a percentage of Open Interest.

"I think there has been a profound change in the gold COTs. While the non-commercial large trader long category is at a level suggesting the tech funds are on the long side of gold in a big way, I don't think it is the tech funds that are long gold. Yet. I think some other, very large, non-tech fund buyers entered the market and bought what the tech funds were selling on the break from previous highs above $445 in March. Just like what occurred in silver a few months ago. You must remember that while changes in the non-commercial category are almost always the result of tech fund activity, the tech funds are not the only traders in that category. So while most think the tech funds are already on the long side in gold (and silver), I don't see it that way."

Although this is difficult to prove, I tend towards agreeing with Ted Butler on his thesis of 'change' and who is in charge of the long side of GOLD. There are straight forward reasons for this to be process well underway.

This is troubling at present, longer term it will certainly show its hand, but for now I tend to view this 'profound change' in a disturbing light.

The Federal Reserve has done an admirable job of screwing us all and by 'all' I would suggest everyone in the interconnected Global Financial System. Their stock in trade, the Dollar, is over owned by anyone/everyone holding them. No one entity wants to bring about the end of Dollar Hegemony without first cashing out.

This is nearly impossible.

Once you tip the first domino, the second and all those aligned behind it fall as well.

Monetary Mystic, Alan Greenspan has done an exceptional job of B.S.'ing the fallacious myth that foreign exchange rates are somehow determined by supply and demand based upon market fundamentals of each Sovereign Nation. That would be true were each Nation's currency pegged to a redeemable form of money, but it is simply not so, nor has it been since 1971, when then President Richard Nixon closed the Gold Window. Dollars were no longer as good as GOLD in Foreign Exchange.

The dismal Science/Black Art of Economics/Global Finance tends towards holding the dynamic captive; based upon the United States Dollar as the Globe's primary Reserve Currency. Sixty eight percent of World Reserves are held in Dollars.

Definition from Econterms:

Seignorage: is "The amount of real purchasing power that [a] government can extract from the public by printing money." -- Cukierman 1992

Explanation: When a government prints money, it is in essence borrowing interest-free since it receives goods in exchange for the money, and must accept the money in return only at some future time. It gains further if issuing new money reduces (through inflation) the value of old money by reducing the liability that the old money represents. These gains to a money-issuing government are called "seignorage" revenues.

The original meaning of seignorage was the fee taken by a money issuer (a government) for the cost of minting the money. Money itself, at that time, was intrinsically valuable because it was made of metal.

Despite record US Current Account & Budget Deficits; the Interconnected Global Economy trades merely to capture a Competitive Financial Advantage... Exports compete to acquire the Dollars required to service debt (IMF/World Bank denominates these in Dollars) and to purchase resources, such as Crude Oil, priced in Dollars.

This indirectly "Pegs" those who hold Dollars in Reserve; Central Banks must accumulate dollar reserves in corresponding amounts to their currencies in circulation in order to avoid a loss in purchasing power, Dollar purchasing power. The greater the market pressure to devalue a particular currency, the greater the amount of Dollar Reserves a Central Bank must hold.

The Dollar is, after all, nothing more than Debt Issuance and the above is nothing more than a first abuser privilege to export Monetary, Credit and Debt Inflation on the part of the United States. For their ongoing participation, Foreign Central Bank's indirect Dollar Peg is an incredibly risky addiction.

The United States essentially owns the World's scare resources, priced in Dollars... for nothing.

Such is the 'First Abuser Privilege' of Seignorage.

'Market Forces' are clearly absent and GOLD's demonetization further allowed the Clinton/Rubin/Summer's 'Strong Dollar Policy to contain U.S. rates of Inflation through low cost imports, exploiting Labor Arbitrage throughout the Globe.

The results have been horrific at best and have manifested themselves in all corners of our Financial, Industrial and Tertiary Economies, but this is for yet another essay.

GOLD is going to be remonetized in my opinion; it will take time, but once the "Poor Men' realize they have been bullied by a wanton and reckless disregard for sound and honest exchange, GOLD will be restored to its proper role of Money.

There is only so much injustice, discouragement of work and thrift, encouragement of speculation and gambling, and economic dislocation/disruption can follow an effort to delude creditors at the expense of debtors by a continuous debasement of purchasing power of the United States Dollar.

This awakening will be THE event for Precious Metals.

Until this occurs, we are simply at the mercy of those rigging the game for their benefit.

Keep the faith, as Gold has moved from $252 to $456 in mere years, this is only the beginning and the best forensic evidence available the 'Interventionists' are losing.

The daily Precious Metals script would be humorous; were it not so criminal. Oddly enough, the break over 435 came on a day when the E-mini's were halted for quite some time. The SPX was aimless without 990N on the bid, there was a lack of selling, but it quickly picked up steam once the afternoon set in and key stocks began breaking down.

Once again GOLD Bulls came out to buy and buy they did. Newmont topped 41.63 only to be beaten back into the close to 40.25, within 2 cents of the low for the day. This type of intraday volatility is exceptionally dangerous, but portends even more volatility to come.

172.48 appears to be the target, a perfect .318 of the entire Wave 1.

The may 7th, 2004 low @ 168.80 must hold or the .500 of Wave 1 opens up @ 146.43.

An entity is pressing the GOLD riggers. There is a force acting within the Precious Metals Markets acting to support the Price at key resistance levels, 432/433 have held up very well, and 435 was broken to the upside. This is exceptionally bullish if it continues as the pattern decidedly not in favor of the Stateside GOLD Market Riggers on the Comex.

GOLD near term performance is going to hinge upon the Dollar's Price action. The $ has moved up and back over the 8417 pivot and is going to move higher once again.

Cash (NYBOT:DXY0) Last trade = 84.25  Change = +0.29 (+0.35%)

Figure 007: U.S. Dollar

The Dollar's action needs to be watched closely as the short interest as a % of Open interest for GOLD is rising and above historic norms.

Figure 008: COT

The Chart in Figure 008 is a historical perspective on the Commitment of Traders (COT) published by the CTFC.

From mid 1999 we see the paradigm shift in GOLD beginning, one that will carry GOLD from a bear market low of 252 to a high of 456.

What is of immense importance in the Chart above is this:

1. Although 'Short Interest' as a percentage of 'Open Interest' has been increasing since 1999, so has the Price of GOLD. This is denoted by the 'Spread' channel in red, it is downward sloping and once again reaching an extreme reading.

2. Points '1>>>' & '2>>>' denote pivotal junctures whereby the Price of GOLD came under duress. Following the vertical red lines from both points 1 & 2 we see a clear peak in short positions.

3. Most notably, these Peaks in 'Short Interest' denoted in 'Position Sigma's' correspond directly to a significant drop in the price of GOLD.

Keep the Faith and own the Metals first.


Author: John Mackenzie

John Mackenzie

John Mackenzie manages private capital.

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