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July 12, 2004

Updates on Markets
by John Lee

This is a followup from the June 1st update.

Dollar

The dollar has turned down again, having briefly crossed the 200 DMA. Before the election, there is no incentive for the administration to have a strong dollar as long as bonds hold ground. However judging by the Swiss Francs, the downside of the dollar may be limited.

Bonds

30 year bonds crossed the 200DMA. I am netural on bonds. There are too many factors affecting it - The dollar, economic reports, inflation perception, central bank buying (domestic and foreign) to name a few.

Foreign Markets

Foreign markets are consolidating for a move. My gut feel is down.

US markets:

S&P 500 is above 200 DMA. The commercials are net short a measly 15,000 S&P contracts. I am only turning negative when S&P 500 breaches 200 DMA and commercials are net short 50,000+ contracts.

Gold

The 200 DMA should serve as a floor. I have a target of $420 within a month.

Gold Stocks

The chance of XAU re-testing 80 is low. Once we take out 96 (200 DMA), new high is within reach by the end of summer.

Oil

Inconclusive. Currency action and inflation perception will control oil price.

Gold/Oil:

The two times that the ratio dipped below 10 (Oct 01 and Mar 03), XAU followed up by posting 80%+ gains in less than 7 month. The ratio (gold/crude oil) failed to cross the 11 resistance level but I expect the low of 9 to hold.

Silver

I am very bullish of silver. The last time the commercials had such a small short position (~60,000) was Oct 03, when silver started to make a run from $5 to over $8. We could be in for major fireworks this summer. Solid support for silver is at $5.5.

John Lee, CFA
www.maucapital.com

John Lee is the founder and principal of Mau Capital Management and the portfolio manager of a mining equity hedge fund. He is a CFA charter holder and has degrees in Economics and Engineering from Rice University. Mr. Lee has a keen interest in the history of money and economics, and has previously studied under Mr. James Turk, a renowned authority on the gold market.

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