Safehaven | Perspectives on the Gold Bull Market

November 01, 2006

Perspectives on the Gold Bull Market
by Greg Silberman

Article originally submitted to subscribers on 23rd October 2006...

Is the economy Slowing down, or is it speeding up?
Is the stock market topping or is it breaking out?
Have Gold and Oil stocks bottomed?

Ahhh, questions questions and nobody really knows the answers!

When the current picture gets cloudy, when the emotions run hot I always find it a good exercise to step back and to refocus on the Big Picture.

Take the weekly HUI chart for example:

Chart 1 - HUI Weekly

From May 2005 to May 2006 the HUI rose by 140% and into over-bought territory (not shown in chart).
Since May 2006 the HUI has been in correction mode, working itself into an oversold position (not shown).
The correction low of 270 was established in June '06 and retested successfully in September.

Whilst the HUI was undergoing its exhilarating rally, 10-year bonds were falling like a rock (bottom of chart). This inverse correlation is highlighted in the green rectangle. The prevailing mood at the time was one of increased inflationary expectations. A good trade was to sell bonds and buy Gold.

How Perspectives have changed

Since July of this year, 10-Year US Treasuries have been rallying hard. A lot of market commentators (including myself) said this was a sign of a Global Slowdown.

But a longer dated chart shows a completely different story:

Chart 2- 10-Year US Treasuries and Centex Corp (bottom)

10-Year Treasuries made an important top in February 2004 and headed lower ever since.
Since July 2005, 10-Year Treasuries have been in a relentless down trend.
At the beginning of July 2006 Treasuries were oversold and logically deserved to rally.
The subsequent rally top in September '06 looks to me like a test of long-term resistance at 108 (blue line).
As 10-year treasuries rallied, battered Homebuilding stocks like Centex (bottom) stabilized and staged minor rallies (green rectangle).

Here's the Point:

From a longer term perspective the latest rally in 10-Yr Treasuries does not look like another major bull up-leg to me.

No!

From a technical perspective probabilities favour Bonds (and Centex) to continue their trend downwards. It's probably too early to know for certain if September will be the correction top. I would expect at least one more crack at 108 (with MACD and RSI divergences developing) before Bonds begin their next leg down.

Timing? Ahh, timing.

On the 17th of August I wrote an article titled Oil, Gold and Interest Rates in which I highlighted the fact that the stock market was tracking the Bond market with a one month time lag. The strong correlation remains in force and, if it continues, points to a late October, early November top in the Dow Industrials.

Bearing in mind the 1 month time lag correlation:

- November will be a correction month in the stock market and bonds will complete their double top at 108.

- The Dow will rally in December giving us our year end Santa Claus Rally.

And then?

Well if Bonds head South into their next down leg, which I expect they will, Stock Market Bears and Gold Bulls may finally have cause to celebrate on the same day.

More commentary and stock picks follow for subscribers...

Greg Silberman CA(SA), CFA
www.goldandoilstocks.com

Profession: Research Analyst and Newsletter Editor
Company: Ritterband Investment Management LLC

Career Brief: Greg qualified as the youngest Chartered Accountant and Chartered Financial Analyst (CFA) in South Africa in 1998 at 25 years old. After completing his traineeship with Grant Thornton he moved to London where he worked for JP Morgan Chase in their Fixed Income Swaps Division. Sick of the grey skies and cold weather Greg relocated to Atlanta, Georgia where he spent the next 4 years freelancing as a management consultant. His targeted clients were fast growing mid size US based companies and he worked across many industries including credit cards, health insurance and energy trading. Greg has recently returned from Sydney Australia where he spent the last 2½ years working in Equity Derivative Structuring for Perpetual investments a major Australian Asset Management Company.

Greg has a passion for the markets and has been writing Greg's market newsletter for 2-years. A newsletter focused on metal and energy stocks and recently non-resource small caps listed in the US and Internationally.

This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.