What can one say after a week like the last one? The price of gold rose 4.2% while the North American Gold Indices were up in the 10% range. THAT is the magnification effect when gold moves. Every so often I provide the long term charts for gold and the various gold Indices so that readers can view the difference in gold movement versus gold stock movement (NOTE: Most charts are found in the Merv's Precious Metals Central subscriber's section). Over any bull (or bear) market you will find that the movement in the value of gold shares FAR exceeds that of the movement in the value of gold itself. Looking at the above chart we see that only very recently gold has risen 100% in price from its 2001 low. Looking at the Merv's Qual-Gold Index, the least performing of my gold sector Indices, the move in the AVERAGE quality gold stock had exceeded 400% during the same time period. Why does anyone want to go through all that trouble to buy and hold physical gold when they can hold pieces of paper (stock certificates) and improve their performance? Oh yes, there is that concept of "real money". Now let's just think about this for a minute. Phony money (U.S.$) are not going to suddenly, over night, become worthless. It may lose its value but over time. During that time the value of those pieces of paper will rise to compensate, probably more than compensate (note the magnification effect noted above). As a financial crisis slowly develops, because that IS what most people talk about when they talk about huge rise in the price of gold, somewhere down the road one just might finally decide that any paper is not worth holding and at that time may convert these pieces of paper into physical gold. Let's say the US$ dropped 50% in value with gold rising 100% to compensate in equal purchasing power. With gold at $1000 these pieces of paper would have risen in value by a factor of 4 (ref the performance comparison above). What I'm saying is that if gold moved from $500 to $1000, then one might expect Barrick to go from $30 to $120 or Goldcorp from $25 to $100 or Newmont from $60 to $240. The smaller quality gold stocks would perform even better. Instead of paying $500 for gold today one would buy the stocks and then sell the stocks when gold was at $1000. One would then be able to buy 4 times the amount of gold with the same starting capital. I'm still trying to come up with a good excuse to buy solid gold versus buying the pieces of paper. All excuses that I can come up with have flaws that favor buying the paper, at least for the foreseeable future.
A look at the long term P&F chart shows the 2001 bull market continuing (chart not shown here). The projection to the $600 level is still there with the next long term goal at $1075 followed by $1575 sitting in the wings.
As for the usual indicators, well as the chart this week shows the price is above its positive long term moving average line (30 WMAw) with the momentum indicator way up there in the positive zone. The only negative IS THAT MOMENTUM. If we look back we have been here before, in early 2003 and early 2004. Both times we had the price of gold go into an intermediate term bummer with new highs not seen for almost a year. We will see the topping activity first in the short term action and then in the intermediate term action. Gold seems to have a habit of quickly moving into new high territory and then taking a rest for months and months. When the masses get discouraged again, zoom and gold is once more off and running.
For now I can only be BULLISH on the long term but note that there is serious risk at this time.
The intermediate term P&F chart shown last week has moved back to its previous high but has not yet made a new high, regardless of the closing price new high. It needs to hit $545 at which point I can then calculate new intermediate term price projections. If it should made the move on Monday, without any further reversals, then the projection will be to the $565 level, with $585 if I was pushing the interpretation of the chart. The $580 level, many readers will remember, was my original long term projection from the initial break in 2001.
As for the usual suspects, gold is above its positive intermediate term moving average line with a positive momentum reading. The momentum peak is still below its peak from a few weeks back but this is not yet an issue until the price actually reverses without the peak moving higher. The volume indicator is basically neutral, just confirming the price move but no more. The daily action has been weak, however, but this could be more due to the holidays than anything else. We should now start seeing increased upside volume.
Go with the flow so I remain BULLISH on the intermediate term but watching the action for topping potential.
SHORT TERM and IMMEDIATE TERM
The short and immediate term analysis may be found in the Merv's Precious Metals Central subscriber's section.
Since we last looked in on the major North American Indices they have had a good ride. During this past week alone most were up in the 10% range. So, where are they now? Today I will look in on the most popular of the Indices, the PHLX Gold and Silver Sector (XAU) Index.
One can compare this chart of about a dozen of the top quality gold stocks versus the Merv's Qual-Gold Index with its 30 largest traded North American gold stocks. What you get is a 240% move in the PHLX versus a 425% move in the Merv's Qual-Gold Index. The latest move from the May lows has favored the PHLX Index by a few % points.
We are in the middle of a new bull run with the Index moving ever higher and momentum continuing to look good. In fact the long term momentum is into new high ground exceeding its previous high of 2002. The Index, however, still has a few more points to go to get into new highs. There were those highs in the 150 to 160 area that were reached in 1987 and 1996 that need to be breached. One might think that these previous highs might create a serious resistance to further advance but we'll just have to wait and see.
From a short to intermediate term time period I can see clear indications on a daily chart of a "blow-off" potential. I have a well defined accelerating bearish Merv's FAN Principle trend lines shown on the chart. We are into the blow-off stage within this FAN Principle. Should the price action drop below this third blow-off stage trend line then we can say with confidence that the latest rally has ended, at least for some time. We are not there yet but could get there if we get a few days of negative Index action. How low would the Index then go, you ask? Well to at least the second FAN trend line. It would then need to drop below this second FAN trend line to confirm a reversal of trend but we are getting way ahead of ourselves here. We are still in a bullish phase so let's enjoy it while it's here.
Like the North American majors the Merv's Indices had a very good week, although their performances were 1 or 2 % points below those of the majors. As often emphasized, it's not the composition of the Indices that is the difference but the method of calculating the Indices. With the majors, you could have 100 stocks in the Index but if you apply 100% weighting to one stock you don't need all of the others, your Index will reflect the specific performance of that one heavily weighted stock.
With the new high in the Merv's Qual-Silver Index this past week we now have all of the Merv's Indices at new high levels, some much higher than others. There is no getting away from the fact that we are into a new phase in the precious metals market. What is actually driving these markets is not known (yes, there are experts that can tell you with certainty why so many investors are bullish but I'm not that brilliant). So, as long as we have a new bull let's sit back and enjoy. But let's not also get too complacent, these markets have a habit of disappointing just when everyone least expects it. The operating emphasis is to profit from the bull but get out fast when it ends and protect capital for the next event.
MERV'S GOLD & SILVER 160 INDEX
The overall universe of 160 North American precious metal stocks advanced an average of 9.0% on the week. For an average advance of that magnitude for 160 stocks, we must be into a new bull phase. The advance on the week was quite general throughout the group with 137 advancing issues and only 20 declining issues. Although very positive it does leave us with little extra upside momentum. Almost all the advances have been taken up and we are left with the prospect of diminishing advancing/declining statistics ahead. The other thing I look for is to see what level of speculation we might have had during the week. Here I use as a guide the number of stocks that advanced (or declined) by more than 30% on the week. We often get one or two but when we gat into the half dozen or more that shows a considerable amount of speculation. This past week we had 8 stocks in this category. Speculation is ripe. Now if only we knew for how long it would last.
MERV'S QUAL-GOLD INDEX
The quality stocks advanced at the average rate of 9.0% this week. Although meeting the overall average, none of the quality issues were in the real speculative category with those 30% plus performances. None even got to the 20% level. The best performer on the week was Meridian Gold with an 18.5% advance. Still, this is quite good for one of the quality caliber. On the week only Apex Silver declined, all other issues (29) advanced on the week. Very good overall performance.
MERV'S SPEC-GOLD INDEX
These are the second 30 of the largest precious metal stocks traded on the North American Exchanges. Here too we did not have any of those 30% plus performers and only one in the 20% range. It seems that most of the 30% plus performers were of the more speculative caliber. This again suggests the speculative nature of the past week's market. In this Index we had three decliners on the week and the rest (27) as advancers. With an overall performance of 7.2% this Index was the straggler of the Merv's Indices.
MERV'S GAMB-GOLD INDEX
With the new component stocks in this Index it is once more performing as it has in the past, reaching into the stratosphere. With a 9.6% advance on the week it was the best performer of the Merv's Indices. Two of the 8 30% plus stocks were in this Index with Nevada Power leading the advance with a 44.4% gain on the week. Four stocks declined on the week with one breaking even. The rest (25) were all on the up side. With POS(itive) technical ratings in the 90% range for all three time periods (same for Qual and Spec-Gold) the bullish ratings are just about as high as they can get. One starts to wonder if we are into a period such as the early 2002 or mid 2003 periods when the Index gained anywhere from 300 to 400 % in less than a year. We are already up over 100% with this set of component stocks since the bottom in May. Do we still have a couple of 100% gains ahead this year? An interesting time ahead.
Although reserved for the subscribers to Merv's Precious Metals Central, this week our e-mail readers have a chance to view the latest chart and Merv's Gamb-Gold Index table of technical information and ratings.
If you are not presently getting these weekly commentaries (with expanded charts and tables of technical information) by e-mail every Sunday, please go to the web site www.themarkettraders.com and request your name be included on the weekly e-mail list.
That's it for this week.
Mervyn Burak, CMT
Hudson Aero/Systems Inc.
Market Technical Information Group
www.themarkettraders.com
merv@themarkettraders.com
8 January 2006
During the day Merv. practices his engineering profession as a Consulting Aerospace Engineer. Once the sun goes down and night descends upon the earth Merv. dons his other hat as a Chartered Market Technician (CMT) and tries to decipher what's going on in the securities markets. As an underground surveyor in the gold mines of Canada's Northwest Territories in his youth, Merv has a soft spot for the gold industry and has developed several Gold Indices reflecting different aspects of the industry. As a basically lazy individual Merv's driving focus is to KEEP IT SIMPLE.
To find out more about Merv's various Gold Indices and component stocks, please visit www.themarkettraders.com and click on Merv's Precious Metals Central. There you will find samples of the Indices plus other publications of interest to gold investors.