Technically Speaking with Burak
Weekly Commentary
(For week ending 13 January 2006)
Mervyn Burak, CMT
COMMENTS ON COMMENTS ON MY COMMENTS
It seems like I hit a sore spot with my comments last week about "why hold gold rather than buying gold shares"? I guess I should just answer some of the points raised by the comments.
First the mathematics. Some have noted the error in math when I stated that "One would then be able to buy 4 times the amount of gold with the same starting capital". The example highlighted the 100% rise in the price of gold since the start of the bull (from roughly $250 to $500) while at the same time the "quality" Merv's Qual-Gold Index rose by a factor of 4 (I should have more accurately said, by 400%, that would be the equivalent from $250 to $1250). I was wrong with my statement of buying 4 times the amount of gold. I should have stated that one would buy 2 ½ times the amount of gold with the same starting capital. Not a factor of 4 but still a lot better than buying and holding gold.
The other common comments were to the effect of disagreeing with the concept of buying gold stocks (and I was only referring to "quality" stocks in my commentary) rather than gold itself. I got all the normal comments about "safety", "real money", inflation protector", etc. The most common reference was continually to the speculative or outright gambling nature of stocks. You know the ones, they drop from $ to zero over night or almost that fast. Every single comment made this point in one manner or another. Please re-read my commentary, I was referring to the "quality" gold stocks in the commentary but I would say no different when referring to the more speculative stocks, such as those in my Merv's Spec-Gold Index or Merv's Gamb-Gold Index.
I've been around this industry for a long time since first working in the mines in the mid to late 1950's. I've seen gold go from $35 to $850 and then down to $250. I've had friends who bought gold in the $600/$700 range (and silver in the $40 range) only to see most of their value evaporate in a matter of months. Some who bought and held because it was "real money", "inflation protection", "Safety", etc. never did recover before passing from this world. This was the real solid stuff, not paper we're talking about. Buying and holding gold is no guarantee of safety of capital.
Maybe the one point I did not make clear in my commentary last week was that I did not mean, EVER, that one should buy stocks, even the highest quality stocks, and hold on for the long term. You buy when the price trend is in your direction and get out when the charts indicate the trend is over. That way you get better performance and safety or preservation of capital. In earlier times I had recommended a speculative Bre-X to clients at the post split price of $0.31 at the start of a new up trend and had them out at $23.00 when the trend was over (gold itself rose from $300 to $400 in the same time period). Bre-X subsequently dropped to zero but we were out long before. How many more ounces of gold could have been bought with those profits rather than initially buying gold and holding?
The discussions about holding or not holding gold bullion in your portfolio could go on and on so I'll just end it here.
GOLD
LONG TERM
Here we see a 10 year history of gold price movement in a very simple P&F chart. Nothing fancy, nothing sophisticated. We had an initial break-out in very early 2002 and not a reversal since. So far it's up, up and away as far as the long term P&F chart is concerned. As long as this chart remains bullish then long term investors, especially those in the "quality" gold stocks, can breadth easy (however, each stock is an individual and can move counter to the trend on its own so vigilance is always required regardless of the gold chart). Our next long term projection is to the $600 level with $1075 next, followed by $1575. When will these be reached? Well one thing the P&F chart does not tell you is when. I expect the $600 projection to be reached sometimes this year. If that's the case then it would have taken 4 to 5 years to reach after the initial break and projection in early 2002. How long for the $1575 is anyone's guess.
As for the usual indicators, well the price is still well above a positive sloping moving average line and the momentum is still in its positive zone. Nothing here yet to cause any concern from the long term basis.
BULLISH on the long term
INTERMEDIATE TERM
Looking at an intermediate term P&F chart we don't get any different story than what the long term gave us. Everything looks rosy with a projection to the $565 level, or if I pushed it, to the $585 level (see commentary last week). With the way gold has been acting we might even reach the $565 level in the next week or so but I would not want to place any money on it. Reversals do happen and we are due for one. At the present time if gold should plunge straight down it could go to $495 and still remain bullish on the chart. However, I would expect some back and forth movement and a higher reversal level should the turn come. Nothing says that the turn is anywhere on its way so let's keep maintaining the bullish view until we have confirmation of any turn.
Looking at a bar chart of gold we can see that gold continues on its way above its positive sloping moving average line and with a positive intermediate term momentum indicator. Here, the momentum indicator is showing some weakness and has not yet reached its level of early Dec when gold had its previous high. This is not yet serious but any indication of weakness should not be discarded but watched. It could lead to something more serious. The volume indicator remains positive but the daily action still has not improved to the extent I would like to see it. Volume action or lack of it is always a concern. That suggests that major speculators, those who drive the prices higher, are not yet that into the game at this time. Maybe they are not yet back from vacations. Anyway, something else to watch.
For now everything is still going great and I remain BULLISH on the intermediate term.
SHORT TERM and IMMEDIATE TERM
Short and immediate term commentary may be found in the subscriber's section of Merv's Precious Metals Central.
NORTH AMERICAN GOLD INDICES
Of the four major North American gold Indices the two AMEX Indices were the best performers on the week, but only with a 1.7% gain. So, let's look in on the oldest of the two, the AMEX Gold BUGS Index.
AMEX GOLD BUGS INDEX (HUI)
Looking at the chart on the next page one sees the thrust of the move since the May bottom. It has been a good time for gold stocks. We see almost a 90% move in this Index since the May bottom. Of course the main part of the Index value goes to the strength of a few largest stocks in the Index with very little effect from the majority of stocks.
The most interesting story from this chart is the possibility that we may be into an intermediate term blow-off stage in the latest move. That requires an accelerating Merv's FAN Principle trend lines (which we appear to have here) and the subsequent breaking of the third FAN trend line on the down side (which has still not occurred). I have been asked about this FAN Principle since I had mentioned it recently. During the course of these commentaries I had explained in a simple manner the principle and criteria involved. There are many new readers to these commentaries who had not read the articles. I will try and put the Principle into a separate article and publish it on the main page of the themarkettraders.com web site for all to access. This should be done within the next couple of weeks so check out the site occasionally if you are interested.
Anyway, the accelerating FANS are shown on the chart and the breaking of the third FAN trend line could result in a serious reversal of trend, at least for a while, possibly going back to the primary up trend line. Other than that we do have an Index that has been pretty strong and continues to show strength. Price above a steep positive sloping moving average line, momentum in the positive range and showing strength, what more can we ask for? There is no use getting too sophisticated in trying to analyze the Index, it's bullish but in a possible topping mode should it break that dashed trend line.
MERV'S PRECIOUS METALS INDICES
Here we see what the AVERAGE stocks in various gold sectors are really up to. With the major North American Indices up only about 1.7% it is interesting that most of the Merv's Indices are considerably higher than that (the Gamb-Gold is up 9.3%). So what's happening here?
Again, the difference is in the method of calculating the Indices where the majors place greater weight on their largest stocks in the Index while Merv's Indices places equal weight on all stocks in their Indices. The other difference is quickly evident in a review of the performances. The major Indices have as their component stocks, the largest companies in the industry. Merv's Indices includes many of the smaller up and coming companies (except for the Qual-Gold Index which IS made up of the largest companies and whose performance is not unlike that of the majors). So let's review each of the Indices and see if we can spot a pattern.
MERV'S GOLD & SILVER 160 INDEX
The AVERAGE price of Merv's universe of 160 precious metals stocks (primarily gold and silver) was up 5.1%, much higher than the major Indices would suggest. This is a very good performance as an average of 160 stocks and suggests that the bull market is still in full swing. Despite the week's performance this overall group is still slightly behind the performance of the AMEX Gold BUGS Index since their lows in May. This Index is up just shy of 80% while, as mentioned earlier, the AMEX Index is up almost 90%.
One would want to know if the latest move in this Index is general or related to a very good performance by only a few stocks. With 105 advancing issues and 49 declining issues the advance may be seen as more general than specific. However we do have 7 stocks with gains in excess of 30% suggesting significant speculation on going. The largest gainer on the week, Bravo Ventura with a gain of 87% on the week, has been on my recommended buy list for a few weeks now. Speculators are now up some 144% since my original buy recommendation at the end of Nov.
Besides understanding the thrust of the latest action one is also interested if such thrust has longevity potential. Here I look at the percentage BULLISH/BEARISH information for the overall group. From the long term perspective we have 89% BULLISH rating suggesting the group as a whole has been on a tear for some time now. From the Intermediate term perspective we have a BULLISH rating of 88%, same comment. From the short term perspective we are still at 84% so that there is no significant hint of a slow down of the BULLISH trend yet although the short term rating is slightly less than last week.
MERV'S QUAL-GOLD INDEX
Getting into the more selective sectors we look in on the quality stocks. Here the AVERAGE price of Merv's Qual-Gold Index increased only 1.2% suggesting that the overall universe of gold stocks did not get its performance from the quality stocks. The average quality stock is up just shy of 70% since the May bottom. This is good performance but as is expected not up to the performance of the more aggressive stocks (once they get going).
Unlike the overall universe, the gainers and losers on the week were about 50/50 (15 gainers and 14 losers). This may account for the diminished performance. There were no stocks in the 30% gain category so no real overt speculation here.
From the longevity standpoint we have a BULLISH long term rating of 92%, a BULLISH intermediate term rating of 97% and a short term rating of 92%. Again, no hint yet of a bullish trend slow down but those high rating can only mean that the next move can only be towards the lesser bull or even a bear, BUT WHEN?
MERV'S SPEC-GOLD INDEX
We have seen how the overall universe is doing and how the quality are doing, now for the speculative stocks, or more specifically the next tier of quality below the quality. Here the average stock advanced 4.1%, a lot better than the top quality but not yet as good as the overall universe. This suggests that the overall universe was propelled by the more aggressive or more speculative/gambling variety of stocks.
With 24 gainers on the week and only 5 losers the ratio suggests that the move was pretty general. Surprising, but there were no 30% plus movers in the group, again suggesting the more general nature of the week's action.
From the longevity standpoint we had a long term rating of 92%, an intermediate term rating of 88% and a short term rating of 88%. Although very strong, when compared to last week's rating we see a very small (emphasis on small) shift in the short and intermediate term ratings towards a decrease. This is not yet evidence of a slow down in bullish activity but another week or two and it might be.
MERV'S GAMB-GOLD INDEX
WOW! While the major Indices are eking out a gain of 1.7% on the week the gambling stocks are going gang-busters with a 9.3% average gain. Although this Index is up slightly more than 70% since the bottom in May, it had been underperforming for some time until the major upgrade in the component stocks which took place at year end. The performance of this new group of gambling stocks, going back to the low of May, would show an AVERAGE positive performance of 146%, far in excess of any other Index and suggests that speculation has been going on for some time. This is an average of 30 stocks so the performances of some were considerably higher.
On the week we had 20 gainers and 9 losers so it was not all gravy. However, 4 of the 7 30% plus gainers were in this group, which resulted in the overall good performance of the group.
As for longevity of this BULLISH trend, we had a BULLISH rating of 97% on the long term, an intermediate term rating of 98% and a short term BULLISH rating of 88%. The short term rating has dropped a little from last week and needs to be watched to see if this weakness continues.
Well, that's it for this week.
Mervyn Burak, CMT
Hudson Aero/Systems Inc.
Market Technical Information Group
www.themarkettraders.com
merv@themarkettraders.com
16 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.
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