There is always a temptation to comment on murderous events such as the London bombing but I'll hold my views to myself only to say that the Londoners have been through worse and are made of stern stuff. As for gold, well it seemed to have gone nowhere after Tuesday's drop. The bombing seemed to have had little real effect. So, where does that leave us?

LONG TERM

As per usual I first look at my long term P&F chart for gold. It is unchanged from last week. Therefore I will not go into any commentary here. One can check the archives and read last week's comments which are still applicable.

This week I show the long term candlestick chart for gold, dating back to the start of this bull market. Not shown but referred to later in this commentary is the previous bear market which took gold from its $417 high in 1996 (it had previously been as high as $500 in 1987) to its low of $252 in 1999. The chart is shown in semi-log scale which often provides a slightly different view of trends than does the geometric scale. The difference between the two charts is in the vertical scaling. To highlight the difference between the two scales, say we had a stock chart with a wide movement in price. On the semi-log scale chart, a one inch vertical height may always equal a 100% move, say from $1 to $2 in one location or from $10 to $20 in another location. Now if this chart was a geometric chart and a one inch vertical height equaled to $1.00, say from $1 to $2 in one location, then in the other location this one inch vertical height would still provide a move of $1, i.e. from $10 to $11. The giveaway as to which scale is used (if not noted on the chart) is the equal $ vertical distances become closer and closer together as you go up the chart.

What this chart shows is a long bull market that is very close to its up trend line. Should the trend break decisively below this line then we may have a serious situation on our hands. Such a break would also confirm a serious situation as provided by other means, the P&F chart for example. The popular long term (40 week) moving average line has been gently turning towards the down side while price momentum has been toying with its neutral line. Momentum has already shown a negative divergence by making a lower high in early Dec as the price made a higher high. Since then momentum has dropped to almost neutral and has been hanging in around that level ever since. It would not take much downside activity to move this momentum into the negative. Everything tells me that the trend is still positive but it would be a stretch at this point to call it outright bullish. It is NOT YET bearish, however. One thing that does cause me to become more cautious on gold is the fact that an event such as Thursday's should have seen gold rise for a few days at least. It rose for a few hours at the best.

INTERMEDIATE TERM

Since first giving an intermediate term bear confirmation signal in early Feb the P&F chart has been moving sideways, neither reconfirming the bear or reversing to the bull. Although a reconfirmation would occur on a new move to $415, it is still the $410 level that is the level to watch as far as the intermediate term P&F chart is concerned.

What the daily chart shows is the same thing, a wide lateral motion since the top in early Dec. However, one notices that each succeeding rally reversed from a lower top than before and each succeeding reaction reversed from a higher low than before. Sooner or later this will come to an end, and the end may be approaching pretty fast. For now the price is below its intermediate term moving average line and the line is pointing downward. Price momentum is still inside its negative zone but not sure what it is suppose to do next so it has started a lateral drift. The volume indicator is below its intermediate term moving average line and getting weaker. All in all, one should be bearish at this point but because of the support close by I will wait for the price to break $415 and then see what's what. I therefore remain neutral on the intermediate term.

SHORT TERM

We can see the tightening of the lateral band on a short term P&F chart. Are we ready for a new higher low now? Time will tell. Presently we are under a bear market confirmation as far as the P&F chart is concerned. The last bear confirmation came with the breaking of the up trend line. The short term trend is now under the influence of a down trend line. A downside "count" had given us a projection to $420 and that is not far from where the price ended the week. Unfortunately, experience has shown that the initial projection is just as likely to be overshot than not met. We'll just have to watch the action to see if gold reverses or continues lower.

From the bar chart we see that the price is below the short term moving average line and the line is aggressively pointing lower. Short term price momentum continues deep inside its negative zone but not yet into the oversold level. It is not quite at the low level from which previous rallies had taken place. Daily volume is on the low side and the volume indicator is negative. All are confirming the P&F bear. We have a support just above $415 and a resistance at the $430 level. These are levels to watch during the week for a hint of possible direction reversal or continuation.

IMMEDIATE TERM

This is not really an investment time period but I use it every week to see what the immediate trend is or is likely to be. The primary indicator used here is the aggressive Stochastic Oscillator (SO). So, what is the SO telling us?

The SO is inside its oversold zone and although the price has been moving slowly lower these past few days the SO has turned around and has crossed above its trigger line (very short term moving average line). This is a warning that the market action is suggesting a strengthening and is often a prelude to a short term trend reversal. We had seen this at the market top a couple of weeks ago. At that time the SO was inside its overbought zone but turned and crossed below its trigger line. Although it stayed below the trigger line it was a week before the price reversed to the down side. The same might happen here.

I usually try to look at one of the major North American Gold Indices and see what they are telling me but today I think I will just spend some extra time on the Merv's Indices. From my perspective the performance of these Merv's Indices are far more important to understanding what is happening to the various categories of gold stocks than any other Indices. As I have often mentioned, ALL of the major Indices calculate their Index value based on some variation of weightings. That is, the larger stocks in the Index are weighted greater towards the Index value than the smaller stocks are. The focus here seems to be on the company, not the stock. You can get the silly situation where 25% of the stocks may be going through the roof but one stock may be going in the other direction and the Index performance becomes negative. Such weightings are not found in the Merv's Indices. Each component stock has the same weight towards the Index calculation as any other component stock. What you end up with is a better picture of what the overall average performance is of the component stocks. Merv's Indices focus on the stock and its market performance, not the company. One can then better understand what is happening in the world of precious metal stocks.

MERV'S GOLD & SILVER INDICES

All of Merv's precious metals Indices are represented in the table of technical information provided with these commentaries. For more information of these Indices and their component stocks, visit the themarkettraders.com web site via the link at the end of this commentary and go to Merv's Precious Metals Central.

Merv's Gold & Silver 160 Index

This Index is the Merv's primary Index covering 160 stocks each week. All other Merv's Indices get their component stocks from within this Index. All the major actively traded North American mining stocks should be found here. If I should have missed any major actively traded stock I would be very appreciative to be informed. Here you will also find many of the smaller more aggressive exploration stocks. I maintain a technical file that now includes more than 700 precious metal stocks so I cannot include them all here. I try to filter out those that look like they are going somewhere and include them in the Index, when there are stocks that can be eliminated.

During the bear market which started in 1996 this Index declined about 70%. When the average gold stock starts to fall, it falls hard and this should always be kept in mind by gold investors. Unlike the price of gold, which made a bottom in 1999, rallied and then made its final (double) bottom in early 2001, this Index made its final bottom in 1998 (one year before gold made its first bottom). From there the average gold stock has been on a real tear. By time that gold made its final bottom the average gold stock had already advanced more than 100%. Since its low point in 1998 this Index has gained, to the Friday close, over 2500% in price (this is after a more than 25% decline from its high). That's an average gain for the 160 stocks. Some, of course, have not done as well (primarily the "quality" stocks) while others have done better. In very early 2004 the Index went through a "blow-off" phase resulting in a break below a third accelerating FAN trend line. Since then the Index has basically moved in a lateral direction. Unlike almost any major North American Gold Index, this Index had not broken below its 2004 low and continues to stay above that level. It is also still above the second FAN trend line, the crossing of which is required to confirm a trend reversal by my FAN Principle.

This chart of the average performance of 160 gold stocks, including all the major companies, highlights the difference in performance of gold and that of the average gold stock. There are times, such as the period 1998 to 2001, when there appears to be no correlation between the two. Speculators who are into commodity trading should focus on the actions of gold, investors or speculator/gamblers who are into gold stocks should focus on the actions of the stocks.

I believe that anyone "investing" in gold stocks should not have an investment time period longer than the intermediate term. Stocks may continue to move for a long term and one would stick with the stock but "long term" investment strategy is too often mistaken when it comes to gold stocks. From the table of Index component stocks (found in the subscriber's section of Merv's Precious Metals Central, in the www.themarkettraders.com web site) I am most interested in the intermediate term information. What I see is an overall bullish rating of 57% and an overall bearish rating of 30% for this group of 160 stocks. The majority is still bullish here. Even the long term ratings are not overly negative. With a 44% bullish and 45% bearish rating the long term has not yet made up its mind overall.

This Index is precariously close to a major downside break. The next few weeks may tell us if the majority of gold stocks are to see a further deterioration in price or if we might be in for the start of a new major bull move in precious metal stocks. Should the Index break on the down side investors are cautioned to get into cash and wait it out. Only gamblers would then be into stocks.

Next week I will cover the other Merv's Indices. These are more dedicated "group" Indices with one covering "quality" stocks, one covering the second tier or speculative stocks and one for the gamblers at heart. An Index of the top 100 precious metal companies by market value (Merv's Gold & Silver 100 Index) is included in the table but I will not be covering it in detail as it will mostly duplicate the comments above.

Reading the Info table

The intermediate and long term technical information table provides the latest weighted moving average (MA), price momentum (MOM), relative strength (RS) and an overall technical rating (RATE) of each component. A + or - symbol is provided to indicate if the indicator is gaining strength or losing strength.

Mervyn Burak, CMT
Hudson Aero/Systems Inc.
Market Technical Information Group

www.themarkettraders.com

10 July 2005

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.