Although I fully expected the year of 2006 to be a banner year for the juniors (that's why I wrote my pieces Junior Festival 200 Part I and part II in the first place) I never could have dreamed of such a big bang right from the start.. Our Gold Discovery Letter portfolio exploded to an average gain of +40% while two companies already crossed the 100% mark since November 01, 2005. The gold shares were rising so fast the last two weeks that people wonder if it is time to sell some.
Again although we understand the concern all we can say is that we don't intend to sell any junior in our discovery/exploration portfolio. Sure we will sell them somewhere down the road but certainly not in the early stages of the phase II bull market in gold. We will explain why in this update and bring you most interesting discovery news of the past two weeks.
Since the beginning of December 2005 the amount of analysts calling for a top in gold is steadily growing and many fear a crash anytime soon. We don't share that fear and here's why:
In my short piece 'Selling Juniors? You must be kidding?' of January 09 I said:
And what about the current overbought conditions for gold and the HUI then?
Well, they may be overbought indeed but in a bull market overbought conditions can persist for a much longer period of time as one would expect thereby making short-term market-top calls almost impossible. On top of that please be aware that a bull market can eventually emerge into a run-away bull market thereby making the technical indicators totally useless..
A good example we've seen during the seventies… Traders buying gold at $250 thought they made a clever deal by selling it at $425 only to see it blowing off to $850 in a couple of weeks time.. Don't get me wrong, I'm not predicting a coming blow-off in gold here but I don't rule it out either.. And when it happens I want to be fully invested..
With gold breaking the $550 mark with force (after hovering around $545 for a while) there could be an extended move upwards in the make here..
One of worlds most respected gold experts Jim Sinclair expected this breach of $550 and told is readers on January 12 to stop trading at all and just to sit tight:
Jim Sinclair, Jan 12 www.jsmineset.com
The final word for tonight is that there is every possibility that $682 is in the cross-hairs of the gold market. If it is not right now, then rest assured it is coming soon. Hold tight and watch closely. The line of demarcation is gold at $544.87 in CASH bullion. We are above that now for the second time so hold tight and watch closely. You will not get a share or an ounce out of me now.
There is no reason to preclude the run to $682 right now. COT is falling back hard. It is looking like $529 plus 3% is holding well. That is the classic definition of a breakout. This breakout as I have been telling you for years would signal a runaway in the gold price, something you may well have never experienced but I have. It is marvelous to behold.
I also reiterate that as long as gold remains above $529 plus 3%, stop trading and hold on for the ride.
Well, Jim Sinclair's readers didn't have to wait for that much longer since the very next day gold cut through $550 with force thereby sky-rocketing the HUI to new all time highs.
If Jim Sinclair is right the party ain't over yet and again I want to stress that the more a bull market emerges into a run-away bull market the less useful the traditional technical indicators become..
A good example we've seen during the seventies… Traders buying gold at $250 thought they made a clever deal by selling it at $425 only to see it blowing off to $850 in a couple of weeks time..
The relative HUI chart has proven to be a reliable indicator for picking the extreme bottoms over the past years.. The whole idea behind the relative concept is that no single item can't escape its own 200 dma permanently…Whenever an item moves too far away from its owns 200 dma gravity will pull it back.. On the down side the same applies.
The trick is to define those areas whereby a buying opportunity occurs and whereby it could be prudent to sell.. Looking back over the past years we've noticed that whenever the HUI dropped down below its 200 dma by 0 - 20% it presented a perfect 'BUY' opportunity. We've also noticed that whenever the HUI moved too far ahead from its own 200 dma by 50 - 80% it presented a 'SELL' opportunity..
Since the HUI is approaching these levels again many people ask me if they should sell..
Answer: No!
How come? What about the relative HUI chart pointing towards the sell zone?
You have to understand that these previous 'SELL' spots were being reached in a slowly upwards trending bull market which lasted about 4 years. This phase is being labeled as phase I of a generational bull market in gold. It gained 100% during this phase I.. Now by breaching the $500 mark we've entered the next phase (phase II) of the bull market and gold will appreciate a lot faster as during phase I. It won't take another 4 years to gain another 100%... During phase III which will be characterized by 'MANIA", gold could easily gain another 100% in just a few single months..
The message should be clear, things are changing.. The phase II will be characterized by higher tops / bottoms in the relative charts.. The only problem we have now is that we don't have any reference yet since we're just at the beginning of phase II. So who knows to which highs coming relative tops will reach… Therefore it's not a worry to me that the relative HUI chart is reaching previous highs and I urge people to be cautious to sell any gold shares here.. One who is certainly not going to sell any shares is Jim Sinclair:
Jim Sinclair, January 14, 2005 www.jsmineset.com
You cannot have a single share of my mine in gold issues or an ounce of my bullion as long as gold holds the break out level. Enjoy your prosperity and stop kvetching.
Sinclair is referring here to the break-out level of $544.
Now let's finally take a peek at the relative HUI chart itself:
Please note that the relative HUI is just approaching its previous tops. The last time the rHUI reached a level of 1.42 was August 2003. But still it took another two months before the gold shares finally peaked in December 2003.
Conclusion:
There is plenty of upward potential left for the gold shares.
I can't stress enough that the most difficult thing to do is to do nothing at all. Just sit tight. Remember that many gold writers advised their clients to sell their gold holdings early December? They failed to recognize the importance of the HUI breaching its long-term resistance of 250.. They issued their sell recommendation based on overbought conditions in gold. They sold their gold shares just after the HUI broke its important long term resistance of 250 and are waiting for another entry point somewhere down the road. Well, good luck, the HUI is trading above 310 now and we're happy to have participated in this entire move.
For our new subscribers I've put up the most important charts I've published since October 21, 2005 in chronicle sequence. Just see how the story has unfold itself and see why we're sticking to our guns. Click HERE for the HUI charts / comments …
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Eric Hommelberg
The Gold Drivers Report
E-mail: ehommelberg@golddrivers.com
Web-site: www.golddrivers.com
January 16, 2006