HUI - Preparing For Launch Soon
(Part II)
Eric Hommelberg
March 19, 2007
Ever since I wrote my piece 'HUI - preparing for launch soon' (Jan 22) the gold stocks tried to take off several times indeed but unfortunately all attempts failed so far. Time to worry? Should we Sell? Wait? Buy? Sure enough the volatility in the gold shares is at an extreme lately. Yes, fear seems to be the tune of the day. Fear of a commodity meltdown due to collapsing Chinese stock markets, fear of a financial crisis due to current subprime mortgage issues which caused severe drops in several subprime mortgage companies. New Century Financial for example dropped a whopping 87% in just five days only. This certainly increases fear for a financial meltdown. In order to prevent such a meltdown the FED and world central banks must act to add liquidity fast thereby fuelling inflation (and inflation fears). Sure enough this is all dollar bearish and of course gold bullish.. Sure enough some heavy weight financial people are trying to downplay gold's role as a safe haven and inflation barometer these days..The reason of doing so couldn't be more obvious, just listen what Richard Russell told his subscribers last week;
Richard Russell, DOW Theory Letters
March 12
The best measure of the dollar is that number of dollars it requires to purchase a measure of pure wealth -- an ounce of gold. Gold is both the unit and the messenger. The government and the central bank fear the messenger. The reason why they fear the messenger is obvious -- they are frightened of the message. END.
So there it is, the central banks do fear the messenger (gold) since the last thing they want on the eve of a financial crisis is to see a sharp rise in the price of gold since a sudden increase in the price of gold would set off all kind of alarm bells such as high inflation expectations, less appetite for the almighty dollar, waning confidence in world's financial system etc..
So in order to prevent an exodus from financial assets into gold the Fed and CB's are downplaying now gold's role as a safe haven.
Please make no mistake about it, the last thing government wants is a sharp rising gold price, they will do whatever they can to halt such a rapid rise. They do so by downplaying gold's role as a safe haven and outright interventions. The US government tried to prevent a dollar collapse (partly) by gold sales before. The Wall Street Journal reported in Jan '05 (referring to the dollar crisis of the seventies)
:
WSJ
Jan 17, 2005
"Worried the falling dollar was undermining its anti-inflation efforts, the Carter administration announced a multi-part support package on Nov. 1, 1978: The Treasury would use gold sales and foreign borrowing and draw on its reserves with the International Monetary Fund to defend the dollar. At the same time the Federal Reserve raised its discount rate a full point." END.
The fact that gold is watched like a hawk by FED and government officials is clearly described by former FED chief Paul Volcker, he said in his memoirs (referring to the dollar crisis of the 70's):
"Joint intervention in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake. Through March, the price of gold rose rapidly, and that knocked the psychological props out from under the dollar." END.
Déjà vu all over again?
As said above the FED and world central banks must act to add liquidity fast in order to prevent a severe fallout from current ongoing subprime issues.. A massive increase of liquidity is dollar bearish and increases inflation/inflation fears..This in turn bodes well for gold..
Sure enough one might argue that the dollar won't go down due to massive intervention by other central banks which don't want to see a sharp dollar decline.. Well, maybe true but in the end there's only that much central banks can do… But for the sake of argument, let's assume that that would be the case indeed.. in order to support the dollar they have to gear up their printing presses as well and that's what's in fact happening right now on a global scale.. Increase in money supply is sky rocketing world wide. Now what if currencies can't devalue against each other due to continuous massive CB intervention against what would they devalue then? Gold/Silver/Commodities? My guess is yes!
(Readers interested in a case for a further weakening of the dollar should re-read my piece 'Gold&US$', for members only)
The simple truth is that gold protects against a declining dollar, the central bank of QATAR figured it out already:
Qatar Triples Gold Reserves to Protect Against Dollar
2007-03-15 04:19 (New York)
March 15 (Bloomberg) -- Qatar tripled its gold reserves in January from the previous month to protect against a weakening dollar.
Qatar joins oil producers including Iran, Venezuela, Indonesia and the United Arab Emirates, looking to shift their currency reserves out of dollars or sell their oil, currently priced in dollars, in euros…END.
ABNAMRO sees a further decline in the dollar as well and is gold bullish for 2007 and 2008, they said:
Gold prices seen strong in 2007 and 2008
March 15, 2007
LONDON (Reuters) - Prices of key precious metals will surge this year and next because of contracting mine supply, an expected decline in the dollar and lower sales by Europe's central banks, ABN-AMRO said on Thursday.
Average gold prices were likely to jump to $695 an ounce in the current year and to $740 in 2008 from $604 last year, it said in its latest Global Mining report.
ABN-AMRO saw average prices of platinum rising to $1,275 an ounce this year and to $1,345 next year from $1,142 in 2006. Palladium was forecast to average $375 in 2007 and $425 in 2008 from $320 last year.
"We have retained our enthusiasm for the market outlook for gold ... The market has seen that the gold price can exhibit extreme price volatility," it said. END.
So after all we can say that recent fear re gold's future was way overdone. Fear is a bad emotion which could get you out of your position at exactly the wrong time. As the saying goes, big up-legs always start when bullishness is at an extreme low.. Well, we are certainly in such territory now..
Let's take a peek at the updated gold and relative charts now and see that recent fear was way overdone indeed and that in fact gold's uptrend is still intact and not threatened at all.
This chart tells us that the uptrend in gold is still intact. All what gold is doing despite the tremendous fear out there is to clock higher bottoms, not lower..
This chart clearly demonstrates that the way is up for gold, not down. We are nowhere near 'SELL' territories as of yet, the relative gold chart just clocks higher bottoms, not lower..
This chart clearly demonstrates the extreme volatility in the gold shares, up, down, up, down etc..
Yes, the gold bull will try to shake off as many gold investors from its back before taking off. Just sit tight and do nothing at all..Aslso here, the HUI is clocking higher bottoms, not lower…
The Gold/HUI ratio chart says that we are in 'BUY' territories, not in 'SELL' territories. A major correction in the gold shares never started form above 2.0 levels..
Yes, fear is the tune of the day these days, but as the saying goes, all major up-legs do start from a point where bullishness is at an extreme low.. Well, needless to say we're in such territory right now.
Now things can get interesting from here. Why?
Well, if the dollar is under severe pressure indeed due to a massive increase of liquidity , gold will start rising again (in fact it already does…). The gold shares will follow and could be boosted tremendously if this rumour turns out to be true:
Barrick Gold may bid for Newmont: report
Thu Mar 15, 2007 6:37 PM EDT
NEW YORK (Reuters) - Canada's Barrick Gold Corp. (ABX.TO: Quote), the world's biggest gold miner, may bid for No. 2 Newmont Mining Corp. (NEM.N: Quote), BusinessWeek reported in its March 26 edition.
Citing "some pros," the magazine said Barrick would go after Newmont for its proven and probable reserves of about 95 million ounces of gold.
A deal would likely value Newmont in the "mid 50s," BusinessWeek said, citing pros.
END.
It should be obvious that if this turns out to be true that it could give a tremendous boost to the entire gold share market..
Now how can you profit from such a new upleg in gold and its shares? Well, sure enough you could buy into some major producers such as Newmont but the stellar returns are made by investing in juniors making a significant discovery. Last year we managed to get our readers early into Aurelian Resources thereby enjoying a gain exceeding 3000%. Just recently we notified our members on two promising juniors with true blue-sky potential. The first one is up 79% since early January, the other up 27% since March 12 and the end is nowhere in sight. Furthermore we issue 'BUY' alerts for stocks in our 'watch-list' on technical break-outs'. If you want to find out about these two promising companies and enjoy our extensive discovery news, market updates and break-out alerts then please join us today. You can do so for as little as $30 per month. Sign up info can be found HERE
Eric Hommelberg
The Gold Discovery Letter/
The Gold Drivers Report
Email: ehommelberg@golddrivers.com
Web-site: www.golddrivers.com
March 19, 2007
If you want to receive these kind of Gold/HUI analysis on a regular base then you can join us HERE for as little as $30 per month.
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