May 7, 2006

Nikkei:       17,153.77
*April 2003 low:  7,603.76

*- See March 31, May 3, & May 30, 2003 reports linked on homepage.

The following are the Gold and Dollar excerpts from the May 7, 2006 issue of the Sid Klein Comment (SKC), which is available in its entirety via www.sidklein.com. The full SKC report is uploaded on a six-month lag. This excerpt for Gold-Eagle has been published on a one-week delay.

PRECIOUS METALS & DOLLAR:

The following was the March 5, 2006 SKC report's title:

"Gold $850 this year?
Is the Dow at 6500?
The "Bull" of Weimar
Japanese Economic Power"
The March report wrote:

"So, who is in the mood to still bet that gold and silver are not in the middle of a raging bull market? It's one thing to miss an investment that makes a lot of money; it's lost opportunity. Life goes on. However, as discussed in the New York section above, if asset prices maintain nominal values and tread water as the Dow Jones has, merely because of a currency printing spree that debases the value of the currency in which the asset is denominated, not holding the appropriate currency mix, may spell a problem of meaningful nature for those seeking to at least maintain true value, if not make it grow sizably…."

After a series of correct forecasts for gold, which included the achievement of the $600 target for quarter-end, after its low and preceding peak were identified, SKC wrote of a partial profit taking opportunity for short term traders, though investors were warned to not touch an ounce. And so, to embellish the above, that same report continued:

"….Presently, much of the crowd that is aware of the precious metals' new bull market, consists of those who were bullish ten years too soon. The loss of their credibility has helped the perma-wrong miss this sea-change. In this sense, this is similar to the Nikkei; all the false starts of the 1990's caused investors to miss an obvious secular low this decade ["Oh, I've heard that before about Japan (gold)"]…."

The above was written with gold trading around $560 and silver $10, as evidenced by the following two charts. As we can see, once a market has broken out, acceleration can occur at any time, while what appears to be a completing pattern is actually one that is merely serving as the pre-acceleration advance (i.e. - an apparent wave 5 is actually a wave 1). This is more evident in the silver chart. This is also why asset allocation is most important, and why I have called all of this a wave-3 acceleration to the upside, ever since and due to the breakout over $500 (since January 2002, SKC has forecasted that a break over $500 would be viewed as a crossing over into a wave-3 acceleration).

Continued below:

The significance of the Yen's bottom is multi-fold (below).

From the above, we see that the daily chart's 200-day moving average (MA) has been broken, as has the 200-week's MA [the latter's last chart point is not seen plotted, as it is a weekly chart (updated on Mondays)].

Apart from signaling that a bottom-to-top move of 20% this year may be underway in the Yen, this activity should also be giving the green light to sell major exporters and invest in domestic stocks, particularly since so many of the latter contain such extraordinary price leverage (see Japan section above).

I am fervently making the case that the bottom I called for the Yen at 120 (after initially having thought that the 115 area would hold) is now confirmed. The secular bull market for the Yen has resumed!

This is consistent with the topping formation I have been watching develop in the Nikkei, since the very beginning of the year (any short term and short lived potential in the index should be contained to 5% from here). The Yen's reversal should be the last touch to reversing the exporters, while the Dollar's hit should create a sucking sound out of US investments. Therefore, to reiterate prior analyses, we will now see a repeat of the 2000-2002 period, when the Nikkei and Dow fell (collapsed), while Japanese domestic value stocks had made their lows, and were advancing.

Simply, again, the antithesis of the 1990s: Yen up, exporters down, domestic stocks up, as Yen appreciation causes domestic investors to move into domestically recognized names. And the Japanese domestic investor is not even in the market yet!

The following quote also stems from Bullion Buzz, this time the May 2, 2006 issue, quoting the venerable Richard Russell. While it speaks volumes for gold and silver, it speaks to the resumed secular bull market in the Japanese Yen as well:

"The Fed may tell us that there's no price inflation. The Fed may take away the M-3 broad money supply figures so that we don't know what's happening to monetary inflation. But the Fed is not going to fool gold. When inflation, galloping inflation occurs, we'll know it. We know that during inflation it takes an increasing amount of junk paper to buy real money - gold."

CONCLUSION

SKC's March 5, 2006 report concluded:

"Whatever scenario unfolds, silver will trade at prices dramatically higher than what anyone is presently imagining."

In Elliott wave terms, insofar as technical analysis is concerned, a wave 5 of 3 is completing in the $14 - $15 area, which should precede a consolidation above $12, and an ensuing wave 5 advance to complete this particular intermediate term move. While silver entries have to-date been timed with gold, SKC's approach may change, as the silver chart is providing cleaner and perhaps less manipulated trading patterns. SKC's view that $850 gold was possible this year flew in the face of the bulls' own expectations, as a breakout into an accelerating wave 3 pattern went unrecognized. $850 is where bullishness will finally note that this isn't just a Dollar debasement, but a move that echoes concerns about all-time highs and an imminent $1000/ounce price. We'll see if I consider another intermediate term call for un-invested investors or short term traders, but fully invested SKC readers will be reminded that this wave 3 is within a larger wave 1. Therefore, $2000/ouce is a more reasonable wave three target for this cycle in 2007.

The Yen is the best fiat currency in the world and it is signaling huge potential for domestic Japanese stocks. It also confirms a developing Nikkei peak, which will cause large-cap exporters to yield to domestic economy and investment plays.

In this scary phase of the long cycle, Asia via Japanese value is in, while all other non-metal investments are out.

Sid Klein

LEGAL NOTICE: On this 13th day of May, 2006, Mr. Sidney Klein has donated this market letter to the public domain.

DISCLAIMER: This market letter is intended to assist in the dissemination of information to private subscribers. The information contained herein represents Mr. Klein's best efforts in good faith to advance knowledge to his clientele, but there can be no implied guarantee as to its accuracy or completeness. The information is given as of the date appearing on this market letter, and Mr. Klein assumes no obligation to update the information or advise on further developments relating to the information provided herein. No solicitation to buy or sell securities is intended, and none should be inferred. Investments are inherently risky, but investment risk itself is a function of individual preferences. Thus any opinions, recommendations, or judgments expressed in this market letter are of necessity abstract and general. They must be modified, accepted, or rejected by individual subscriber/investors whose risk averseness cannot be known to Mr. Klein.