Weekly Gold Market Outlook
A Gold & Currency Digest
Ed Bugos Interim Market Update
Normally I publish my annual review & outlook earlier in the month; but this year I took it upon myself to extend the review portion of the report to the entire 2000-05 period for various reasons. The review caused me to reflect on my past decisions - good and bad - and thus helped ground my outlook for 2006 and beyond. It should be done any day now… maybe even tonight.
Meanwhile, this is just a general update on the action in the gold sector, and some further strategy.
The gold stock averages broke out of their three week ranges this week in the midst of a fundamental news vacuum - there's no shortage of news and bullish gold sector noise today but none of it adds or detracts much from what has already been covered.
It just feels like a steady growth in the bullish crowd… to the beat of a confident (but not yet overly) bullish tune.
There's nothing in the charts that I don't really like. Gold prices are coiling around the US$560 range this week in what appears to be at least a neutral five day triangle (flag) - both the lows are getting higher and the highs lower. A move is thus imminent and the gold stock averages are pointing up (the HUI/Gold ratio has broken out of a bullish looking three week flag for instance).
The XAU has just about reached the low end of my intermediate target range (155-165) based on the technical implications of the most recent 18-month (2004/05) consolidation; the implications of the five year (1998-2002) head & shoulders bottom suggest a slightly higher target range: closer to 185-200. However, the low end of my intermediate target range just happens to match the 1996 high for the XAU (the HUI doesn't go back to the early 1996 high in gold stocks). There is no way to be precise on these targets - markets aren't that predictable and the character of the gold market is changing before our very eyes in ways I haven't figured out yet. Personally I think the market should have been here a year ago, and that the action in the sector in recent months certainly resembles a sling shot, dare I say. I am bullish enough to say that the market will probably move to the high end of my target ranges (i.e. XAU=200; HUI=400; Gold=US$633), but this is no science to begin with. Anything beyond those figures is outside the scope of any kind of measurement - technical, fundamental, historic - in my arsenal, at least for the near term.
Now, when I suggest taking profits on this stuff, even while arguing for gold to rally into the US$2000-3000 range ultimately, I have a specific investor in mind: that is, anyone looking to minimize their downside during the inevitable PRIMARY correction.
Last week I believed that even though I think the market is going higher in the short term, investors should BEGIN to build some cash reserves by selling into this rally on account that the sector reached one of my first expected milestones for both the primary sequence that began in 2001, and the intermediate sequence that began in the middle of last year. We are not surprised that the market has continued to grind higher in spite of that and are, in fact, pleased. After all, we're still long to the hilt, right?
I don't usually regret selling strength.
In any event, this is really the first time I've suggested any genuine profit taking. Some of you will remember my controversial call to sell up to half of our gold stock position late in 2003, but that was indeed quite different - then I was merely shifting the weight from gold stocks to gold and silver bullion, betting mainly that the latter would outperform the gold stocks for the remainder of the primary wave. The overall gold sector allocation remained much the same, however. And the results have born us out - the HUI/gold ratio has yet to pass the 2003/04 high. Today I am saying: while this sector is likely to go higher in the near term (and long term), sometime in 2006 it will suffer a steep correction from levels that may not be much higher than today's because we are in the final throes of the first primary sequence (wave) of the long term (secular) bull market in gold that began in 2001 and will ultimately end somewhere thousands of points higher than today… but nothing goes straight up and the fact is that even the long term players always end up regretting not selling something when the corrections come, especially the primary corrections.
How many people bought a general stock mutual fund in 1981 and held it all the way through to 2000, let alone a tech stock or financial sector fund? What happened usually was that even those that intended to hold for the long term tended to give up on their long term outlook during any one of the corrections (1987, 1994, 1996, 1997) and in many cases ended up selling a bunch of their positions at the bottom out of disappointment - because the correction came unexpected (they always do) and was usually steeper than most people thought. Bull markets have a way of making us greedy and while it is true that my conservatism may stem from the vestigial conditioning of the past bear market (1981-1999), I think we are entering a fresh phase of greed.
Wherever the peak will be, whether US$600 or US$800, it will happen in the next few months, and after that a correction of up to 30% in gold prices and up to 50% in the HUI would make a good fit for the historical model that has served us well up to this point.
After that, onwards and upwards.
But anyone who can't stomach that kind of volatility would be wise to start selling the current rally in order to build a small cash reserve. Last week I suggested selling up to 10 percent - I would only increase that to 15 percent, and only for the gold shares - I would cap my gold bullion sales at 10 percent for now, and maybe permanently (leaving me a 33% position in gold bullion).
Personally, I prefer to own my gold for the long haul and trade the primary gold stock cycles… that is the 3 to 5 year trends.
So my strategy is to reduce my gold stock allocation to 25% of my total portfolio between now and the peak of this intermediate run, wherever that will be. Prior to last week's sell recommendation it stood at 37% (same as the suggested gold bullion position).
Of course the risk is more like a probability that the market continues running, at least in the short term. But based on all the sense I have in my brain I think that over the next year or two, especially once the market is past my targets, the risk of a major correction starts to exceed the risk of being caught out of the market. Maybe I'll be wrong, but I don't think so. The fact is, I can afford to ride the bull longer now that I have a little cash in case I am wrong about the precise timing of this thing… even after taking these profits we still have 2/3 of our portfolio vested in the gold sector (allocated between the shares and bullion), and after taking further profits (according to the strategy outlined above) we'll still have more than a 50% total allocation to the sector.
That's still plenty exposure in my opinion for being wrong.
Needless to say, my outlook assigns a very low probability to a straight up move to my long term targets.
As I've emphasized recently, we're looking for a normal bull market, at least until the final stages where either the Fed is dismantled, or simply restructured. I don't think anyone's prepared to bet on a dismantling… YET.
Editor - The GoldenBar Report
January 28, 2006
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