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Weekly Gold Market Outlook
A Gold & Currency Digest

Ed Bugos On Gold & HUI

TECHNICALS: GOLD PRICES

Gold failed to confirm the bears by making a genuine lower short term low in any of the major currencies last week. The closest it came was against the Euro and the USd where it made a lower intraday low on Friday, albeit a temporary and marginal one. If anything it makes for a bullish bias on the chart because it implies a bullish flag. As it stands, in all the other currencies the six week correction has taken on a more neutral looking formation with the recent low coming in higher than the February low in these cases. The momentum gauges took a turn for the worse through the correction; but the shakeout of speculative longs was more satisfactory this time around than it was during the October downturn, according to data from the CFTC's weekly COT reports.

The most bearish facts that I am observing in the charts of gold prices is that 1) the current correction low is slightly below the previous trend high whereas the October low occurred well above its previous trend high (see chart below for a visual comparison of the current correction to the October correction), and 2) the current leg is the most overbought of all of the intermediate legs since this thing started five years ago, though it could still get more overbought if our most bullish short term scenario proves correct. Support for this scenario lies at US$535 plus or minus a few points while confirmation rests with a break out through the US$572-578 range.

In other words, if we're right to be bullish on the short term the correction should be close to being complete - perhaps there should be room for another week or two and one more low.

In terms duration, nevertheless, at eight months of age the current advance is rapidly approaching the long-in-the-tooth stage.

It is now the longest lasting advance since the 2001-02 move that lasted about 14 months, though it could be argued that the 2003 advance lasted nine months (instead of six), depending on which lows you take as your starting point for the trend. Sentiment, however, is mixed; as highlighted in the last issue the smart guys are all cautious/bearish on their short to intermediate term views, which makes being bearish far too easy and comfortable for me.

So far I'm not surprised at the fact that March is a non event - in light of all the hoopla about the Iranian oil bourse and of the implications of the discontinuance of reporting M3, etc.

Usually when a price level or time frame is widely targeted or foreseen it turns into a resting place of sorts… a non event.

Aside from the age of the current move, the most bearish fact is seasonal risk. The period from March to May has historically proven to be the seasonal weak point for gold in any given year - in this period the market finished down in more than 18 of the past 33 years - more than any other period of the year. This means that strictly speaking, the odds are against the bulls. However, those odds are neither as proven nor as strong as the odds implied by the winning superbowl team, or presidentialcycle.

The years 2001 and 2002, for instance, saw bullish action during these traditionally weak months.

So why not take what the market has given us and run? Lots of reasons:

  • Inflation argument has legs and still remains largely out of the market
  • Geopolitical risk factor holds a potentially bullish (upside) surprise
  • No genuinely bearish fundamental or technical facts around to warrant a bet against the trend
  • Markets think central banks are tightening, but they aren't
  • Valuation targets (ratios) relative to oil and other commodities suggest scope yet
  • Short term chalk marks suggest the sector is now oversold (even if intermediate move is overbought)
  • The cheerleading has been relatively tame, and confined to a handful of bulls
  • Diversification out of US dollars is a likely trend, yet to really see the light of day in terms of news
  • The US dollar's technicals appear to be telegraphing another spill
  • The T-bond situation could hurt stocks, and confidence in the economy
  • Seasonal risk may already be factored

And finally, there are three late stage developments that have yet to fully blossom:

  • a blow off in silver shares;
  • a break down in the US and Canadian dollar; and 3) the outperformance by the junior end of the market.

We're seeing some froth in the silver shares and the junior end of the market just now but the Canadian and US dollars are just beginning to show signs of tiring. In my outlook the Canadian dollar price of gold peaks last.

So maybe the correction has another low in store for us before month end but I like the odds for another 50 to 100 point upside move better than the odds for a 50 to 100 point downside move from here… slight as they are.

GOLD STOCKS: Correction Almost Over The US gold stock averages have completed a second corrective leg with a low well above the main intermediate trend line (see chart). Given the depth of the pullback so far a third leg is not necessary, and could only prove troublesome to the bullish short term outlook if it occurs. The correction in both gold and gold stocks has now reached the extent that was allowed for in my short term outlook, which historically means that we should probably expect one more lower low before the advance resumes… cynical perhaps.

The upside break out parameter is the last lowest high in the six week downtrend (325).

Short term support should hold at the recent low near 280; but if not, support for the intermediate trend lies at above 250 (or above 260 ideally). The HUI is the only gold stock average where a miniature head & shoulders top is perceptible - if it is legitimate the downside objective measures to about 255, but I don't think it is since the corrections in the other gold stock averages look more normal. The Canadian gold stock averages appear to be holding up best. The HUI/Gold ratio suggests that gold stocks are short term oversold, especially in light of the continuing advance in the Dow and renewed easing speculation. Within the indexes, the South Africans and the blue chip producers have fared the worse through the correction while the silver producers have fared the best. I believe this is event related. In the case of Newmont and Freeport, concerns over their Indonesian interests may have arisen due to news of large protests against the current Thai government further north.


Ed Bugos
Editor - The GoldenBar Report
www.goldenbar.com

March 15, 2006

The Goldenbar Report: is not a registered advisory service and does not give investment advice. Our comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While we believe our statements to be true, they always depend on the reliability of our own credible sources. Of course, we recommend that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you to confirm the facts on your own before making important investment commitments.

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