19-Sep-05: According to his biographer Jesse Livermore once said, if memory serves correctly, something like: that in bull markets natural disasters are bullish; and in bear markets they are bearish. He meant for stocks.

Or maybe it was that natural disasters tend to occur more frequently in bear markets.

In any event, I don't think they mind if gold prices break out on news of national disasters; gold bugs get bad publicity that way because it makes them look like they're benefiting at other people's expense. [Like at the expense of the looting classes themselves maybe!]

Pay no mind. In the world of business, even bad publicity is good publicity, ultimately.

FOMC Rate Hike Discounted Short Term; Gold Bulls Brush it Aside, Look Beyond… Sorry, last week's report got derailed as gold started to break out late in the week when I had expected the pre-FOMC rally to pause until the FOMC gave it either a green, amber, or red light.

Maybe that was a little naïve; it sure is typical - because I sense my conservatism to have been conditioned by the choppy nature of the market over the past nine months at least. The break out, which looks genuine now, reminds me that markets like to condition speculators to trade in a certain way - taking profits early for instance is a trading style more suited to choppy markets than letting the profits ride a little, which is more suitable for when the market is moving - and just when enough people have figured it out, wham, the rules change. I have a feeling that the gold market is about to condition investors not to sell too early. Of course I am cognizant of the fact that in order to achieve this circumstance the gold rally must exceed expectations (as all markets invariably do); indeed I'm betting on it!

But what's driving it… what is the catalyst?

This question squanders too many resources.

Realistically it isn't even possible to forecast specific catalysts with any degree of confidence, and once they are in and people understand their implications then their relevance fades.

Remember the Bad News Bulls? Watch for them in Gold (Bad News = Good News) One cannot perceive the "Greenspan Put" and predict deflation (in the quantity of money relative to the demand for it) without contradicting himself logically. Either the Fed can control money supply or it can't; and if it can, it does not have to mean that it has full control - only that it has enough influence to sustain/induce an expansion.

Perhaps my point will be clearer in light of a paradigm that became well known in the nineties: 'bad news for the economy (or profits) was good news for stocks and good news for the economy was bad news for stocks.'

In other words, the market eventually realized that bad news meant an easier Fed, so it went to work bidding up stock as well as bond prices on bad news; and vice-versa. Well, in those days there was a bull market in paper.

Today, we're in year four or five of a bull market in commodities.

In other words, in terms of asset classes, the primary benefactor of the post 2000 inflation policy has been the real assets - commodities and real estate. So why wouldn't this paradigm apply to the commodity bull?

That is, why wouldn't bad news on the economy translate into stronger gold prices (specifically, since it is the metal with the most pronounced monetary qualities) in the same way and for the same reason: because it means that the Fed would loosen the purse strings? Except instead of going into stocks it goes into gold…

Sooner or later in this gold bull market that paradigm will catch on; why not here and now?

Or do you think markets are still hung up about this deflation bogeyman?

Well, certainty is not a characteristic feature of this business anyhow. Fortunately though, we can be certain that the Fed will inflate again sooner than later.

But I'm confident that this is the beginning of the final thrust of the primary leg that began in 2001; my minimum target is US$500, based solely on the existent technical parameters; but I have a hunch this move - if it is the final thrust as per the model I've been relying on recently - will surprise all of us on the upside. I wouldn't be surprised to see gold US$600 occur as quickly as oil prices shot up from U$50 to US$70 per bbl… 4 months.

As a piece of evidence supporting our contention that gold prices are likely to be resilient in the face of declines in stock or bond prices, or other commodities like copper or oil, or strength in the foreign exchange rate of the US dollar, note that it has been resilient to the pull backs in copper, oil, and the CRB recently; to the strength of the FX value of the US dollar since May; and that it has even outperformed the Dow for almost two months now.

Note also that on Monday's slide in the Dow, USd gold prices leaped to a new 17-yr high.

Small consolations so far, but I believe that this most spectacular final inning has just begun.

Gold Shares Stealing the Equity Spotlight; Strategy & Target Recap The gold stocks are on a roll too.

As a sector they've led the market consistently this month - up about 15 percent on average over the last 21 trading days - last week alone the XAU gained 7.8 percent while the HUI leapt 8.8 percent - though the XAU outperformed in August. The bulls blew right through the 220 resistance barrier on the HUI (average) and put in a decisively bullish bias in the XAU chart.

Meanwhile, the CBOE gold index broke out, and the Canadian junior index made fresh highs.

Few other sectors have been able to come close to the performance of the gold shares all month. Last week's best performing US equity sector outside of the gold stocks was the Dow Utility average, gaining 1.9 percent; and over the last 21 trading days to Friday, next to gold the best performing sectors were, respectively: the Energies (up about 10%), and the Biotech and general Commodity-Related (up about 7%).

If the gold share indexes make new highs now, on this weakness in the stock market, the technical case for a significant move bodes well - for as much as a 40 percent run (in the averages: HUI & XAU). But I think that gold (bullion) prices have to run well past US$500 for them to realize that objective… which I'm not ruling out.

For now my intermediate target on the HUI is between 275 and 300, which means I'd start taking profits there - how much will depend on how my outlook develops between now and then. Assuming gold makes it to US$500 and the HUI/Gold ratio makes it back up to its 2003 high, the implied target for the HUI in USd terms is 325.

Please keep in mind that I'm going into this move with a slightly reduced gold share position (our long exposure to the gold equities was reduced significantly at the end of 2003 and was increased slightly again the following spring, still resulting in a reduced weighting; net proceeds went into an overweight bullion long as a bet on the gold/HUI ratio and the rest went to a short against the stock and bond markets); for those that have retained their full gold stock position all the way along and wish to remain conservative it might be advisable on this run - even now perhaps - to take some off the table earlier than we intend to at our aforementioned HUI targets.

If my hypothesis is correct then this move should represent the final climax of a primary leg which I expect will be both extremely profitable as well as followed by the largest correction the sector has seen so far. I could conceive of a situation where gold runs to US$525 or higher and the HUI to 325 by December, then both retrace the entire move, and end up right back at these levels by Spring 2006, plus or minus. If I am correct, this next move will be the fastest and most profitable one for the bulls yet, but will end just as quickly… thus if one wants to buy that dip it is advisable to take profits on any extraordinary strength no matter how bullish the noise.

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

September 20, 2005

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