Pendulum Swings Toward Gold

June 28, 2006

A cycle seems to be in progress, playing itself out within the confines of the commodity bull market. A pendulum swings its investor emphasis from gold to energy and back again to gold. The chart for the HUI (gold & silver miner stock index) versus the XOI (energy producer stock index) is the most unusual mine eyes ever have observed among several hundred such charts.

The "head & shoulders" reversal pattern tends to let loose its impact far less than some chartists forecast for it to do so. My sense is to look for built-in confirmations before formal identification of such a pattern. The support at the 50-week moving average has been a reliable internal indicator of support and resistance alike. Note how the blue line has offered support on the upswing, and resistance on the down swing. For the last three weeks the battle has been waged for the 50wMA to provide support. In my view, mining stocks will prevail in the next several weeks, perhaps next few months. One might anticipate this ratio chart to shoot upwards soon.

Here is the unusual trait of the above chart. The two parallel lines are very obedient, even after the pendulum does its work in the swing. In Nov2003, a peak occurred as mining stocks prevailed. In that bullish pattern favoring miners, the shoulder line could be drawn at 0.275, while the neckline could be drawn at 0.345 with reasonable adherence to both guidelines. Months later, after the pendulum swung to favor energy, the flip flop occurred to render the "head & shoulders" a rising pattern which hit its low point in Aug2005. Suddenly (well, in long-term time ticks) the shoulder line became the neckline and the neckline became the shoulder line. The technical guidelines swapped roles in eye-popping fashion. The baton has been passed from oil to gold. The pendulum then moved in the opposite direction.

The fundamentals might offer further reinforcement for the pendulum swing. The oil world remains transfixed by Iran, atop Iraq. The United States has backed off, used better judgment, and yielded to the United Nations. Both Russia and China have proved as powerful counter-weights to the US monolith power. Iran's two partners offer formidable geopolitical power with their respective strengths. Without any formal treaty, Russia has promised Iran military retaliation if attacked by an external aggressor (unnamed), after having delivered state-of-the-art Sunburn missiles and worked closely on uranium enrichment programs. China has inked a few multi-billion$ energy deals with Iran, made huge capital outlays at energy production sites, not to mention the unspoken potential of lending a million men in uniform toting rifles. Russian technology combined with Chinese capital have earned quiet on the MidEastern front in a grand high jinks leverage game. It would seem the US Military is selective in choosing adversaries, where the price of quick victory is then guerrilla warfare, surely not mission accomplished. The UN was hurdled in 2003 when challenging Iraq, but now the UN is appealed to in the midst of standoff with Iran. Credit Iranian partners, since the US media seems hard-pressed not to do so. Little is heard of reluctance in the UN Security Council to slap sanctions against Iran, as the United States wishes. Russia and China sit as permanent voting members on the UN Security Council. The UN charter is to avert war, and it is doing its job. As we increasingly learn, the media reports the news after the government fabricates the news. Certain vital pillars holding up the oil price are giving way.

The crude oil price is set to come down. Its chart is a developing rounded top, discussed in the next Hat Trick Letter, due to be posted in mid-July. An oil price retreat to the mid-60 level is appearing very likely. Its props are giving way. Furthermore, the clowns in the USGovt agencies are looking for Congressional cooperation in deeper regulatory controls in the crude oil market. A goony research report claims that speculators, such as hedge funds, add between a $9 and $20 price premium per barrel of oil. Perhaps the oil premium directly reflects the presence of US Troops in Iraq, more appropriately. Geez, could anti-speculators reduce between $50 and $200 on the price of gold? Gold has taken some lumps, has regrouped, and is set to mount a counter-attack. It awaits an end to interest rate hikes, or at least a prolonged pause.

Ratio charts are loaded with information. On the physical market, the gold price ratio to the crude oil price bears a vague resemblance. See "GOLD/WTIC" which is also in a reversal, covered in my July issue upcoming. Of additional interest is the "SILVER/GOLD" ratio, which appears to once again ready for a liftoff in favor of silver. The other critical ratio chart is "HUI/GOLD," the mining stock index relative to physical gold. Its chart is less clear on forward indication, after its annual spring swoon (storm). Get ready for a feeble but unsuccessful attempt to render the crude oil a "liquidation only" market, just like the powers that be did in the gold and silver market in May. Among the precious metals markets, the PTB raised margins on long futures contracts and dumped on the short side of the market, after opening the gates to massive leasing. Claims that the US financial markets are free remain humorous and absurd at worst, naïve and ill-informed at best. Much is soon to unfold. So many forks in the roads for the many stagecoaches run by key global players. The knights, bishops, castles, and queens are maneuvering on the global chessboard. It is unclear whether USGovt leaders are adept at chess, while Russian President Putin is a master chess player. US leaders seem only to be capable of viewing the MidEastern corner of the chess board, with bunker mentality. There are almost no red-white-blue chess pieces on the rest of the board, well, except pawns.

The US Federal Reserve is all set to deliver its seventeenth consecutive 25 basis point rate hike on its Fed Funds short-term target. The only language missing in their public statement is "This institution is committed to raising interest rate until financial crises no longer appear manageable, or until they are no longer profitable to the aristocracy. We continue to deny that the USEconomy itself operates precisely like a speculative hedge fund, and resembles a bubble. We will not reveal whether we believe or utilize the nonsensically flawed economic statistics when deciding upon policy." As the importance of monetary decisions grows, the makeup of the inexperience among USFed governors and chairman should be apparent. My conjecture is that numerous little financial crises are working like strong acid in the background structures, starting with Fanny Mae. Beware that they still look for concurrent statistical indicators to guide their decisions, despite contrary claims. They are destructively reactive, not competently proactive. The main question in my mind regarding their total lack of transparency and never to be seen financial statement, is whether their criminal acts will be hidden under the Impunity Act passed last month, whereby large influential corporations working closely with the USGovt are immune from disclosure to Securities & Exchange Commission. Is it national security they intend to protect, or the license to steal??? If not theft, could vested interest gains be the reward for partnership in national service???

Keep in mind the merger of corporate and state interests which is the centerpiece to the Mussolini Fascist Business Model. Putting politics aside, the model, which the USEconomy has followed in the last several years, promotes inefficiency, stagnation, collusion, further conglomeration, and legal cover for fraud. See Halliburton in the military complex. See JPMorgan and Goldman Sachs in the financial sector. Europeans often lodge the accusation that the United States financial system engrains institutional dishonesty. Few seem to attribute this horrible trend to the absence of the gold money standard. No evidence is visible to me that the trend is improving. It seems to be getting worse. See the hedge fund controversy, as the FBI, SEC, and a key Wall Street brokerage house might expose two sets of rules. My contention is that a new major fraud case will be exposed on a monthly basis from the US financial sector, forever. As long as this perverse condition prevails, the migration to real money such as gold, and real assets such as crude oil, will continue and offer mammoth profit potential, but not without stumbles and seasonal turbulence.


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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 24 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at For personal questions about subscriptions, contact him

Jim Willie

Jim Willie

Jim Willie CB, also known as the “Golden Jackass”, is an insightful and forward-thinking writer and analyst of today's events, the economy and markets. In 2004 he launched the popular website that offers his articles of original “out of the box” thinking as well as content from top analysts and authors. He also has a popular and affordable subscription-based newsletter service, The Hat Trick Letter, which you can learn more about here.  

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Jim Willie has experience in three fields of statistical practice during 23 industry years after earning a Statistics PhD at Carnegie Mellon University. The career began at Digital Equipment Corp in Metro Boston, where two positions involved quality control procedures used worldwide and marketing research for the computer industry. An engineering spec was authored, and my group worked through a transition with UNIX. The next post was at Staples HQ in Metro Boston, where work focused on forecasting and sales analysis for their retail business amidst tremendous growth.

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The King James Bible mentions gold 417 times. Not once does it mention a paper currency.

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