Second Hand Lions

May 1, 2008

I watched a movie this weekend that I really enjoyed. It was called "Second Hand Lions." Well, actually I only saw parts of the movie since I was doing some other things, but the movie had several undercurrents as messages for the viewer that really were heart warming. One of the messages that I was left with was that in life one must look at all of the information that is provided to him, and then he must decide what is true or what is false. Sometimes things don’t really seem like they can be true, and then suddenly that exact truth falls into place.

Reflecting on the markets, that message from the movie seems to be at play most of the time. We often speak of market fundamentals and market technicals, but the truth is that fundamentals can take a longtime for investors to realize in terms of their importance- and the technicals can often play out in different ways. The bottom line is that market price movements over the long haul will always be based on the underlying fundamentals, yet price movement in real time is based on the perception of those fundamentals by investors. Thus, price movement in a bull market usually climbs higher with most investors constantly afraid that the rise in price will end- Bull markets tend to climb a wall of worry.

This concept is presently at play in the Precious Metals Sector as there is a tug of war going on between those who believe outright deflation will win out while others only see Dollar inflation leading to price inflation as the main market driver. We have discussed these issues in great detail over the last few months, but this issue is at the heart of what we are going to discuss, today. I don’t think there is any doubt about the great Bullish fundamentals for Gold and Silver in this time-frame, but the Precious Metals Stocks have not appreciated in line with the metals at this time- not to mention the fact that we would expect the PM stocks to rise more aggressively since they are leveraged to the price of Gold and Silver. With the Fed suddenly creating new loan facilities for the banks and investment brokers I think the Fed has in essence started screaming, "Hey investors, we are inflating the currency", yet it seems that the investors haven’t really heard……..yet.

In our last editorial we showed a chart of $Gold where we noted how the price of Gold and Silver ran higher in December of 2005 while the PM stocks as represented by the HUI Index pretty well held steady. We showed the general similarity of the recent move higher in Gold and Silver while the HUI held in place. In both instances Gold and Silver suffered sharp corrections while the HUI stayed pretty firm. Let’s take a closer look at those two time-frames for Gold and the HUI to see what we can gleam in terms of similarities. Then we will take a look at one of the PM stocks as a reference point.

$Gold- Late 2005 Versus 2008

We can see in the following daily chart of Gold from late 2005 that Gold spiked up through the "big number of $500", and then retraced the move. At the time, many investors thought that the move upward in Gold was done for the "cycle." Yet, we can see that the move down only lasted for about 7 days with the RSI dropping below 50. Gold corrected with an initial large drop, a bounce, then a second drop to just a bit below the first move down.

Next, we have a weekly chart of Gold’s move so far in 2008. Where in 2005 Gold ran up through $500 which was a big deal at the time, then retraced- in 2008 Gold ran through "big number" $1,000, then did a similar retracement so far. We can see in the weekly chart in 2008 that Gold has now corrected for 6 weeks by falling sharply, then bouncing before moving back down to around the lows for the move. If Gold were to move a bit lower this week, then the correction would look very similar to the 2005 move in time and in the way price has reacted off a "big number high." Thus, we might see Gold bottom around 860 this week with the RSI testing 50.

Looking through the chart of Gold in this current Bull Market, these two periods are the only times I can find where Gold ran to new highs where the HUI did not accompany the move unless the HUI already had a very large recent run. Both of these moves involved sharp reactions after hitting "big numbers" where traders often look to sell. In both of these periods the HUI index did not participate with leverage as expected with the HUI moving to slightly higher highs, then retracing to support.

The HUI- Late 2005 Versus 2008

Now, let’s move to the HUI chart in late 2005. In this daily chart of the HUI we can see that when Gold ran higher, the HUI barely made new highs. Yet, while Gold corrected sharply the HUI held the "old high support" very well. I remember how the PM stock investors were pretty demoralized in this time period as most thought the HUI would fall much further after such an aggressive run in Gold had seemed to fail. Yet, only about 7 days later Gold bottomed and started moving higher. With that next move the HUI started a good up-move. During this time period the RSI had a series of moves between around 50 and 70.

The next chart is a weekly of the HUI in 2008. Like in late 2005 the HUI moved to only slightly new highs while Gold ran ahead. Also like 2005, the HUI has held "old high support" while Gold reacted off a "big number high." The RSI has basically oscillated between 50 and 70. If the HUI and Gold bottom this week, we would have a very similar potential set-up to late 2005 when both the HUI and Gold had higher objectives to meet.

One might ask what the potential significance is of these similar moves in 2005 and 2008. Basically, the main driver of the markets has not changed. The main market driver has been Dollar inflation which is the reason that the HUI has outperformed Gold in this Historical PM Bull Market due to the leverage of the HUI to Gold and to Silver. We recently saw Gold advance while the HUI did not as investors worried over outright deflation becoming a problem- worried that investors might sell all stocks. Yet the Fed announced new loan facilities for the Banks and Investment Brokers that certainly looks like more Dollar inflation, in fact, it smacks of the monetization of private debt. In this case since the banks use "fractional reserves", the dollar inflation might be multiples of what the Fed coughs up unless the "loans" are really used to shore up previously depleted reserves. Bottom line- the fundamentals for the PM sector are still exceptional. If Dollar Inflation is going to continue to be the main market driver, then the PM stocks are way behind their fundamentals at this time. We expect the probability is very high that Gold and Silver will resolve to the upside like they did back in late 2005. If so, the PM stocks should resolve aggressively higher since the current new highs in Gold and Silver have not yet been fully factored into the PM stock pricing. We have been suggesting that the HUI will run to around 640 and to around 800, with the possibility of seeing an amazing run to around 1250 in 2008. In the similar move in 2005, the HUI moved up about 60% from this point. That would equate to about HUI 800. Of course, all of that is off the table if the PM sector does not bottom over the next 2 weeks, though I expect to see the bottom this week.

Goldcorp- GG

I am sure that you are all familiar with the stock of Goldcorp as it is an institutional darling due to the liquidity of its stock, its sound mining operations, and its Precious Metals reserve base. When I am evaluating the potentials for an index like the HUI, I like to compare what I see in the charts of some of the index’s components to what I see in the chart of the index so let’s take a look at the chart of GG.

I have chosen to show the chart of GG using a chart form I have circled the similar price periods in late 2005 and today that we have focused on in the charts of Gold and the HUI, above. We can see that the current corrective action is very similar to late 2005 as the price of GG has moved higher in what looks like a "running correction." If you look at a long-term chart of GG you will find many instances where the chart shows this type of characteristic. Usually when you see this type of price movement, it is very positive for future price action of the stock. In fact, if you look at how the price of Goldcorp tends to move, many times the stock corrects about 50% in intermediate-term moves, and then rises about 4 times the bottom price. We have already shown on a previous chart that a potential price target for GG might be up to about $80. If we get a bottom in the HUI index this week, we might see GG correct a bit lower to around $33 and a half to $34. If the stock bottoms around this area, a similar move to late 2005 might suggest a run coming up to around $56 to $62, initially. I believe the chart of GG suggests that our comments about the HUI and Gold, above, might be right on track. We might see Gold soon put in a slightly lower bottom before running up to around $1,130 and $1250. If things get hotter we might see Gold run all the way up to around 1437. Similar targets for the HUI would likely be 640 and 800 with the potential to run all the way to around 1250. I suspect that to see those kinds of numbers we would have to see the moves extend out into August or September- possibly all the way into year-end. As we have shown in the last editorial, we have been expecting general market strength to come in this coming time period with weakness coming into the 4th quarter. Under the scenario described, above, we would not expect the PM stocks to run into weakness until the general markets showed more aggressive weakness in the future.

I think that the matters discussed above are very important to Precious Metals investors at this time. If you look at the way this PM Stock Bull has moved, most of the gains tend to be concentrated in about 25% of the time. If it looks like the bottom is coming in this week, we will return with some individual PM stock charts for you to consider. We will also take a look at some stock charts compared to the move in Silver.

As we have noted we will be moving our work to a subscription site, though there has been a delay with the site, itself. I apologize for the delay, but do not have control over creating the site. I would again like to thank readers for the many kind comments that I have received. We are compiling an e-mail list to contact those who wish to be notified when our new site is up. [email protected]

For the moment…………..Goldrunner.

Below, is a link to the Goldrunner Index which includes links to the recent series of editorials we have posted.

Again, I’d like to thank all of the posters at the Gold-Eagle Forum for their daily input. This thank you is especially extended to TQ and to Grininbarrett who have positively affected my growth over the years, along with posters Pittrader, Trader_Vic, and Mr. Aholbroke. Special thanks go to Dr. Vronsky and Westerman for creating the Gold-Eagle site and for editing my work. A very special "Congratulations" go out to Dr. Vronsky and Westerman after Gold-Eagle saw its hit counter ring up to 286 million this last week.

Here is the link to a site I use to research the warrants of Precious Metals stocks. I will be discussing some aspects of the leveraged use of warrants later in this editorial series.

Another very good site that is dedicated to investments in Silver belongs to David Morgan, and his site can be found here…………….

Nevada accounts for 75% of U.S. gold production.

Gold Eagle twitter                Like Gold Eagle on Facebook