Abstract

Whither gold and silver is the topic de jour. Will they continue up in a break-a-way bull market, or will they consolidate and then move on? Perhaps it is possible that they will even correct downwards before heading up. So many scenarios remain viable probabilities.

If one frequents the more popular gold sites the predominant theme is that gold is headed much higher - some say $600, others $630, a few $700, and even $850 is mentioned as being possible during the present move. The same holds true for silver.

As readers familiar with my writing know - I am as bullish on gold and silver as anyone is, perhaps more than most. My love and fascination with the precious metals is not, however, limited to their monetary value as an investment that may generate profit.

My true attraction to gold and silver is in regards to their unique distinction as the sovereign of sovereigns - the hard money currency of choice since the days of the ancients. Gold and silver have been money since time immemorial, and they will be money until time is no more.

The ideological belief in the precious metals as money is a completely distinct and separate issue from investing in gold and silver for profit. This is true for more than one reason, on more than one level; however, we will focus on only one such reason presently.

Up or Down

That is the question that everyone involved in the precious metals wants to know: is the price going up from here - or down? Where is Cassandra when you need her? If she told the truth, would we listen to her? Perhaps we will get a glimpse to judge accordingly.

Before proceeding any further we would like to point out the distinction (which we trust most readers are aware) between the different trends within the market: the short term trend that lasts from days to weeks; the intermediate term trend which lasts from weeks to months; and the long term trend which lasts from months to years.

We are only interested in the intermediate term trend and in the long term trend. The short term trend we will leave for those astute and nimble traders better suited than we are for such pursuits.

Physical

Physical gold and silver have been on a tear, making 20+ yearly new highs. Since the intermediate term low back in May of 2005, both metals have appreciated in stellar fashion: with gold up over 40% and silver exploding upwards for 70% gains.

Gold & Silver Stocks

Both the HUI Index and the XAU Index have made handsome profits as well. The XAU is up an astounding 87% form its 52-week low, and the HUI is up an unbelievable 110% since its 52-week low. It just does not get any better than that.

The HUI is points away from making a new yearly high. The XAU's yearly high was 156.47 so it is just less than 10 points from a making a new yearly high, which is approximately 6.5% away.

Questions

We have learned through the years (more than we care to admit to) that one is prudent to question what may go wrong in any endeavor, as opposed to only seeing what may go right.

It is also a good idea to have a plan to deal with what could possibly go wrong - otherwise, if the unexpected happens, it could have dire consequences when one is ill prepared. A good friend puts it thus: "forewarned is forearmed." We think our friend is wise.

We are as bullish on gold and silver as anyone is - perhaps more than most. Our love of the precious metals runs deep in two veins: one is the ideology that it is the hard money system mandated by the Constitution, and the other that at this particular time it is a good investment as well.

We note that the two veins course through the same body, yet remain separate. To confuse the two as the being exactly the same in substance - is not advisable.

So call us scrooge or bah humbug, or whatever you will - but we cannot help from having a couple of questions we would like to see answered in the affirmative.

Why is both gold and silver at 20+ yearly new highs, yet the gold and silver stocks, as represented by the HUI and XAU, have not made new yearly highs - when they supposedly lead the metal, not tag behind?

Why is Newmont Mining, the leader of the pack - down almost $10 dollars from its yearly high, which is approximately 18%? (the HUI has of today put in a new high).

Why is Pan American Silver off approximately 8% from its yearly high, and very close to breaking below important support? (it is presently below the support line).

Until we find affirmative answers to these divergent questions, we remain skeptical of the reward to risk ratio we perceive to be in place. Hopefully we are just being worrywarts that see the boogey-man still hiding beneath the bed.

Charts

Below we provide some charts that illustrate the questions we have posited. Of particular concern is the point and figure chart for Newmont that has a price objective of $45.00.

It bothers us that the leader of the gold stocks has such bearish price action, and even more bearish projected into the future.

Newmont Mining Corp.

Unfortunately, the weekly chart does not portend much better:

Newmont Mining Weekly

Next is Pan American Silver, arguably the leading silver mine in the world. Bill Gates likes it, which is good enough for us.

We have been in and out of the stock a couple of times and it has been very good to us. The level to watch is $25 - today it closed at $25.62. (today it is now below 25)

PAAS
Pan American Silver

Below is the continuous weekly chart of gold. You cannot ask for a much better looking chart, which has been a thing of beauty.

We are concerned, however, that charts look most bullish just before they turn bearish - and most bearish just before they turn bullish.

Hopefully a pivot point is not in the offing, however, hope is not a good companion in the world of investing.

Gold Continuous Weekly

The HUI is performing admirably, and is close to making a 52-week high.

Call us stupid, but we are fond of selling into 52-week highs - not in buying them. In a bull market, we prefer to buy into weakness and to sell into strength.

HUI Daily Gold Index

Lastly, we offer the five (5) year chart of the XAU Gold & Silver Index. We have chosen the five-year chart for two reasons: one is because it perfectly illustrates the price action of a bull market.

One can tell by a glance if a market is in a bullish primary trend, as the chart will start in the bottom left hand corner and rise upwards to the top right hand corner - in a series of higher lows and higher highs. It is a work of beauty and art, as is the chart below.

The second reason is that the chart is a picture of all of the price action of the current bull market, and as such, it provides the best blue print we have of the market.

We have noted the intermediate highs, and the intermediate lows. The shortest duration of any preceding intermediate term correction was 3-4 months in length. The present correction is approximately 2 months old. There is no written law that corrections have to be of any certain length. We simply offer the observation.

We also note it has been 10 months since an intermediate term correction has occurred - last spring of 2005. Once again, it is not written in blood how often intermediate term corrections occur. Nevertheless, occur they must.

It is but a law of physics. Nothing goes straight up without coming straight down. Every move in the market eventually corrects - that is the tricky part: the timing.

XAU Gold & Silver Index

We have learned over the years (more than we care to admit) that it is best to consider what can go wrong with any certain endeavor, than to simply perceive what can go right. It is good to see both.

So too has experience shown that it is prudent to have a plan ready to deal with what can go wrong. As our wise friend said: "forewarned is forearmed." We would add: expect the unexpected and be prepared. Surprises can be a bummer. We are growing to old for bummers.

© 2006 Douglas V. Gnazzo

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