Thomas
DeChastelain
Memorial Archives

Bullion Charts and Commentary
posted Jan 8, 2006 at 12:13PM

Bullion Charts

Gold Daily



Gold Weekly



Nobody wants to sell.

Gold Monthly



Nobody wants to sell.

Gold Bugs Index

HUI Long Term Chart



The measured move objective for this break-out is 337.

HUI Daily



Moonshot or die time?

HUI Weekly



Ratio Charts

HUI/Gold Ratio



XAU/Gold



If this is a Wave III then the resistance of the XAU/GOld ratio will eventually be taken out.

Year End Discussion

The gold complex continued to surge in strong fashion. With this move, my thoughts, or wishes for one more meaningful retracement, as part of the long standing correction that has been our environment over the past few years, has pretty well gone out the window.

One of the reasons that I now think that a new phase has started is due to the simple fact that I was wrong in not anticipating the break-out. More precisely, the parameters with which I look at the gold complex have suddenly stopped working. Those "parameters" have served this commentary fairly well, avoiding the deep corrections and capturing good chunks of the upswings. And yet, very much like the HUI breaking out of the 150 level, those same parameters put me on the fence when the right position was to be holding tight.

Like many people, I use year end to go back and review past "predictions" and trading practices. Of course I have the benefit of going back to past commentaries, ergo there is no real room for revisionist history. The exercise was not without its bittersweet ironies. Regular readers might remember that in the latter part of May I was "buying gold in strategic force" and waxing eloquently on the bullish outlook for gold. Indeed I was already looking ahead to the time when the sector would be coming up against key resistance. I spent some time talking about my experience with the HUI at the 150 level, with declarations that this time, I would adopt a more "buy and hold" attitude.

Of course in the end, old habits die hard, and it was the usual culprits. One was an over-reliance on COMEX COT data, with slight differences. At the HUI 150 level it was the absolute levels of open interest which steered me wrong. At the time open interest was at levels associated with the 1980 top, ergo I speculated that there would be a retracement.

This time, being "wiser" I took a different approach. I had come upon this article which talked about COT analysis, not in terms of absolute open interest, but in terms of percentages of open interest held by commercials.

To be specific if the commercial short position made up over 40% of the total open interest, then it was a good time to sell. If the commercial short position was 20% or lower of the total open interest, it was a good time to buy. Along with that came a compelling chart which plotted those percentages against bullion, and showed a perfect correlation.

What I really found enticing was the fact that the COT could "reload" very quickly, without any damage being done to trend support. It was that kind of reloading exercise that I had been waiting for, in vain, apparently.

Some readers have pointed out to me that the ETF, and thier upkeep of physical gold is having an impact. Others have made the suggestion that the Japanese TOCOM is beginning to gain influence in relation to the COMOX. Obviouly more study will need to be taken.

The other faux pas, and a common one to contrarian psyches, is to overemphasize momentum indicators over price action. Selling at resistance is not a bad decision, tactics wise: but when the price failed to follow through on early retracement action, reversed and broke through the 250 level, I should have been quicker in recognizing the new situation.

Of course there were other non-technical factors that were involved. One was portfolio management I did adopt a buy and hold attitude, but in junior oil sands. Their success is making me more cautious about having too low a percentage of cash in the till. That can go under the guise of rationality.

More irrational perhaps was reading glowing, bullish commentaries about gold, and having contrarian hairs stand on end. Quite frankly, it is still a concern. It is pretty hard to find any bearish commentary out there. Right now, I believe that Bob Moriarity (of 321 gold) is the only commentator of note within gold circles that has come out with any kind of bearish declarations.

When you look at overall general markets, you will notice that there is a general similarity. Many of the them, like the HUI, have broken out to new highs. Others look like the HUI did in November when bearish patterns suddenly reversed and surged towards break-out points.

Are the markets all reacting to favorable economic outlooks? If so, they are ignoring the yield curve. More likely the markets are reacting to, or at the least anticipating, a huge surge of liquidity from the Fed. In such an environment gold will do well. Of course as always, the danger rests in the fact that as easy as taps can be turned on, they can also be turned off. I know many gold commentators are calling for general equities to roll over and die. Personally for those invested in "things", I believe buoyant markets is what you want to keep seeing.

The Bear Case

Is the technical bear case for at least some kind of retracement completely empty? Of course not. Things are never that simple. First, the "old" parameters are still all bearish. The sector is overbought on a daily, weekly and now monthly time scale. COT is still bearish. Now in a "Wave III", or "Phase II" type of bull market these won't mean as much, and indicators will remain in overbought conditions.

This is not a contrarian environment, but a momentum one. As regular readers are well aware. I feel much more comfortable in the prior than in the latter. One has to wonder how much "dumb money" is really left to keep things going forward.

Perhaps more pertinent is to revisit the situation and commentaries in the early part of May. At that time things were looking very bleak for the gold sector. The index had broken some key support lines. Measured move objectives saw the HUI not only retesting the 150 level but potentially going back down to the 130 level. There were of course several things working for contrarian psyches.

One, the sector was very oversold. Two, in an era where technical analysis is more common, the breaking of a major trend line, held the promise of inducing a final flushing out of technical selling. Three, the XAU/GOLD ratio was nearing a major level of support which had signified optimum buy points in the past. Four, the COT was in bullish territory. Five, seasonality was approaching the bottom end of its range.

In other words, the situation which immediately preceded a major bottom in the gold sector, is exactly the situation that exists today, except in reverse.

Predictions for 2006.

Right now I only have two.

One is that the political, ethical, social and economic foundation of America will continue to deteriorate. Every country will have its negative forces to contend with, and America is no exception. However never has America had such a collection of delusional dolts at the helm, that are actually trying to institutionalize these negative forces as the law of the land. Do not be fooled by a rising stock market. The ideology in place has, as its central purpose, to keep the stock market rising, and will sacrifice everything else in order to do so.

Two. More specifically, there will be military action in Iran. Yes there will be much howling from the usual pacifists and anti-Bush crowd (of which I am a member). However in this case, unlike Iraq, pre-emptive military action is justified. Of course this military action will be necessitated because of a foreign policy that could only be described as ludicrous.

Why the Russians would help this medieval culture, the very country that is supporting groups that Russia is warring with, just for some "money" is incomprehensible. The fact that too much of the US political elite still wanted to live in the cold war, and did not step in earlier to do something, will be a decision regretted by many on this planet.

If America does not do the dirty work, then Israel certainly will. They have no choice. They are dealing with an Islamic conservative who believes that a halo shines around his head every times he speaks in public (like George Bush, he gets his orders from on high). A leader whose belief system revolves around the necessity of exterminating Israel and indeed anyone who doesn't fit into his archaic world view.

Israel understands full well the dangers of not responding to the language and rhetoric of genocide. Indeed the entire fateful, arguably illegal, creation of Israel, and their entire military build-up, was for the express purpose of defending themselves from the next batch to try.

Of course when military action comes it will not be enough to keep Iran from retaliating. 4.2 million barrels a day of oil production will no longer be available. There will be considerable political pressure on the Saudi's, which means their production will be at risk. Oil will climb, and most likely double. General stocks are the most vulnerable. I expect oil and gold stocks to climb, and climb hard, at least as first. At some point though, the high oil prices will cause global liquidity to crash, perhaps even trigger a deflationary spiral.

And you know there are scenarios which are much worse, (think mushroom clouds) that are no longer just the terrain of the tin-foil hat crowd, but very much within the realm of possibility. It may be that my silver bullion bars, which I now use as paper weights, may come in handy after all.

Trading Discussion

Time is becoming a premium and this commentary has gone on much longer than planned.

So to be brief. Penny stock gold exploration companies are where I am focusing my interest. If you remember the breakout of the HUI from 150, gold explorers lagged the sector by a few months before starting to move up as a group. But when they did, it was with very "satisfying" results.

I only have token exposure at this time. I will build at a very slow rate, if the sector continues to climb.

Preferably, the sector will correct at some point. Right now this correction will not be an "E" wave to finish off a major corrective period, but most likely a wave 2 type correction within a larger overall impulse.

Wave 2 corrections are unpredictable so one has to play things a little by ear, and still use good technical criteria for entering positions.

If you are looking at higher quality vehicles, I still would stay away from anything overbought. Wait for some Fib retracements, or at least some consolidation patterns to make themselves known.

There is no need to panic into positions. If this is a Wave III affair then this bull market is going to last for a few years. As well, in these kind of markets a lot of the money, is made at the tail end of things

Good trading.

Bullet Bullet Bullet