The analysis presented is the view of a pure market technician. There is no attempt to present any fundamental data or information as this is not the expertise of the analyst.

Two up days in gold and everyone goes bananas. Several down days in oil and ho-hum.

GOLD

First a look at my long term P&F chart. The gold action this past week sure raised a lot of eyebrows and commentaries but when one looks at these long term charts it sometimes makes only a small ripple. Many commentaries are gung-ho predicting that we might even see $500 gold THIS YEAR. Boy, that’s a whole $14 away. Where have they been all this time? My projection for where gold is going does not, unfortunately, take time into account. Most commentators and even analysts who predict that something is going to hit some value during a specific time period are just tossing numbers and dates around. A few will be right and they will be sure everyone knows it but of course they will not mention the many times they were wrong. As for myself, I just follow the action and assess where things are going by methods that are over a hundred years old (I was there when they were developed, or so it sometimes seems).

So, where are we on the long term P&F chart? Not anywhere we haven’t been for weeks now. Since the break above the $440 level (and subsequently the $450 level) nothing new and exciting has been happening on this chart despite the action of the past week. We are still heading towards that next long term target of $560 and then on to $600. Nothing on the chart even gives us a hint of anything other than that. So we know the trend and target from the P&F chart but we need to know a little more, such as the strength of the trend. For that we go to the bar (or candlestick) chart.

Looking at a 30 Week RSI as my long term price momentum indicator (shown is the 40 week RSI to go along with the use of the popular 40 WMA line) I see a continuing negative divergence versus price activity. This is not good for the long term as weakening momentum has a nasty habit of reversing the price trend. However, such reversal does not happen instantaneously as we see since the divergence has been going on for a couple of years now. However, the divergence must end to provide greater trust in the upwards trend of the price. The volume indicator (I use the On-Balance Volume) has been on an accelerated upward trend for some time now confirming the price move. As for the price moving averages, my 30 WMAw and the popular 40 WMA, they are positive and far away from the price action. There is nothing here that will change anytime soon.

On the long term there is only one prognosis, BULLISH.

Looking at the intermediate term P&F chart I see where the up trend line didn’t help us in early 2005 but it sure saved our butts earlier this month when the price broke below two previous lows. It’s always good to have a confirmation of indicators and not base ones decisions on only one. Thursday’s move broke into new highs. What does that do for our trend and projections? Well, the trend remains bullish, no change there. As for move projection, we had projections of $515 and $545 on the previous break-outs at the $445 and $455 levels. The latest consolidation pattern and break-out gives us a projection to $530, right in the middle of those previous two projections. The intermediate term seems to be solidifying and telling us that the mid point of the previous projections is the level to watch. That would get us above the previous peaks of 1987 and 1982 with only the volatile action of 1980 to overcome and it’s up into no man’s land as far as prices are concerned. BUT let’s not overdo it and get too far ahead of ourselves. Suffice it to say that the next levels to watch are the $515/$545 area.

As for the usual suspects, the price is far above its intermediate term moving average line (no surprise here) and price momentum is positive, also no surprise. Unfortunately, the momentum is still underperforming versus the price action and needs to strengthen or else the rally may reverse. Volume is back on the positive side after a short period in the negative.

On the intermediate term I can do nothing but go back into the BULLISH side.

NORTH AMERICAN GOLD INDICES

It was a good week for the major gold indices with all gaining anywhere from 3% to about 4.5% on the week. The full gains were made on the Wednesday and Thursday action. Prior to that they were not doing much. One would have expected some “lead-in” to the moves but not a hint. This makes me a little suspicious of the moves but not to put too much emphasis on the event. This week it’s the turn of the S&P/TSX Capped Gold Index to be looked at. As with most Indices and with gold, this week I go back and see how this Index has performed over the years. Unfortunately, this Index was created in 2001 so I do not have as much historical data as I would have liked.

S&P/TSX CAPPED GOLD INDEX

Although the Index only starts in 2001 it does encompass the bull market in gold, except for the first few months. One thing is very evident here and that is the effect of component stock weighting towards the Index calculation. Although there were some great winners in the Index they had very little effect on the Index value calculation. Stocks such as Barrick Gold and Placer Dome had such a large weighting towards the Index calculation that they overshadowed all other stock effects. AND their performances were pathetic, comparatively speaking. If one reads my comments long enough one might get the impression that I have little regard for the weighting method of calculating Indices. They would be right. Why go through the charade of including 15 or 20 stocks in an Index if only the largest 3 or 4 have any real effect on the Index calculation. Giving each stock an equal effect on the Index calculation is not perfect as it gives the smaller stocks greater impact but still I think it is the superior method as far as understanding what a group of stocks are doing.

The S&P/TSX Capped Gold Index gained on the week but was the weakest gainer of the major Indices. While most moved into new high territory this Index still has a ways to go. It didn’t even exceed its high of a few weeks back. All indicators are positive, however, suggesting that maybe the trend will continue and new highs will be seen shortly. However, looking at this chart one asks “why invest in gold stocks with this kind of poor performance?”. One needs to look elsewhere to know the answer to that question.

MERV’S PRECIOUS METALS INDICES

For charts of these Indices go to the individual Index pages of the subscriber’s section to Merv’s Precious Metals Central. Only the Merv’s Spec-Gold Index is shown this week. Although the various Merv’s Indices had a good week they did not break into new highs as most of the major Indices did. There is still more on the up side to go before they do that. However, looking at their performances over the past few years one gets the idea that a significant upside move may not be far away. They all show the bull move from around 2001 to 2004. All have been consolidating their gains over the past couple of years within lateral or slightly negative channels (except for the Gamb-Gold Index). The one thing that bothers me looking at these Indices is that, using the Qual and Spec Gold Indices as examples, they had about a three year lateral consolidation before starting their bull markets. I hope that does not mean we still have another year of lateral moves before the next bull phase gets going. But once it gets going one can anticipate great moves ahead. I have shown the Index values at major junctions in their trends on the various Merv’s Indices charts for a quickie idea of the magnitude of the various moves, bull and bear.

MERV’S GOLD & SILVER 160 INDEX

I have been tracking a group of 160 precious metal stocks for the past 12 years so this Index has a fairly decent background of performance. Of course, the component stocks changed during that time as some stocks were deleted and others added but the total of 160 has been consistent. One cannot get a better reflection of what is happening to the total sector than one gets from this Index. As can be expected with such a large Index, the large quantity of smaller stocks has a huge impact on the Index performance, up or down. That is why I had also developed individual Indices to get a better feel for the performances of a more dedicated group of stocks (such as the quality and secondary).

Just an interesting point from this Index, we do not see the “double bottom” in 1999 and 2001 that we see in gold or other Indices. In fact, this Index shows that the bull market in the overall sector started even earlier, in 1998, and did not let up until it stalled in Jan of last year. When gold and the other Indices were STARTING their bull moves the full sector was already up almost 200%. It has been in a lateral “box” ever since 2004. The longer it is consolidating in this “box” the greater will be the next bull (or heaven forbid, bear). Despite the euphoria of the past few days this Index is still very much in the consolidation phase but we should be preparing for the possibility of a break above the “box”.

MERV’S QUAL-GOLD INDEX

I have been tracking gold stocks for a considerably longer period of time than the development of the 160 Index. My original gold index was a simulation of the various major Indices and goes back to early 1980. This became my Qual-Gold Index. On a normal chart the period from 1980 to 1993 looks like a period of little action but when converted to a semi-log scale it shows a few periods of great action. My chart in the Index page starts in 1993 to show both bull and bear periods of action. We see a 70% bear in 1996 through 1998 and a 400% bull from 2000 to 2004. Of note is that we are less that 50% above the 1996 high. This is not such a great performance for stocks.

This Index is the only one of the Merv’s Indices that has broken above its channel or upper resistance line. It is even into new all time high territory. If it can stay in this territory for another week or two to verify the validity of the move we can then shout Halleluiah, the bull is back. That should then get the juices flowing and get the whole sector in phase.

MERV’S SPEC-GOLD INDEX (see chart)

A couple of years after the development of the 160 Index I realized that there was more to the gold sector than quality and everything else. There were a large chunk of stocks that were in business for quite some time but did not fit the bill as quality and not as part of everything else. Most investors were interested in performance but were not into outright gambling. From this was developed an Index of secondary precious metal stocks, those that were “training” to become the next quality. In 1995 I developed the Spec-Gold Index to represent this second tier of stocks. These are in general, the next largest companies in terms of market capitalization after the Qual-Gold group. We see here a mix in performance between that of the Qual stocks and the overall 160 group. We have the lateral consolidation of the Qual in 1998 through 2001 and the 160 in the past two years. We also have the performance of the 160 when moves start. This is therefore a group to watch when trends get going.

One interesting point about the latest action in this Index. One can see the steady weakening in the price momentum indicator. However, it seems to be on the verge of breaking its down trend line and possibly getting back into a strengthening mode. Something to watch.

MERV’S GAMB-GOLD INDEX

The Gamb-Gold Index was the last of the “gold” Indices that I had developed (up until the development of the recent silver indices). After the development of the Spec-Gold Index there still seemed to be something missing. Although the overall 160 Index had a huge list of exploration, and hoped to be exploration, stocks included it was just too massive. There was a large audience interested in a little bit of gambling but were at the mercy of cons and promoters. The result was the development of the Gamb-Gold Index. Here I include some of the more risky small companies from the overall 160 Index. The attempt is to pick those stocks that just might have a chance of becoming the next 10 or 20 “baggers” (where the term 10 bagger comes from is a mystery to me but it sounds good). But in the process one also gets those that drop like a rock into never-never land. Although the performance of the Index seems similar to that of the Spec-Gold Index you are more likely to find the 10, 20 and 30 baggers here but the Index performance is tempered by the fact that you are also more likely to get the losers here. The performance of this Index over the past couple of years has differed from that of the other major or Merv’s Indices in that it is in more of a positive mode with a well defined up trend line in tact.

Well, that’s it for this week. I didn’t intend the Merv’s Indices analysis to be a background on the various Indices but that’s the way it turned out. When I start these commentaries I never know where I will end up.

FUTURES COMMENTARY

METALS

Gold: Strong surge into new highs but it lasted only 2 days. Momentum and volume action still positive so maybe the surge will continue in the new week.

Silver: Upward surge with gold but seems to have more momentum behind it. Still that previous Dec high of $8.28 to be overcome.

Palladium: The chart looks great. I keep thinking it can’t last forever but it keeps on going higher. Momentum just about to enter the overbought zone so maybe a rest period is not far away.

Platinum: Price moves higher but volume action is just not there. Longevity of this move is suspect.

Copper: Rumors abound but there is no doubt about the trend, it’s all up, up and away. Momentum positive but still some distance from the overbought zone. How much longer can the trend last?

ENERGY

West Texas Light Sweet Crude: The down trend seems unstoppable but there is some indication that a rest from this plunge is about to take hold. A rest, not a reversal. The P&F chart suggests that the eventual projected move could go all the way to $46.

Natural Gas: The rally seems over and it’s back to the down side. Let’s see if the $11 support will hold.

Heating Oil: Heating oil seems to be taking a rest and moving laterally. Next move may be a little rally but don’t count on it.

Unleaded Gas: Seems to be taking a rest in the $150 area but better support at $140. No sign of any recovery.

CURRENCY

Australian Dollar: Finding support at the $0.725 level but no hint of a rally yet.

British Pound: Broke through $1.72 support but has not plunged. Momentum not as weak as price so maybe a rest or rally not too far away.

Canadian Dollar: Volume action negative. Momentum just sitting on top of its neutral line. Price seems to be stabilizing. Much depends upon the trend in oil.

European Euro: Stabilizing after a short drop below support. Are we seeing currencies starting to gain some strength or is it the U.S. dollar losing some strength?

Japanese Yen: Well, the Yen sure is not stabilizing. It continues to head into the dumpster. It is in the middle of a heavy support zone from the 2003/2004 activity and should take a rest soon.

Mexican Peso: Has rallied almost back to its previous highs but it looks like the rally is starting to lose steam. No reversal yet but it could come soon.

Swiss Franc: Continues to move slowly lower after breaking support. P&F chart suggests the move could go all the way to $0.645.

U.S. Dollar Index: Everything is still looking good but there is the first hint of a topping process. Let’s see what happens over the next few days.

INDICES

It should be noted that the comments in this section are based upon the actions of the Indices futures market and not upon the actions of the respective Indices themselves.

Dow Jones Industrial Average: Into new 7 month highs but volume action very weak and new highs may not last.

Nikkei 225 Index: Friday may have been an exhaustion gap and the end to a great rally but never bet against an established trend until the reversal has occurred.

NASDAQ 100 Index: NASDAQ continues to move higher after breaking into new rally high ground.. Is that a one day reversal action I see on Friday? Monday may be a bummer.

Russell 2000 Index: Continues to rally but still some distance from previous highs.

S&P 500 Composite Index: Finally made it above the previous Aug highs but low volume continues to hamper confidence in the move.

FINANCIALS

Eurodollar: Rate of downward move slowing down but still moving lower. Could halt shortly and maybe even rally but don’t count on it.

Federal Funds 30-Day: Still hanging in there at the $96 level, give or take a few pennies.

Treasury Notes 2-Year: Rally stalled at the intermediate term moving average line. May continue rally during the week.

Treasury Notes 5-Year: Same comment as for 2-Year.

Treasury Notes 10-Year: Short rally halted but momentum suggests that it might start up again.

Treasury Bonds 30-Year: Rally halted, momentum still in the negative zone but improving and volume action starting to perk up. Let’s see what the new week holds.

Merv Burak, CMT
Hudson Aero/Systems Inc.
Technical Information Group for Merv’s Precious Metals Central www.themarkettraders.com

[email protected]

During the day Merv practices his engineering profession as a Consulting Aerospace Engineer. Once the sun goes down and night descends upon the earth Merv dons his other hat as a Chartered Market Technician (CMT) and tries to decipher what’s going on in the securities markets. As an underground surveyor in the gold mines of Canada’s Northwest Territories in his youth, Merv has a soft spot for the gold industry and has developed several Gold Indices reflecting different aspects of the industry. As a basically lazy individual Merv’s driving focus is to KEEP IT SIMPLE.

To find out more about Merv’s various Gold Indices and component stocks, please visit Merv’s Precious Metals Central. There you will find samples of the Indices plus other publications of interest to precious metals investors.



NEWS YOU CAN USE…

International Barytex Resources Ltd. (IBX) is a Canadian mineral exploration company managed by capable professionals with successful track records and many years of experience in the mineral exploration and development industry. The management of IBX is focused on the identification and exploration of economically attractive metallic mineral deposits. Learn more.