Tuesday, January 01, 2008

Precious Metals Update

The holiday season has so far been a kind one to PM investors. Gold finally emerged from a consolidation triangle and seems well on its way to $1000/oz. As disclosed earlier, I had turned rabidly bullish in September. During the 6-wk correction that started in November, I bought call options on every significant dip. While some partial profits were taken on bounces, there are still a number of GDX and PAAS calls in my trading account at Zecco.

Readers know that I frequently use charts to determine entry and exit points. It’s something I’ve been doing without proper justification. Although there are plenty of academic research saying that technical analysis does not work, I’ve always thought that since there are plenty people out there believing in it, it has at least become a self-fulfilling prophecy. That’s a pretty good argument in break-out situations; however, in corrective pullbacks, a large number of technical traders can invalidate seemingly clear support levels. Case in point, the consolidation from May 2006 (wave 2) ran longer than expected and didn’t end until a long sideway channel was violated in mid August. The sharp drop and snap back was in fact the start of wave 3. [I’m labeling the waves here the same way as Martin Goldberg, which I think is the most “obvious” designation.] On this most recent pull back, first a triple bottom around 396 was violated, then a quick penetration below the range of wave iv as well as the 50% retracement level. Plenty of “weak hands” were taken out at these levels which paved the way for a new advance. The above shouldn’t be taken as an indictment against technical analysis. Rather the point is that its message should be interpreted with care. Indeed this recent behavior has been great for dip-buyers since it was clear where the major stop loss orders were.

Now I’m going to look at where this HUI rally may take us. It’s an about face because I’ll resort to trend lines/Fibonacci levels which I said may be giving misguiding signals just a second ago! Hey, did I mention this is guess work anyway?! Fact is, there is no other way to forecast time and price on this scale. So here it is: HUI = 580 by May and 760 by year end. The timing of the May peak is interesting in that significant peaks or troughs of the HUI tend to be made in that month (Peaks in May ‘01, May ‘02, May ‘06, troughs in March ‘03, May ‘04, May ‘05, nothing special in ‘07), although I believe we’ll be ultimately much higher by year end.

There is usually a great dispersion in upward price forecasts so I’m not worried about traders front-running these targets. Nonetheless, I’ll be very surprised (and proud) if the actual trajectory is anywhere close to what’s outlined here. I’ll settle for just getting the direction right.

Best luck in the New Year.