Gold N’ Silver Easter Eggs

In some ways life never seems to change. When you are 5 years-old you run around the back yard looking for Easter Eggs on Easter Sunday morning. You find an egg, open it up, and get excited by what is inside- then you ramble after another. You never know for sure what the next Easter egg might contain, whether it will be something that excites you about the same, or whether it will be something that excites you more. The main reason is that the goodies you find are all relative to each other. At 5 years-old you find a dime and you think you are rich, until you find a quarter and it changes your reference points. Heck, at 5 years-old you might find a nickel after you find the dime and be just as elated as if you had found the quarter, since the nickel is bigger than the dime. If you found a dime minted before 1964 you might not get more excited since it is just a dime, right? In fact, your smarter older sister might tempt you to trade that Silver dime for one of her new shiny quarters. At five years of age many of the reference points that you come to understand as an adult simply do not exist.

Investing is much the same as our five year-old Easter egg hunt at times. Many times an investor simply does not know how important an event is until sometime, later. He also might not know whether the move was really “positive” or “negative” in the longer-term scheme of things. A very short-term trader might live and die with short, sharp moves like we saw in paper gold and silver last week, but to an intermediate-term PM investor, a long-term PM investor, or someone who only invests in physical Gold and Silver- such a move might be nothing more than a blip on a chart. That just emphasizes how important it is for each investor to understand and be committed to his own style and time-frames for investing. Do not get distracted by others. Just stick to your game plan, and be happy for others’ successes.

I am simply suggesting that each investor needs to know who he is, what his investment objectives are, what his investment time-frames are, and what his goals are. For instance, an investor in physical Gold and Silver is primarily committed to protecting his wealth. If he looks at the paper price of gold and silver after a sharp reaction he might get a bit dejected, yet there have been large numbers of comments across the net this weekend that suggest that the availability of physical Gold and Silver for purchase is almost nonexistent. If true, the physical Gold and Silver investor for wealth protection should be quite content that “he has his in hand.” The intermediate-term and long-term investor in the Precious Metals stocks and the physical Precious Metals only need ask themselves two questions at this time. Have the fundamentals for Gold, Silver, or the Precious Metals stocks changed? If so, how have they changed?

We have spent several weeks discussing our take on the fundamentals of the PM markets, especially in reference to the other markets that might affect the fundamentals of the PM sector. I will list all eight of the previous articles, below, so you can skim through them to make your own mind up in terms of where the fundamentals for the Precious Metals Sector lie in the grand scheme of things. Personally, I think the fundamentals for the PM Sector just became a lot stronger than I would have imagined. We’ll get to those thoughts in just a minute.

Real Money Gold Versus paper gold

. In our previous editorials we have tried to distinguish between physical Gold and Silver that are considered Real Money in times of economic turmoil versus paper gold- really a paper derivative of Real Money Gold that is traded in the futures markets. Real Money Gold and Silver only exist in finite amounts on earth. The total of all Gold ever mined is said to only be about the size of a tennis court in three dimensions. Thus, the supply of Real Money physical Gold on earth is very limited. In contrast, the derivative paper futures that we see as our “Gold market” are merely paper derivative contracts that can be printed to infinity. So, many investors watched the large drop in paper gold on their computer screens last week, before running out to buy Real Money Gold and Silver at these lower prices, only to be shocked. It has been reported that the supplies of physical Silver to be purchased appear to be pretty well nonexistent at these prices. It also appears that the levels of physical Gold to be purchased are in short supply. This is one reason I have elected to distinguish between the two in previous writings. Expect that situation to get much worse as this Historic Gold and Silver Bull continues to play out over the coming years. You can only protect your wealth by owning physical Gold and Silver that may not be available for you to purchase as we move along. The ownership of paper gold and silver is a mirage dependent upon counterparty risk and the potential for changes in the rules when things get tough.

We have noted in great detail the massive deflationary backdrop that the economic world opposes as the result of massive debt built-up over the previous decades. To make matters worse, the financial world delved into the world of leverage by the use of derivative products to extend the economic expansion out in time. Now, all of those derivative products are collapsing in real time. To a large extent those derivative problems have been lumped under the term “sub-prime loans” which simply implies the problems are the result of mortgage loans gone bad, but that is only the tip of the derivative nightmare. Still, we see financial corporations taking huge write downs due to this derivative exposure- write downs that destroy the core of their assets as an ongoing concern. As this drama unfolds investors start to sell-off stocks creating the waterfall declines in the general stock indices like the Dow. We had been expecting such a decline due to the fractal cycles, and we expect the bottom of the current deflation scare to come in during the 4th quarter of this year, or as late as early 2009. As these momentum declines occur in the general stock indices large traders sell the stock market futures while simultaneously buying the paper gold futures. That appears to be what we have seen in the charts of paper gold as a sharp rise. Investors are afraid to buy the Precious Metals stocks in such a downside momentum market for the general equities because of the risk of panic creating a real deflationary event where everything is sold off- taking the PM stocks with it. As you can see in a chart of the Precious Metals stocks as viewed in the HUI Index- no such waterfall decline occurred along with the general stock momentum decline. The HUI moved to new highs and sits above resistance.

In our last editorial we showed the LT chart of the USD hitting our short-term target rail, but noted that things can stay oversold in the environment of downside momentum moves of the general stock markets. We would thus expect the US Dollar to hit resistance at the moving average lines and to continue down over the intermediate-term. In the short run we’d expect the US Dollar Index to be turned back around the 20 week EMA to potentially find a double bottom. On 3-14-08 we posted a chart of the BKX (the Bank Index) on a couple of sites suggesting that a short-term bottom was coming in for the general markets due to non-confirmations in many of the technical indicators. We illustrated that by writing “bottom” all over the chart. Charts, below………

During this latest deflationary scare downside run in the general stock markets, Bear Stearns went up in smoke over derivative issues called “sub-prime.” Bear Stearns was an investment bank that was considered to be crucial to the underpinnings of the economy so the Fed stepped in to do a deal with J. P. Morgan if JPM would take BSG over through a merger. Certain historic moves by the Federal Reserve in this time period should be considered eye-opening to investors. Along the way, the Federal Reserve created a facility for the investment banks to use where an investment bank could borrow Treasuries from the Fed using some derivatives that appear to have little market value as collateral. The investment banks can then use those Treasury instruments as collateral to shore up their asset bases to prevent them from going under. In doing so, the Fed basically said, “My Treasury instruments are yours to use for collateral.” Thus, the Fed stepped up to the plate to backstop the investment banks from the derivative risk that they carry on their books. This might be a rather simplistic way to describe what happened, but I think it will serve our purpose.

Remember that a Central Bank cannot really go bankrupt. A Central Bank simply prints more money to cover any needs that it has- sending the value of the US Dollar lower in value. Such a move by the Fed simply told the markets that “No investment bank will go under with us backstopping them.” That historic move created an environment for a short-term bottom in the general stock indices that sent traders covering their stock market shorts and also covering their paper gold and silver longs. There also have been reports that the closing of certain paper market positions held by Bear Sterns helped caused the same type of reversals, but I suspect the overriding cause was what the Federal Reserve actions dictated. So, during a period when the PM stock investors were scared that their PM stock holdings might fall if the general markets melted down, the Fed made an historic move that caused a bottom in the general stock markets while the paper gold market reacted sharply to the downside. Just how might all of this affect the PM stocks and Precious Metals going forward?

With all of the above going on the investor in physical Gold and Silver has been very happy, up until the point where the paper gold and silver markets suffered a sharp decline last week. Those same physical Gold and Silver investors now find ambivalence as they run about trying to buy more physical Gold and Silver on the drop, but cannot find many sources to purchase from at these lower levels. The PM stock investors are feeling more of the “Blues” since the PM stocks in general did not rise a lot during the paper gold and silver rise as they worried about a general stock market panic taking the PM stocks lower. Now that the panic in the general stocks markets appears to have dissipated, the PM stock investors find the PM stocks falling with the paper gold and silver reaction to the downside. So is there no hope?

Well, imagine yourself back at five years-old, again, in the midst of the Easter Egg Hunt. You run and grab an egg, open it, and find a dull-looking dime, inside. The other older children come up with bright shiny quarters. Your “ugly” dime looks so small and so ugly compared to those quarters, but maybe the fundamentals are not what they seem- at least that is true if that is a “Silver” dime you hold in your hand.

Reactions take place in markets all of the time, but we need to step back to examine the fundamentals to decide what is true and what is not true in the end. Once we do such an examination in regards to the events of the last few weeks, I see nothing but very strong fundamentals for the Precious Metals and the Precious Metals Stocks. The deflationary panic scare was averted when the Federal Reserve stepped in to backstop the investment banks. What the Fed was really saying is that they would continue to print US Dollars to no end in an attempt to avert a deflationary collapse. In fact, the Fed went to historic means in making that assertion. They are being very accommodative in terms of interest rates by dropping them below the level of inflation. They are printing US Dollars to assure the markets that plenty of liquidity will be available. And finally, they are now willing to openly monetize debt, even private debt, to prevent a deflationary failure. For the PM sector, both Real Money Gold and Silver along with the PM Stocks, the fundamentals just don’t get any better than that. As soon as things settle down a bit, we should see investors move in line with the fundamentals to flock to physical Gold, physical Silver, and the Precious Metals stocks due to the underlying fundamentals at hand. I expect to see “Silver dimes for five year-olds” in terms of a shift in investor psychology as some segment of general stock investors realize that the US Dollar will continue to fall in value over the long haul. As Dollar inflation continues to filter through to price inflation we should see an increase in the number of investors seeking safety for their savings in the PM sector.

In terms of the chart, this is not the first time that we have seen Gold and Silver rise dramatically then fall back while the PM stocks patiently showed strength at new highs, only to rally smartly when things settled down. In fact, in 2005 my expected trading model for the HUI index showed the potential for the HUI to run up toward 400. In late 2005 Gold ran up to hit my next expected upside target while the HUI sat around new highs. Many suggested that the sharp run and retrace by Gold would usher in a “double top” for the HUI that would send it dramatically lower. But after a short period of consolidation, the HUI took off much higher due to the strong fundamentals at hand. I have suggested over the last couple of weeks that the best thing for the PM stocks at this time would be if we had a high level consolidation by Gold and Silver, and that is what I expect to see play out. In fact, I would not be surprised to see the PM stocks take the lead over the next few weeks on the upside, and still expect the PM explorers to make a big move before this run is over. I am still not sure if this run will extend out into August or September, but we will see how the markets play out. The recent moves by the Fed have squashed the fear of a deflationary panic at this time.

Below is a chart of $Gold with the HUI plotted in blue behind it. I have created an orange column to mark the area where Gold and Silver moved sharply higher, then retraced back in late 2005 while the HUI marked time around new highs. The situation resolved with the HUI moving much higher along with Gold and Silver due to the very strong fundamentals of the PM sector at the time. I expect something similar to occur at this juncture. There are Gold and Silver expirations coming due the 26th or 27th of March. I would not be surprised to see the PM stocks start to outperform going into that period, or very early in April. On the chart you can see the shaded orange area back in late 2005 where Gold and Silver spiked higher. I have placed an angled solid black line to show where Gold found support above the “last” area of consolidation on the chart. I have placed two dotted angled black lines to show the area of similar support in the Gold chart in the current time-frame. You can compare the relationship of the HUI to the Gold move in the 2005 time-frame to today.

One reader asked me if this was the intermediate-term drop that I expected to culminate in the deflation scare bottom for this time period- a drop that would likely see an extended correction in terms of time. Anything is possible in these markets, but I do not think this is it. In terms of the 1970’s market the symmetry of the chart does not look complete on the upside, and the similar movements in the USD and the Dow on the charts do not look like they have fulfilled their structures. In fact, I have mentioned before that many of the smaller exploration stocks charts seemed to be lagging, but this consolidation in Gold and Silver might well put them back on track.

I would again like to thank readers for the many kind comments that I have received. We will be moving our work to a subscription site over the next few weeks. 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 the link to the Gold-Eagle Forum where many of us discuss the various topics of the Precious Metals sector………..

https://www.gold-eagle.com/cgi-bin/gn/get/forum.html.

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 282 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.

http://preciousmetalswarrants.com/

Another very good site that is dedicated to investments in Silver belongs to David Morgan, and his site can be found here……………. http://www.silver-investor.com/