Precious Metals Charts II

As I contemplate the markets on this early Tuesday morning, it all seems so surreal. We have discussed many different aspects of the Precious Metals Sector in the first seven parts of this series, but we truly live in historic times. We have discussed how the Federal Reserve and Friends are trying to address the current massive deflationary backdrop with the use of US Dollar inflation and easy rates, but it appears that the Fed has taken things a step forward to a new level. We have already noted how the Fed has been printing massive amounts of US Dollars, keeping interest rates artificially low, and likely monetizing debt; but over the weekend it appears that they now have elected to monetize the debts of key market participants that might fail, taking whole sectors along with them. The Fed’s recent deal to offer $30 billion Dollars to accommodate the bad paper of Bear Sterns for the J. P. Morgan takeover shows just how far the Fed is willing to go in these interesting times. So in the end, where does that $30 billion come from? Well, as Mr. Bernanke said some time, ago, “The Fed has something called a printing press”, you know?

We have discussed how the Fed is using the printing of large numbers of US Dollars, called US Dollar inflation, as the main weapon against the massive deflationary backdrop. The US Dollar inflation will create price inflation which first shows up in the rising prices of the commodities like the base metals and the agricultural sector, before those cost rises move up the chain of finished goods as much higher price inflation to the consumer. We have shown this effect in charts earlier in the series. We have also discussed how the value of the US Dollar drops as Dollars are printed, and the supply of US Dollars increase. The falling value of the Dollar even affects the charts that we see such as the chart of the Dow since the Dow is denominated in the US Dollar. We have shown how a falling Dollar can make a crash on a chart of the Dow look pretty tame. Below, we again show a chart of the Dow over a long period of time. We see that in the 1929 period, the Dow crashed about 90% from its highs. In this time period the Dollar was pretty strong because it was backed by Gold. The Gold backing prevented the Fed from printing Dollars at will because they could only print Dollars to the extent of Gold they owned to back it. Thus, the crash of the Dow occurred during a time of a “strong and pretty constant-valued Dollar.” During the 1970’s, the Dollar was not backed by Gold so the Fed could (and did) print all of the US Dollars they wanted to, thus causing the supply of the Dollar to rise while the value of the Dollar dropped fairly dramatically. During the 1970’s, the Dow moved through a series of highs and lows while it basically oscillated sideways, instead of “crashing on the chart.” In the 1970’s the Dow only fell about 40% at its lowest point from its high. Chart, below……….

We can see the real effect of US Dollar inflation in the 1970’s on the Dow chart in the next chart that shows a long-term chart of the Dow divided by Gold. In terms of Gold which acts as Real Money in times of financial turmoil by staying constant in value to protect your savings, the Dow crashed in the 1970’s just like it did in the 1929 period. In fact, the Dow as measured by Real Money Gold actually crashed worse in the 1970’s than in did in the 1929 crash, against Gold. This is a very important concept to understand since we are in a period of US Dollar inflation much like the 1970’s at this time. Thus, we might see the Dow only fall about 40% from its ultimate top on a chart of the Dow, but still crash in value against Gold as it did in the 1970’s. If that were to happen, the Dow and Gold might revert back to about a 1:1 ratio somewhere around 40% off the Dow’s 2007 highs. That could be to around a level of 8,000 to 8,400. If that were to happen, we would expect that $Gold might hit a high of around $8,000 in the coming years. Please remember that Gold stays at a relatively constant value, but is divided by the local currency like the US Dollar. Thus, as the Dollar drops $Gold rises at a logarithmic rate.

Next up is the US Dollar chart I have been showing all along. This chart was created back in early 2007, but the first time I showed it in this editorial series was back on Feb. 26th. At that time the Dollar was sitting at around 74.46, just below the top black angled line. It might have looked like there was little chance for the Dollar to drop straight down to the area where the blue line and the middle black line meet, but that is exactly what it has done over the last few weeks. As I stated a few days, ago, the Dollar appears to be short-term oversold, but in a Bear Market things can get oversold and stay oversold. This is especially true during a time when the Fed is monetizing everything in sight to protect the markets from crashing. On top of that, it is expected that the Fed will further cut interest rates later today. We suspect that the US Dollar Index might fall all the way to around 63, later this year.

This chart of Gold simply shows that $Gold continues to run up the directional line that we had shown some weeks back toward $1,130. We expect $Gold to spike up toward $1,250 at some time over the next few months, in fact, we have stated that $Gold might spike all the way up to over $1,400 over the coming months. In order to show that higher target that corresponds to a Gann number, we would need to show a longer-term chart. For now, we will stick with this version. Notice at the bottom of this chart that the HUI shows similar characteristics to the Gold chart, but has not moved more vertically, yet. We expect that to change in the very near future.

We have been showing you a chart of Silver that I call the Silver Momentum Fractal that contains a directional line that we expect Silver to follow up to $26 to $27 in the May to June time-frame. Yet, there is a higher potential target for Silver in the coming months if we move to a longer-term chart. The below chart suggests that $30 to $33 might be a valid target for Silver in the coming time-frame. That does not mean that Silver might not spike a bit higher if the environment is right. This chart was originally created back in 2006 by another chartist who artistically presented the blue cup on the chart. I am not sure who the original chartist was, but I think that it might have been Salscandle or Mr.Bug. The chart was already set-up in a time-frame conducive to looking for a potentially higher Silver target in this coming time-frame so I hope that the original chartist does not mind me using it to show this relationship. The original blue cup had a top that angled down from left to right. My new potential target black cup has a black top that angles upward from left to right. The black angled lines are confirmed by multiple previous highs including the latest short-term top at around $21.71. The new black-topped cup shows a potential Silver target up to around $30 to $33 over the coming months. Notice how each previous momentum run in Silver has been increasingly longer on this log chart as time has passed. My Silver Momentum Fractal Chart shows a directional line that is the same length as the last run. We may see the expanding price tops continue as shown on this chart.

It certainly seems that the fundamentals for the PM stocks have far outrun the price of the PM stocks at this time. I think the reason for this is very simple. Investors are extremely afraid that the Dow is going to crash in this environment, creating a situation where the PM stocks are aggressively sold off along with the Dow stocks. It appears that the Federal Reserve is going to extreme measures to provide massive amounts of liquidity to protect against a crash of the Dow, even trading T-Bills for rancid toxic “sub-prime loans” that have no market value at this time. Besides the possibility of the Fed cutting rates, later today, there is an Armstrong turn date that comes due over the next few days that also might help to support the Dow. If investors are coming upon a change in psychology that will stabilize the Dow stocks, we could see a rather explosive move upwards in the PM stocks. The shorter-term chart of the HUI shows that its price is still flirting with an angled resistance line where there is nothing but air, above. A firm break above that angled line could fairly quickly see the HUI run up to around 640.

Gold in Rand has rapidly risen to our first target on the chart to 8669. Will the gap be a break away gap, or will it be some kind of short-term top? We will have to wait to see, but I suspect that if $Gold is going much higher, then Gold in Rand will be running much higher, also. Gold in Rand has already run up 65% higher than the its average in the 4th quarter of 2007, though the South African Gold miners have not faired well in terms of the price of their stocks. At the top of the chart is a smaller chart of GFI as an example of an SA Gold miner. GFI has announced that the power company has allotted them increased electrical power above the original expected 90% to run their mines. If the psychology of investors turns in the near future, I think the price advances of the SA Gold stocks could be rather dramatic. By the way, this is not the first time that Gold in Rand has run much higher ahead of a sharp advance in the stocks of the SA Golds. You can see on the chart that the same relationship played out during the time period I have been calling the “1st fractal.” Will the fractal relationships repeat? We’ll just have to wait to find out.

It is getting very late, but I thought I would include a few PM stock charts to show some chart potentials. We covered some of the large cap HUI components in a previous editorial so I thought we might move down the line to some smaller mining companies, today. If we see a change in psychology toward the PM stocks with the prices of Gold and Silver at these higher levels, we would expect the smaller PM stocks to potentially rise by the highest percentages. Please note- these charts with target potentials are only that- potentials on a chart. It is certainly possible that the PM stocks do not rise if the general stocks fall sharply, and even if they do rise, a particular PM stock might not rise, or might rise a good deal less than the chart potential. Do not view any chart potentials that we show as advice to buy based on the chart. Anytime you make an investment decision, you need to due your own due diligence by studying the fundamentals of the company, and you should always seek the advice of your investment advisor- which we are not in any way, shape, or form.

The first chart is a rather nice chart originally created by Mr. A. Holbroke. I have customized it a bit by adding what I consider to be angled resistance lines on the chart. We can see that the MACD appears to have already broken out to new highs. Price appears to be trying to break above the black angled resistance line on its third try at around 56, with a gap in angled resistance, above, up to about 87. The black angled resistance line I have shown at 87 might be a lesser resistance line, but I’d have to go to a longer chart to see.

EGO (ELD.TO) appears to be trying to break through the light blue angled line resistance as well as the fib line. Above the angled resistance line, there appears to be a big gap in resistance up to around Canadian $18.76 at the green circle. The RSI, OBV, and MACD have broken to new highs, supported by a recently rising ADX line.

I apologize because my lower black channel line on the chart has “drifted” upward as lines on a chart sometimes do. ECU is a smaller Silver stock that has a history of rapid price advances as seen on the chart. The TA indicators look constructive to me. If ECU breaks out to the upside, the upside potential could be as high as $24. This is a smaller stock so do not forget that it is more speculative. I do like the small Silver stocks, here.

Unfortunately, it is getting very late, or very early, depending on how you look at it; so I’ll have to stop for now. I will try to return with some more individual PM stock charts that I follow later in the week, though. 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 281 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/