Goldrunner……But I Won't Do That

Robert Johnson- CROSSROADS

http://youtube.com/watch?v=Yd60nI4sa9A

Clapton and Mayer- CROSSROADS

http://youtube.com/watch?v=Zh4n1bZi4d8&feature=related

When I read the various Precious Metals chat boards and forums with an eye toward the fundamentals of the Precious Metals Sector, I am reminded of a few songs in the area of Country and the area of the Blues that I sometimes enjoy. I have placed links to the songs, above, so you can get a feel for the emotions involved. Currently, it seems that most PM stock investors are worried about so many things, especially the possibility of a deflationary slide in the general stock market that will take the PM stocks down with it. Is that a rational notion, or is it just the wall of worry that Bull Markets frequently ride? Let’s take a walk you through many of the various fundamental and technical considerations so you can hopefully make your own investment decisions with some level of confidence based on the fundamentals at hand.

“Maybe, It’s………..”

Garth Brooks

http://youtube.com/watch?v=BXLUY3gUDCg

Making investing decisions is never easy, and we will usually find something to worry about. Some of our worries might be rational, while others might be more irrational. The bottom line is that we will never know for sure so we can only try to remove our emotions from our decision making process and work hard toward isolating the most important fundamentals. Human emotions tend to swing across the extreme ends of the spectrum, from fear to greed, and then back, again. In between are many different shades of fear and greed. Only the investor can decide his own personal tolerance level of fear or greed. When investing, one might get caught up in fear or greed at the wrong spot since there are no traffic signs on a chart. This does not just happen at extreme tops or extreme bottoms. In my work I only hope to present a broad range of the fundamental factors and the technical chart parameters that you may wish to consider. After that, you need to decide for yourself. A chart potential is only good if price will move in that direction. Whether price will move in that direction is completely based on how investors collectively view the fundamentals of a market at any one point in time, and vote with their investment Dollars.

Below, are links to the parts of this series presented over the last few weeks.

PART I- REVIEW

www.gold-eagle.com/editorials_08/goldrunner021008.html

PART II- SILVER MOMENTUM

www.gold-eagle.com/editorials_08/goldrunner021608.html

PART III- LONG-TERM FRACTAL GOLD

https://www.gold-eagle.com/editorials_08/goldrunner022308.html

PART IV- WHEN INFLATION AND DEFLATION CLASH

https://www.gold-eagle.com/editorials_08/goldrunner022708.html

PART V- HUI FRACTAL POTENTIALS

https://www.gold-eagle.com/editorials_08/goldrunner030308.html

PART VI- PRECIOUS METALS STOCK CHARTS

https://www.gold-eagle.com/editorials_08/goldrunner030408.html

At The Crossroads- The PM Stock Blues

. In the first six parts of this series we have discussed the various facets of the fundamental and technical aspects of the Precious Metals sector. Across the realm of internet sites where PM investors meet there seem to be many happy faces who own mostly physical Gold and Silver, but many unhappy faces who own primarily Precious Metals stocks. This is especially true of those who own the stocks of the PM explorers. Now, those same unhappy investors are getting more worried, it seems. They are afraid that a sharp fall in the general stock markets will take the PM stocks down with them. We know that anything is possible in the markets, but is that fear rational? Let’s take a look at the Bullish case for the PM stocks, and I’ll let you decide.

Before we move to the stocks, let’s review just a couple of concepts that I have tried to convey earlier in this series. The Fed has elected to fight the massive deflationary backdrop with massive US Dollar inflation. US Dollar inflation leads to price inflation. The Fed hopes to neutralize the massive deflationary backdrop through the creation of inflation that might create Stagflation. The “massive backdrop of deflation” is the bad news coming out, everywhere. The early signs of inflation caused by the US Dollar printing are being seen in the rapid rise in Gold, Silver, oil, and all of the commodities like Wheat and Copper. These rapid rises in the basic things that go into every retail product, including the petroleum to transport finished goods, will eventually force prices for consumers much higher. That will be the recognition point of price inflation for most consumers. Coupled with a weak economy, that will result in a condition known as Stagflation. We saw Stagflation in the 70’s, in fact I have shown how the chart of long-term Gold is mimicking the moves of the late 70’s so closely that I have termed them “fractals.” I have also shown how a look at the chart of the Dow gives a distorted picture of what is happening to the buying power of people if they are invested in Dow stocks. The Dow is at about the same level as it was in 2000, but the Dow has crashed in terms of an investor’s “purchasing power” by about 73% against $Gold which is an early inflation indicator. Thus, a Dow investor’s purchasing power has crashed by about 73% since 2000 due to US Dollar inflation, though many do not understand that. As the US Dollar inflation moves through the system to the commodities, then on to finished goods, that 73% buying power crash will affect Dow investor’s lives very directly. Yet, the Fed must continue the acceleration of the US Dollar inflation to fight the massive deflationary backdrop so things should continue to get even worse. The Dow will continue to fall further than the current 73% crash against inflation as the US Dollar supply continues to expand, with a continued fall in the value of the US Dollar.

You see the chart of $Gold go up and down, but the value of Gold really does not change. $Gold is really Gold divided by the US Dollar value like in a (math) fraction. As the currency, the US Dollar, falls or rises in value: the price of Gold in US dollars reacts because Gold is priced in the local currency, the US Dollar. Thus, everything denominated in US Dollars is going down against the constant value of Gold. This includes our Dow, your Bonds, your house, your car- everything you own. For example, if the value of your house has dropped by around 30%, then if Gold as an indicator of future inflation is taken into account, your house has probably really dropped by over 50% in terms of what you could buy with the proceeds versus the value in the year 2000. There are a few caveats to that concept, but it would take too much time to cover the short list of exceptions. The point is that the above relationshop is why investors turn to Gold as Real Money in inflationary times like a period of Stagflation- they are trying to protect the buying power of their hard earned savings, their wealth. In a deflationary period Gold and Silver stocks suffer along with the Dow as investors sell off everything trying to survive financially. But in a period of Stagflation like the 70’s there is no “throw the baby out with the bathwater mentality” so the PM stocks due very well. That is the Crossroad we are currently at in investor’s minds as they are having a very difficult time coming to a conclusion of whether we are in a deflationary period or a period of Stagflation. With the Precious Metals stocks lagging their fundamentals as seen by the sharp rise in Gold and Silver on the charts, if the investor psychology embraces the Stagflation concept the PM stocks should rise rapidly to catch up to their true fundamentals. If the investor psychology votes for deflation, then we should see the PM stocks suffer with the Dow as investors throw everything out the window by selling in an attempt to protect themselves financially. In my opinion we are at a very crucial crossroad in the minds of investors. I believe that the correct read is “Stagflation” since the Fed can print Dollars to infinity as long as they do not care about the value of the US Dollar. That is exactly what I see them doing. Let’s move on to the charts.

Chart 1 shows the Dow Jones Industrial Average from 1900 to the present. To the left circled in blue is the Dow’s deflationary crash in 1929. You can see that once investors started to panic, the sell-off fed on itself till the Dow dropped 90% from its top. In the middle of the chart circled in black is the stagflation period of the 1970s. It looks like a sideways Dow move on the chart, but the truth is that the Dow dropped 40% in that period. To the far right of the chart is the price movement of today. The Dow initially dropped in 2000, but then moved to higher levels into 2007. Even with the real estate bust and all of the negative news that has come out over the last year the Dow has stayed at a pretty high level. We have shown that part of the Dow buoyancy is simply due to the massive USD inflation that keeps the Dow higher in terms of lower valued Dollars. Dow stock investors might not realize that their Dow stock investments are falling in terms of inflation since it is not shown on the chart. Still, the current Dow chart looks much more like the Stagflationary 70’s than the Deflationary 1929 dive. Note this in your mind since it affects our consideration of the outlook for the PM stocks.

CrossChart1-Dow

If you look at a chart of the Dow in the 70’s time-frame, you will see that the Dow moved through a series of higher highs and lower lows much like the current period of Stagflation, today, where the Dow topped in 2000, then dropped sharply before rising to new highs. Now, the Dow is again falling to new lows, in my opinion. This is exactly what I think we should expect since the 70’s was also a time period of a sharply falling US Dollar in terms of its value. We have explained above how a sharply falling Dollar masks the real fall in the Dow in terms of inflation. If you go back to earlier charts in this series, you will find that when the Dow moved to new highs in 2007, it was still way under water against Gold and the commodity indices. That is the “falling US Dollar effect” on the Dow chart. Expectations of inflation are that inflation will soon be eating up your store of value as a Dow Stock investment.

Chart 2, I find rather fascinating. It is the chart of the “yield curve.” The yield curve is the Long Bond rate divided by the short-term 3 month T-Bill rate. When short term interest rates are falling faster than the Long Bond rates, the yield curve rises. When the short-term rates drop below the inflation rate it is inflationary, or good for the PM sector. Most investors use the tainted CPI to view the inflation rate, but all other indicators of inflation show inflation to be much higher than the CPI reveals. What I find fascinating about this chart is that my comments on the chart indicate the chart was produced in early 2007. I have indicated on the chart that it looked like the yield curve was turning up as it did in late 2000. I was using this chart as a coincident indicator for an upturn in the HUI, and you can see that the HUI started the Bull Market when the yield curve turned up at the vertical blue line on the left. I would have expected the same relationship to hold at the right blue line in early 2007, but at that point the HUI moved sideways for about 6 months while the Dow moved higher instead of topping as the earlier fractal had suggested. There are two things to take from this chart. First, you can see that the HUI moved higher from 2001 to 2003 while the yield curve was rising. The yield curve is again rising, but it is rising faster now because the Fed is cutting rates more aggressively in bigger chunks. Theoretically that would suggest that the HUI might move upward more aggressively at this time supported by falling short-term interest rates.

CrossChart2-yeild curve

Chart 3 is a rather simple chart of $Gold. I recently showed a chart of $Gold where price is moving right up our directional line toward $1,130 with an expected further move to around 1250 in the intermediate-term. I have also noted the potential for Gold to spike up to around 1437, a Gann number. Since we are considering the possibility of the PM stocks moving higher while many PM stock investors are singing the Blues, the 3 year moving average of Gold becomes important. We can see that at the last top around $730 the 3 year average price of Gold was at about $450 an ounce. Currently, the 3 year average price of Gold has moved up to around $650 an ounce and is aggressively climbing. Since PM company’s Gold and Silver reserves are valued based on the 3 year average price of Gold, this should be significant to the Precious Metals stocks since the 3 year average has increased about $200 since the last major high. Yet it does not appear that the Precious Metals stocks have seen such an upward revaluation in reserves, yet, especially as seen in the explorers. Price movements of PM stocks are determined by the thoughts and actions of investors, but theoretically investors would bid up the prices of PM stocks based on higher reserve valuations as the 3 year average price of Gold rises. A $200 increase in that average is not small potatoes, yet we see little sign that it has caused a higher valuation for the PM stocks, especially the explorers, YET.. Don’t forget that higher reserve valuations usually take two forms. First, the ounces that qualify as reserves are revalued higher due to the higher price of Gold, but additionally more “inferred resources” of lower grades get moved into the higher valued reserve category.

CrossChart3-Gold

Chart 4 is the chart of the US Dollar. We have shown this chart before, but this chart is crucial since it shows the result of the Fed’s Dollar inflation strategy which is the main driver of the market movements at this time. The value of the US Dollar affects everything we view that is denominated in Dollars. Since the Dow chart is basically the Dow divided by the Dollar, a falling Dollar value makes the Dow “look” higher than its value really is as viewed against a constant like Real Money Gold. The average Dow stock investor does not always understand that so he is less likely to panic and sell Dow stocks when deflationary news crossing the airwaves. He sees the Dow price, but does not see the inflation destroying his wealth. The price of $Gold is basically Gold divided by the Dollar so as the Dollar drops, $Gold rises. The truth is that Gold stays relatively constant in value but its price changes in regard to the underlying local currency. The $HUI is basically the HUI Index divided by the US Dollar so if the value of the Dollar is getting smaller, the HUI rises in response. Additionally, the PM stocks are generally valued higher by investors as $Gold and $Silver rises because producing PM mining companies might see potentially higher earnings, in fact, their earnings are “leveraged” to the rising price of $Gold. We have noted that the PM mining companies and the PM explorer stocks additionally rise in response to a higher $Gold price as the 3 year average price of Gold advances creating a higher value for Gold reserves that are owned in the ground. The price of the US Dollar in the chart, below, has broken out to a new low. We expect it to drop to around 63 on the chart in the intermediate-term, but Jim Sinclair expects the Dollar to ultimately drop to around 52. The US Dollar index is getting pretty oversold in the short-term, but not so in the intermediate-term. In fact, in Bear markets items tend to get oversold and stay oversold for long periods of time.

CrossChart4-USD

Chart 5 shows commodity inflation. In this one chart we see Oil at the top, the new CRB Index second, the Agricultural Grains Index as the main chart, and the “old” CRB Index at the bottom. These indices are all exploding higher with the Grains Index having more than doubled over the last year and a half. It takes time for these commodity price increases to filter down the chain to force up the price of finished goods, but the tsunami of price inflation is coming. There comes a “point of recognition” where general stock investors realize that their general stocks are no longer rising. Many of the general stock investors will not hit that point of recognition until they see the numbers on their portfolio statements start to fall. The second point of recognition occurs when the same investor figures out that not only is his general stock portfolio falling in value, but inflation is further eroding his buying power by as much as 10 to 13% per year. Now, where is that general stock investor going to move at least part of his money? He is unlikely to move to Bonds in this environment because the rate of inflation is higher than his rate of return. He is used to investing in stocks so there is a good chance that he will look at charts of the PM stocks and consider moving some of his money, there. Since the PM stock universe is relatively small compared to the amount of money invested in general stocks and bonds, it would only take a small amount of investment Dollars moving to launch the PM stocks, upward. In fact, I suspect that we are on the verge of brokerages that have dissed the PM stocks for a very longtime suddenly reversing that stance to advise more investors to move to the PM stocks in an effort to keep those accounts.

CrossChart5-Commodities

Chart 6 is a chart of $Copper which has broken out to new highs. If Copper runs like the rest of the commodity complex going forward we might see 6 dollar copper in the intermediate-term. This is very significant to PM Mining Companies since many of them produce Copper as a by-product of their PM production, plus many have high levels of Copper reserves. As the price of copper rises those companies have higher earnings if they are producing, and both producers and explorers see their reserve valuations upgraded which translates to higher PM stock prices. Please note that the price of Copper might not run aggressively at this time. The chart formation could evolve with a more moderate rise in the intermediate-term, then rise very aggressively after the next intermediate-term bottom. It might make little difference to a potential Precious Metals stock rally at this time, though, as long as the price of Copper is rising.

CrossChart6-Copper

I know that many Precious Metals Stock investors are getting more than a bit antsy at this time. I think we might be very close to a major crossroad in the intermediate-term for the PM stock investor. It is natural for the PM stock investors to be very concerned, here, since many of them value Real Money Gold and Silver as a foundation for life. The same group of investors are also the General Stock Market Bears. True PM investors are a fairly small part of the investing world so they are dependent on the whole world of investors to realize the reality of the situation in terms of Stagflation versus deflation to create a near-term PM stock rally. After all, most PM investors are stay heavily invested in the PM sector at all times. It will take new money moving into the PM stocks to create a rally.

With the Federal Reserve committed to Dollar inflation and managing the markets to prevent a panic like 1929, I do not see a panic in the general stock market being likely as long as the US Dollar is going lower. We have shown how the falling USD supports the price of the Dow. If general stock market investors do not panic they will start to see their portfolio balances dropping and will be looking for another place to invest their money. These general stock investors will not flee to investment vehicles they do not understand, in fact, it appears many might have moved part of their money into the PM stocks between 2000 and 2003. If not, they likely ran into some very happy PM stock investor who advised them that they should have. It will not take a lot of money coming out of the general markets and rotating to the PM stocks to give the PM stocks a real boost higher. In fact, the start of a momentum run in the PM stocks might even attract some smart money with big gains from the commodity sector. What I am suggesting is that the start of a momentum run in the Precious Metals stocks at this time could easily become a self-fulfilling event.

Thus we have shown in the charts, above, how and why new money might move into the PM stocks in the intermediate-term. Stock investors might move to the PM stocks as the Dow falls and even move more as they realize that inflation is additionally eating away at their savings. Bond investors might move some money to the PM stocks as they realize that inflation is eating up more than their interest return offers as seen in the rise in the commodity charts. As price inflation works its way up the chain it will only get worse for Bond and general stock investors. The Yield Curve is very supportive of owning the PM stocks at this time and will only get more supportive as the Fed is forced to cut rates further. The rapidly rising price of Gold and Silver should create much higher earnings for PM producers in this environment. The rising 3 year average price of Gold and Silver should give both the producers and explorers a lift since they both own reserves and inferred resources. The icing on the cake is the recent break-out in the price of Copper as a by-product of production and as reserves. But, here is the catch that creates the current cognitive dissonance for PM stock investors. We can speak of revaluations higher all we want, but those revaluations are a direct result of the investing world seeing the PM stocks as a good investment and moving their investment dollars to the PM stocks. If that happens, we might see a dramatic move in the PM stocks in a fairly short time-period of time once the psychology starts to change in that direction. In fact, that is the reason that I think we tend to see exploration stocks move so rapidly in a short time period. All of a sudden somebody on the Street comments on reserve revaluations upward, and the herd runs in that direction. I have previously shown some charts of HUI components that I expect might do very well if the above comes to fruition.

Let’s take a look at the daily chart of the HUI as a surrogate for the PM stocks. We can see in this chart that the HUI is making its third attempt to break through a heavy angled resistance layer that might open the door for a move to around 640.

CrossChart9-HUI

Everybody and their dog hates the South African Gold stocks at this time, but you might want to give them another look. I had alluded to that about a week, ago, when I included a chart of Gold in Rand with the stock charts. Yes, the SA Golds are suffering with reduced electrical power, in fact, Goldfields recently stated that they might suffer a drop in production of around 20%. Yet, let’s do the math. The average price of Gold in Rand in the 4th quarter was around 5,000, but GFI turned in a very large increase in earnings. Now, the price of Gold in Rand is around 8,000, and we might see higher prices to around 8,700. At 8,000, that is an increase of 3,000 or a 60% increase in price over the 4th quarter average. Even if GFI only produces 80% production in the 1st quarter with these sharply higher prices, they still might turn in some pretty lofty earnings. And, on top of that investors might revalue their reserves much higher. In fact, at the last top for GFI in 2006 the 3 year moving average of Gold in Rand was only about 2,800 as seen on the chart in blue, but has now risen to 4,500 and is rapidly rising. That is a 60% rise and suggests we might see a sharply higher revaluation of reserves. If memory serves, GFI has around 94 million ounces of Gold reserves, some large quantity of Silver reserves, and over 200 million of inferred ounces of Gold- some of which probably will need to be moved over to the reserve column with a revaluation of reserves based on the rise in Gold in Rand. Yet, the price of GFI is currently around $16, about 38% off its high in 2006. That just does not make any sense to me. And, as of Friday we have this…………

“Johannesburg, Friday, March 7, 2008: Gold Fields Limited (“Gold Fields”) (NYSE, JSE, DIFX: GFI) is pleased to confirm that it received formal notification from the Department of Minerals and Energy that, following representations by the Chamber of Mines and consultation with all stakeholders, the mining industry had been allocated an additional 260 MW of power which will effectively allow mines to increase their power consumption from the current level of 90% of average historical consumption.”

Does that press release suggest that GFI might very soon be back to full production. If so, the price of GFI could rapidly move higher with 8,000 Gold in Rand, or am I missing something?

Chart 7- Gold in Rand…………

CrossChart7

Chart 8- GFI

CrossChart8

I hope to return over the next few days with some more charts of individual Precious Metals Stocks. 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.

Thanks also go out to CaptainHook and David Petch of TreasureChests since I have learned so much from them. They offer a wide diversity of fundamental and technical information and can be found at

http://treasurechestsinfo.com/Nuke/

There are many great editorials that can be found on the Gold-Eagle site at the following link. Master David Petch from TreasureChests is one contributor…….

https://www.gold-eagle.com/research/petchndx.html

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/