The HUI - Ride On A Rail !

This editorial "series" is intended to take a look at some of the fundamentals that might generate the price movements in this generational Precious Metals Bull Market, along with the charts and the technicals. Fundamental analysis is always multi-faceted with some fundamentals being more important than others. In fact, certain fundamentals might act as the foundation for the Precious Metals Bull while other fundamentals might act as "modifiers" in a cyclical way.

In Part One, we discussed the general backdrop of massive deflation, along with what might be the proposed "cure" by the Fed. Since the major parts of "the cure" involve dollar inflation, lower rates than would be expected, and massive liquidity injections into the markets- the cure is basically inflationary in nature. Part Two considered the price movements of $Gold in response to the inflationary considerations of Part One. Both parts are linked, below……..

In Part Three, we will look at some of the fundamental and charting considerations involved in generating price movements in the HUI Index, especially noting the fractal nature that I have described in the past. Certain parts of the fundamental picture seem to be generating the fractal movements as we will discuss. Yet, those fundamental factors that generate the fluctuations in the HUI Index are basically lesser factors that operate only as a "modifier" of movement of the general trend that is caused by the foundation of the price movements of the Gold and Silver Bull Market, itself.

I am expecting a sharp rise in the HUI in the immediate future to around the 470 level into April where the HUI will hit the same angled resistance that it hit at the 401 top. If the HUI resolves like it did in the earlier fractal, it will run through that resistance up to as high as 539, before starting about a 12 week correction back down to the angled line resistance, turned angled line support. I would expect the bottom of the correction to complete fairly quickly, but for the correction itself to last for around 12 to 14 weeks. After that correction is over, the HUI might continue the rally higher all the way into the first half of 2008.

I use the term "ride on a rail" because an advance in the HUI from the 350ish level to potentially 520 to 539 by April would by necessity be a sharp rise with only very short corrections. [Such a run is consistent with a 3 fan-line formation breaking out to the upside.] Such corrections would likely come in at the old top resistance around 374, the old top high of around 400, and the angled line resistance that lies around 470. Still, the term "ride on a rail" might also be used in the intermediate-term sense for the run into the first half of 2008. My potential targets for the HUI into 2008 are for the index to possibly run as high as 1250 into April or May. This would be a very sharp rise for this index in the intermediate term and would likely hit some resistance late in the year in the 720 to 780 area, before exploding higher into April/ May of 2008. This move has a precedent in the earlier fractal move.

So, what are the fundamentals that would drive the HUI on such a "ride?" Well, we have the Bull Market in the price of Gold and Silver that has begun to rise at a higher slope as seen in Part 2. This accelerated rise in the price of Gold and Silver creates higher expectations of profits for the PM producing mines. But expectations of higher Gold and Silver prices revolve around the shorter-term direction of the price movements Gold and Silver as the price oscillates between overbought and oversold on the chart. So, let's look at some things that might go through investor's minds as the HUI chart plays out.

Once the Fed starts printing dollars, it must continue to print at an ever-accelerating rate. This printing of dollars, or dollar inflation, will ultimately result in price inflation of the goods and services in the economy. It is the increase of dollar supply chasing after goods and services. The dollar inflation also results in a lower value of the US Dollar as the supply of dollars fall within the normal concepts of supply and demand. As the value of the US dollar falls, it takes more dollars to buy an ounce of gold, thus, the price of Gold in US Dollars, $Gold, goes up as priced in dollars. This we have seen in the charts of $Gold. This gives rise to the birth of the Gold and Silver Bull Market which is the foundation for the Bull Market in the Precious Metals stocks.

Gold and Silver stocks are what we call "derivatives" of the metals, Gold and Silver. A mining company produces Gold and/ or Silver, but the profits of the mining company and the reserve valuations of the company, do not rise directly proportional to the rising price of $Gold. This is the result of several different factors. In fact, some of the factors are modified (multiplied) by other factors to give very different investment results for the metals, Gold and Silver, versus the mining company's stocks at different times. It also produces more volatility in the stock price of the derivative mining companies, than is usually seen in the price of the underlying metals. Let's take a look at some of these phenomena.

The price movement of $Gold and of $Silver has its own volatility. This is created by the psychology of investors as that group sees the future price of Gold and Silver being more bullish, or less bullish. Investors move the price up or down based on their "expectations" of future fundamentals. In fact, we always see extremes of psychology at market tops and at market bottoms.

The price of the stock of a PM company is determined by the actions of investors as they vote their dollars according to how they see the fundamentals of a company playing out in the future. Yet, the fundamentals of a company might include profit from mining the Precious Metals, the profit from other metals that are mined in conjunction with the Precious Metals, the valuation of a company's PM and other metal reserves, and the prospects of a company finding more reserves. These added fundamentals of a PM business enterprise can add a lot of volatility in both directions to a Precious Metals stock.

Different PM mining companies that are producing the metals have different cost levels. One company might have a producing cost of $100 per ounce while another company might have a producing cost of $500 per ounce. As the price of $Gold rises from $300 to $400, the lower cost producer sees a very positive increase in earnings while the higher cost producer cited only sees a lessening of earnings losses. Yet, both companies may or may not expect to see the valuation of reserves rise, depending on the grade of those reserves and the depth to which they are located. One mining company might be producing a large amount of Copper along with the PMs, and the price of Copper might be rising, increasing profit. One of the two companies might find a particularly good looking vein that might massively increase reserves upon proper drilling. All of these different considerations go into valuing a PM company, but all at the same time. So to say that an investor valuing a PM company based on fundamentals is a three-dimensional job just might be an understatement.

On top of all of this, there are other considerations. For instance, the PM reserves are not constantly valued by the industry in direct relation to the current price of $Gold. Instead, they value the reserves based on a three year average of price. This adds to the volatility of the price of a Gold company if the price of $Gold is seen to break through resistance into a higher range as some investors will immediately build the expectations of higher reserve values into their models. Yet, the reserve valuations are also affected by a rising price of $Gold in another way. As the price of Gold moves higher, some reserves that might not be economical to mine at $300, suddenly become economic to mine so more reserves are added to the number of ounces of reserves the company lists. This increase in reserves will also add to the fundamental valuation of a mining company. All of the above goes into the informed fundamental investor's calculations of a mining company's value and affects the mining company's stock price.

The above considerations are all basically driven by the price of $Gold. Thus, I would call the above considerations "foundational" since they are mostly pretty directly caused by the price of the metals that the company mines. Yet, there are other factors that also affect the price of the PM stocks. Before we consider them, let's review a bit about how Gold and Silver Bull Markets tend to move.

A Gold and Silver Bull Market is a momentum market. It tends to rise in a parabolic form on a chart. This is because Gold and Silver are really the oldest and most trusted form of "money" ~ Real Money. We might say that Gold and Silver has always been the default "Historical World Currency" in times of trouble. Paper currencies can be increased in supply when governments elect to print more, thus lessening their value due to increased supply. Gold and Silver have comparatively finite supplies so investors have always turned to them to maintain the value of their savings when trust in paper currencies fails. The value of paper currencies tend to trend in price for very long periods of time since the economic fundamentals of countries change slowly over long periods. The rising deficits and debts of countries tend to rise somewhat exponentially as governments tend to print more currency to cover needs, much like a failing consumer might add credit cards. As a government prints more paper currency, the value of the currency falls, thus worsening deficits and debt as it takes more dollars, each worth less, to procure what is needed by a country. Interest on the debt also increases so more debt accumulates. The value of Gold and Silver really remain at the same relative value, but they go up in value compared to the falling paper currency. Like today, the government is usually accelerating the paper currency printing which gives rise to a constantly accelerating value of Gold and Silver in such a currency ~ the result of which is a parabolic rise of Gold and Silver on a chart. This parabolic rise on the chart is also caused by the momentum of investors moving toward the stable value of Gold and Silver as Real Money as they flee the distrusted and inflated dollar.

If Gold and Silver were simply valued by investors based on dollar inflation, this Gold Bull market would look like a simple rising parabola on a chart, in fact, the chart would mirror the chart of number of dollars being printed. But investors are constantly looking at all kinds of considerations- many of which are simply distractions, in my opinion. In reality, investors are constantly looking for inefficiencies in price movement that they can take advantage of. Thus, they are looking at how news will be accepted by the total of investors on a daily basis. If so, then investors are investing based on their perceptions of other's perceptions of the fundamentals in many cases. Yet, the average investor can really struggle with identifying the most important fundamentals to consider at any one point in time. For instance, investors have been taught the words of "Don't fight the fed." This statement has traditionally meant to not go against the Fed's direction in interest rates. But, I think that saying has a dual meaning at this time. The Fed is printing dollars at an accelerating rate. I'd say "Don't fight the Fed" should be in regards to dollar printing at this time. Of course, maybe that is true in all Gold Bull Markets.

Along with the above, we have the Fed injecting liquidity into the markets, but the Fed cannot control where that liquidity goes once it is provided. The Fed really wants the liquidity to support the general stock and bond markets, but in this environment it increasingly floods out at a faster pace into the Precious Metal and commodity sectors~ real things of real value, versus paper. Thus, we run into another complete category in PM Company pricing ~ liquidity considerations. This is caused by the Fed playing games in an attempt to get liquidity to move to the general stock and bond markets, and out of the commodity and PM markets, on a cyclical basis. It also might include attempts by the Fed to "talk down inflation" in many different ways.

Jim Sinclair has posted his "5 Pillars of a Gold Bull Market." We have already cited what may be the main driver which is lower USD valuations based on increased USD supply, or dollar inflation. At a similar spot as today in the earlier fractal, the USD failed an important test on the chart. This caused the expectations of investors to quickly "price in" further Gold and Silver strength. But at about the same time, the general equities also turned down. The downturn in the general equities market in the earlier fractal saw liquidity flee to the higher momentum expectations of the Gold and Silver complex. Weakness in the Bond market also adds to the flood of liquidity that might also seek the Gold and Silver complex seeking protection of the value of savings.

So in essence, the liquidity injections create cyclical phenomena whereby the liquidity sloshes over to the PM sector creating regular bull momentum runs as we might witness into the first half of 2008. When one of these momentum runs begins, it usually is a wonderful rise with increasingly shorter corrections along the way since at this point in the liquidity cycle the Fed has little to do to stem the liquidity movement, except to talk. Eventually, the PM sector will become overbought and the PM investors will become overleveraged, where the Fed will "rinse and repeat", withdrawing liquidity to start the whole process over, again. At that point, most of the liquidity has moved to the PM sector so the withdrawal of liquidity will affect the PM sector most, stopping the momentum run and sending the PM sector into another fairly steep correction as the use of too much leverage hammers traders. On top of all of this, the "black boxes" currently used to trade the market by many of the Funds will turn against the former PM momentum move and accentuate the decline, helping to exacerbate the steep corrections seen in PM Bull Markets. Then, the Fed will have the ability, once again, to add liquidity with the expectations that such liquidity will more efficiently flow into the general stock and bond markets.

It seems to me that the above response by the Fed, do to being "between a rock and a hard spot", creates the cyclical phenomena that we are seeing as the HUI Fractals unfold. This Fed response during the massive backdrop of deflation is very limited in choice compared to other times. In normal times the Fed could raise rates more aggressively, effectively raising the rates at a faster pace than the true underlying rate of price inflation. But in the period that would normally be K-Winter, the massive deflationary forces would destroy the general markets and housing, should the Fed raise rates to such a degree. Thus the Fed is left to "talk about rate hikes", while raising rates at a much lower pace than true price inflation- the result of dollar inflation. Thus real rates are very negative, as any rise in interest rates is less than the rate at which dollar inflation is rising.

All of this gets a bit confusing when considering inflation as indexed by the CPI. The CPI is supposed to measure price inflation in the economy. Yet, price inflation always lags dollar inflation. Also, the CPI index has been messed with in many ingenious ways to "redefine" how prices rise. This has mostly been done with the introduction of "substitutions" like suggesting that one might buy cheaper chicken to substitute for higher priced beef, or by trying to equate the dollar advances in worth as computers work faster. Thus, the tainted CPI numbers are used by the Fed to talk inflation concerns, down, but a little common sense will suggest the true nature of the rise in price inflation. A recent article stated that currency inflation in most Western countries is running between 12 and 13% on a yearly basis. Some articles have stated that price inflation is running between 10 and 13%. I suspect that both statements are correct, just based on common sense. If so, then the miserly little interest rate hikes by the Fed in comparison to dollar and price inflation will not only support the USD, but will necessitate that the USD value go even lower.

In review, I'd expect an aggressive run in the PM complex into 2008 with corrections along the way decreasing in time and in amplitude of price. This will be the result of PM investors trying "to trade" the corrections, only to find them becoming shorter and sweeter than what we have seen over the last few years. Those traders will likely sell, only to find themselves chasing price to get back in at higher levels. I'd also expect to see the percentage gains of the PM stocks to far outrun the percentage price gains in the Precious Metals into April to May of 2008 since the volatility of the PM stocks is much higher than that of the metals since the PM stocks are leveraged to the metals. An expected break of the PM Metals pricing into a higher range should also fairly quickly start the revaluation process of the PM reserves of mining companies, higher, since the 3 year average of Gold and Silver prices has continued higher for the past year- but will also be fueled by an expectation of even higher 3 year averages going forward. Simply put ~ I am expecting a slow explosion of pricing to hit the PM stocks running all the way into 2008.

So, what could all of this look like in chart form? Well to put it simply, I'd expect it to look just like the earlier HUI fractal, except in higher Elliot Wave Degree. Below, is an overview of what I term "The HUI Fractals." In this chart we have the basic Elliot Waves listed by numbers, have similar corrects at different degree circled in the same colors, and have proposed similar targets marked by the same colored arrows.

On the chart we can see that the dark blue angled resistance line that was hit at 401 is now at about the 470 area. I would expect the HUI to run up and through that line to hit the dotted line at the blue arrow in the 539ish area, much like the price did on the left side of the chart in the "earlier fractal." Such a run would be a "ride on a rail" with very short corrections. After about a 12 to 14 week correction back down to the solid blue angled line, I'd expect the HUI to run up to around the green arrow in the 720 to 780 area later in 07, probably in the October to November period. At that time, I'd expect the HUI to correct less vigorously as it prepares to rise aggressively into April to May of 2008. That 2008 top should be more important and might lie in the 1244 to 1255 range. All of these numbers are similar to the moves in the first fractal. Those expectations are all based on a similar resolution to the HUI price in the current time period.

Note that the HUI price movement (on the left) from the number 2, up to the number 3 at the red arrow, shows a series of shorter corrections in "time." That is what I would expect on this momentum run, also.

The next chart shows what I expect this upward leg that I call a "ride on a rail" to look like from a closer perspective. We can see in the blue circle on the left, the equivalent fractal area to today. We see that the rise up into the correction in the earlier fractal was basically the same slope and length as the rise out of the correction. That expected rise out of the latest correction is marked with a green line on the right side of the chart. We can also see that the fib lines drawn to the 470 mark at the angled line resistance reveals that the HUI price is making an important break-out at this time. Above that line, there is very little resistance which will allow the HUI price to run faster……ride on a rail.

The third chart displays the "earlier fractal" and shows the rise out of the correction being similar in slope and length the rise into that correction. The top of the correction, the "A, B, C" down, and the first wave up - are all circled in different colors to match the similar movements in the next chart of the current fractal. Notice the similarities in the technical indicators in both fractals. The only real difference between the two is that the first move up as seen in the red circle in the "current chart" is a stronger move. I suspect that this might suggest more strength in the HUI in the current fractal. I believe that it is caused by investor's expectations of USD weakness in the near future.

The 5th chart shows inter-market relationships. The earlier HUI fractal correction on the left and the current fractal correction on the right are bracketed in black vertical lines. Near the right black line in both time periods we can see that the US Dollar failed important re-tests of overhead resistance. In both cases we can now see that the HUI started to run on the upside in response as did the price of $Gold. Notice that in the earlier fractal the HUI fairly quickly factored in further USD weakness as the HUI ran to an equivalent of a first half 2008 price of around 1250.

In chart 6 we see a red line chart of the Dow, superimposed over a chart of the HUI. We can see that in the earlier fractal on the left, the Dow turned down about the same time that the HUI started to run. On the right side we can see the same type of action as the Dow has just turned down. Will the Dow continue down at this time? I think so. This correction in the Dow would motivate liquidity to move over to the HUI helping to fuel a ride on a rail as it did in the earlier fractal. (Thanks go out to "Rambus" from the GE Forum whose chart I used to add the relationship to.)

The last chart for Part 3 is another chart of the HUI. This chart shows the HUI fractals, again, but I am showing it to display how the fibs in both fractals are very similar. On the left we see the fib relationship for the similar correction, up to the next top. We see a very similar relationship would evolve in the current time period if the HUI resolves by running up to the area of the pink arrow at around 539. Notice the red line at that point. It runs over the top of the similar target in the first fractal to the pink arrow. That red line is also parallel to the upper and lower lines of the trend channel. This shows the unique symmetry of the HUI fractals' formation.

I hope that all of you have a wonderful week. I also hope that all of you who are invested in the Precious Metals have a wonderful "run", up into April……then on to 2008. In Part 4 of this series, we hope to take a look at some potential chart targets for some PM stocks into the first half of 2008.

Below, is the link to the Gold-Eagle Forum where many of us discuss the various topics of the Precious Metals sector………..

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, Grininbarrett, and JBI. 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 256 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 atwww.treasurechests.info/index.php

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……. www.gold-eagle.com/research/petchndx.html

E-mail contact:

[email protected]