Kitco Commentaries - By Peter Degraaf

Gold has risen almost daily for the past three weeks. The question on the minds of those who were smart enough to buy when the POG fell below the 200DMA is: should I take some profits here? For an answer we turn to the charts.

The interesting thing about charts is that everybody looks at different chart patterns, or chart characteristics. Just as a glass of water can be half-full, while to some it is half-empty, so it is with chart analysis. While a stock or commodity is rising from bottom to top, various analysts and their followers interpret the chart patterns in different ways. At the first positive signs, a few hardy souls begin to step up to the plate, then, as more signals turn positive, some of the people who have dared to go short during an overall bull market, (as is currently the case with gold and silver), hurriedly cover their short positions. Soon more and more people, afraid to miss the boat, jump on board. Remember the analysts who were advising their clients to ‘go short’ a few weeks ago? These people are now helping the market along, as they cover their short positions. When all the signs are positive, when the majority of traders are long, and every short position has been covered, the market is due for a correction. Such corrections give a second chance to those who ‘missed out’ on the original move. The reason why chart patterns tend to repeat is because they represent ‘human actions’, clumped together.

The obvious chart pattern is that of an ARAT (Advancing Right Angled triangle). Within the ARAT we see a ‘golden crossover’ (where the 50DMA crosses over and above the 200DMA - arrow on the chart). This is a very bullish sign in the medium term. The conclusion we can draw from this chart is that short-term traders will likely take partial profits near the resistance line (I do not recommend shorting a roaring bull market), then be prepared to buy if and when we near the area of support. By then the RSI (at the top), will likely be back near 50. If I were pressed to make a guess, I would pick $635 as the spot where the next interim bottom will form. (Please remember this is but a guess, based on today’s available information)

As for fundamentals, as long as central banks, on a worldwide basis, are increasing the overall money supply, demand for gold will outstrip supply. The latest COT report shows that commercial traders are ‘net short’ 92,000 contracts. The recent high point was in May 2006, when gold touched $725, and the COT report at that time, showed 172,000 ‘net short’ contracts.

The situation for silver is even more bullish than it is for gold. This is because silver is not only desirable, alongside gold, as protection against monetary inflation, but the industrial applications for silver continue to increase. Gold is often found in ‘pyramid form’, i.e. the deeper you dig, the more grams per tonne. In the case of silver, it is the other way around. Most of the silver is found close to the surface. It is a fact that most of the easy silver has already been dug up, and used up. During the past 50 years we have collectively ‘consumed’ the estimated 5 billion ounces that were dug up during the past 5,000 years. When I first became interested in silver, in the late 1950’s, the US strategic stockpile consisted of some 2.5 billion ounces.

All of that silver is now gone, used up!
Let’s look at the daily bar chart for silver.

Once again we see an ARAT developing. The blue arrow indicates where we might have expected the 50D to dip below the 200D. The fact that it stayed above, and never touched the 200D is very bullish. Silver has clear sailing now till it reaches the resistance area around 14.50

Notice the fact that the POS has just closed above the 50D, and that is another bullish development. The RSI and the MACD indicators have enough room left to facilitate a move up to 14.50.

Let’s take a look now at the daily bar chart for the HUI index of unhedged gold and silver mining shares. Until recently this index was a reliable pre-cursor for bullion. It has lost some of its leadership since the introduction of the electronically traded gold and silver funds (the new ‘Blue Chips’).The index nevertheless still has a lot of ‘eyes fixed upon it’.

The HUI index shows many of the characteristics mentioned earlier, including a ‘golden crossover – see arrow), as well as a close above the 50D.

The HUI has room to move up to 350 – 360 before meeting up with serious resistance.

During December the POG was negatively impacted by the dropping oil price. Despite the lower price of crude, the Amex oil index held up remarkably well, and why not. At $50 a barrel these companies are making a lot more money then they were at $12 a barrel a few short years ago.

Those who are predicting a price below $50 are totally disregarding the ‘Iran factor’. What you have there is a head of state who rules alongside of a religious fanatic, the Ayatollah Khomeini. They belong to a small group of fanatical Islamists who believe that Islam will one day rule the world, and that before this happens, there will be great violence, and they are willing to be a part of that, and even help these events along, regardless of the loss of human life in the process.
President Bush is bravely attempting to stem that tide, despite the fact that many people, especially in Europe, are cutting the ground from under his feet.

Whenever people sense my support for President Bush, they clutter my mailbox with hate mail. Before you do that, please visit www.google.com and type in the name of a brave German CEO, Mr. Mathias Dapfner, head the huge Axel Springer AG printing company. The article recently appeared in Die Welt, (in German), but the English version is available on the ‘web’.
The article is titled: “Europe, they name is COWARDOUS.”

He cites a number of cases in history where people elected to choose appeasement (with disastrous results), instead of standing up to tyrants. I salute Mr. Dapfner!

Those of you who are willing to consider all of the factors that impact the price of oil may be interested in knowing that last week the prestigious Bulletin of the Society of Atomic Scientists moved the so-called “Doomsday clock” from 11.53 up by a full two minutes, to 11.55 To view the clock, visit www.thebulletin.org. In their communication they cite the current situation to be ‘as ominous as just before Hiroshima’.

Here we see another very bullish chart with a strong up-trend, a ‘golden cross-over’, (blue arrow), positive alignment between the 50D and 200D and a very recent buying opportunity that will still be available in many individual oil stocks. The RSI and MACD are positive, with room on the upside. This oil index is a ‘leading indicator’ for the oil price itself. Exciting stuff!

My last chart features the Amex natgas index. Now that winter is here, the overstock of gas that pressured the price is being used up, and individual natgas stocks are looking good again. It is a fact that North America uses a lot more gas than it produces, and despite the increase in drilling, consumption is rising faster than new gas is coming into the market. Thus we are once again dealing with a commodity that has bullish underlying fundamentals. Even the Canadian natgas trusts are a ‘buy’ at this price, as the new rules that were proposed by the Minister of Finance do not take effect for a number of years, are still not ‘law’, and may never pass!

Another very bullish chart! The two blue arrows point to the place where weakness usually causes the 50D to drop below the 200D. Here it never happened. The 50D and 200D remain in positive alignment. The upward channel is well defined. It behooves us to have at least one good natgas stock in our portfolios!

DISCLAIMER: Please do your own diligence. I am not responsible for your trading decisions.

Peter Degraaf is an online stock trader. He issues occasional E-mail alerts to his subscribers. He offers a 60 day free trial! Contact him at ITISWELL@COGECO.CA