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-- Market Alert and Update emails Market Update, Jan-04 2015 Firstly and most importantly, Happy New Year! Secondly, here are some of our thoughts on the current situation in the financial markets and some short-term trading ideas. The charts mentioned in this email are posted at http://tsi-blog.com/2015/01/charts-of-interest-3/. 1) As 2015 gets underway, the most extreme sentiment is evident in the commodity and currency markets. The best examples are oil, where Market Vane's bullish percentage is languishing at 10-11%, and the Dollar Index, where Market Vane's bullish percentage is at an unusually elevated 85%. Also of note is that the bullish percentages for silver and platinum bottomed at 16% during the final quarter of 2014 and are still at very depressed levels (the low-20s). Sentiment extremes constitute fuel for tradable price moves that run counter to the majority view, but, as we've witnessed over the past few months, they can persist for an inconveniently long time. 2) In US$ terms, gold was unable to generate a clear-cut bullish signal by ending 2014 above its 2013 closing level ($1205). It also remains below its 20-day and 50-day MAs. Refer to Chart 1. However, the recent price action can aptly be described as positive thanks to a) the 2nd January upward reversal following a spike to a new multi-week low, b) the strength in gold-mining stocks relative to gold bullion, and c) the relative strength at the junior end of the gold-mining sector. The recent strength in gold-mining stocks relative to gold bullion is illustrated by Chart 5, which shows that the HUI/gold ratio has just broken above its 40-day MA. This means that HUI/gold's current position is similar to its position at the same time last year. At this time last year a tradable 3-month rally had just begun. The recent relative strength at the junior end of the gold-mining sector is illustrated by Chart 6, which shows that the GDXJ/GDX ratio bottomed in mid-December. The rebound since mid-December suggests that tax-related selling pressure peaked at that time on a sector-wide basis, although the effects of tax-loss selling were evident in the performances of some individual names until around Christmas. 3) In US$ terms, gold lost a bit less than 2% during 2014. Not a good performance, but hardly a disaster. In euro terms, gold gained about 12%. In a world where most bank accounts yield almost nothing, this constitutes a good return. As has been the case for a while, in euro terms gold is close to generating a very bullish signal. Specifically and as illustrated by Chart 2, gold/euro is near the top of what appears to be a major basing pattern. 4) Relative to the Industrial Metals Index (GYX), gold broke out to the downside in early-November and then almost immediately began to rally. The early-November downside breakout in the gold/GYX ratio was therefore a false signal. As illustrated by Chart 3, the gold/GYX ratio is now very close to an upside breakout. An upside breakout by gold/GYX would be a bearish omen for investments that do well during periods of rising economic confidence. In particular, it would be a bearish omen for the broad US stock market and junk bonds. 5) In general, gold-related investments are close to generating clear-cut bullish signals, with "close" being the operative word. The US$ gold price is close to breaking above its 20-day and 50-day MAs, gold/euro is close to completing a major basing pattern, gold/GYX is closing to breaking out to the upside, GDXJ is getting close to its 50-day MA, and while the HUI and the XAU ended the 2nd January session above their respective 50-day MAs the breakouts are not yet decisive. Chart 4 shows the XAU. The most important nearby resistance for the XAU lies at 75-76. A daily close above this resistance would point to a continuing short-term advance to near the 200-day MA. 6) In response to HUI/gold's break above its 40-day MA and in anticipation of additional bullish signals emerging during the weeks immediately ahead, we are going to add some short-term trading positions to the TSI Stocks List. Specifically, we will: a) Add a short-term position in GDXJ if it pulls back to US$23.90 (just above its 20-day MA). The current price is US$24.96. A JNUG position would provide a lot more bang for the buck, but this 3X ETF is too volatile for our liking. b) Add a short-term trading position in Asanko Gold (AKG) at the current price of US$1.48. As well as being oversold and offering good value, AKG will potentially be given a boost during Q1-2015 by the release of the Phase 2 Feasibility Study for the Asanko Gold Mine (Ghana). c) Add a short-term trading position in Timmins Gold (TGD) at the current price of US$0.97. Despite its recent stupid acquisition of the Caballo Blanco project, TGD has the potential to rebound strongly during the first quarter of 2015. A daily close above US$1.01 would be an upside breakout. The goal with each of the aforementioned trades or potential trades is to profit from a rebound to near the 200-day MA ($32-$33 for GDXJ, around $2.00 for AKG and the $1.30s for TGD) within the next 2 months. Note that at current prices Endeavour Mining (EDV.TO) would be our first choice for a short-term trading position in an individual gold stock if the TSI List didn't already have a short-term position in this stock (added at a much higher level several months ago). Also note that Charts 8, 9 and 10 show AKG, EDV.TO and TGD, respectively. 7) We never cease to be impressed by the way that when speculators have the bit between their collective teeth, the same old piece of news can be used time and time again to justify an extension of a price trend. There have been many examples of this phenomenon over the past several years, including the US$ on the downside during the final quarter of 2007 and the first half of 2008, oil on the upside during the first half of 2008, oil on the downside over the past month and the US$ on the upside since September. With regard to the currency market's performance over the past few months, every time Mario Draghi opened his mouth and essentially uttered the same tired words about doing more to create "inflation" in the euro-zone, speculators sold the euro. This happened for the umpteenth time on 2nd January in reaction to a Draghi interview. In our opinion, the waves of speculative euro selling are not based on the belief that the ECB will aggressively inflate the euro supply; they are based on scepticism that the ECB will be able to inflate fast enough to sustain bull markets in European equities and bonds. 8) In the 8th December Weekly Update we wrote that we had no opinion on the likely short-term performance of natural gas (NG) the commodity, but were becoming interested in obtaining some long exposure to NG equities via FCG. This was due to the medium-term upside potential created by FCG's preceding price crash. Subsequently, in the 15th December Weekly Update we wrote that we would add FCG to the TSI List if it traded at US$9.80. FCG didn't quite make it to our targeted buy price before reversing upward and quickly gaining 20% to around $12. It has since pulled back to around $11, which means that it is still up by almost 10% from its mid-December low. FCG's rebound happened despite a substantial decline in the NG price. As illustrated by Chart 7, after collapsing from around $4.70 to the $3.60s in November the NG price collapsed again in December and hit a low of $2.81 on 2nd January. Although FCG's price action suggests that its rebound is probably not over, our trading plan was negated by the quick-fire up-move during the second half of December. If FCG were to now trade at our stipulated buy price we would not add it to the TSI List. At current prices we are more interested in taking long exposure to the commodity than to the associated equities, because NG's price crash is a dramatic over-reaction by futures traders to the decline in the oil price and a minor bearish change in the amount of gas in underground storage (refer to http://ir.eia.gov/ngs/ngs.html). However, we won't do anything at this time. 9) One of the most popular views at the beginning of 2014 was that government bond yields were certain to rise over the ensuing 12 months. A popular related view was that stocks would substantially outperform low-risk bonds as part of a rotation from bonds to stocks. These views proved to be completely wrong, but, incredibly, they are still very popular. This is evidenced by the fact that speculators and small traders remain heavily net-short the combination of Treasury Bond and 10-year Treasury Note futures, despite these markets having trended upward throughout 2014 and having ended the year near their highs. One of the biggest-ever bullish mismatches between price action and sentiment therefore persists. With speculators and the 'dumb money' still betting heavily that long-dated US Treasury yields are about to zoom higher, it's a good bet that these yields will be flat-to-lower during the first half of 2015. However, it's a different story with government bond yields in the euro-zone, which have nowhere to go but up. Consequently, anyone wanting to bet on higher government bond yields would be well advised to avoid the US Treasury market and take a bearish position on the bonds issued by any euro-zone government. Market Update, Dec-28 2014 Charts Price charts related to the following comments have been posted at http://tsi-blog.com/2014/12/charts-of-interest-2/. Price Inflation The longer that an outbreak of "price inflation" is delayed, the worse it will be for the US economy. The reason is summarised in our recent blog post at http://tsi-blog.com/2014/12/only-price-inflation-will-put-an-end-to-the-insanity/. Therefore, the longer that an outbreak of "price inflation" is delayed, the better it will ultimately be for gold. This is because gold is primarily a play on bad monetary policy, and the absence of an obvious "price inflation" problem paves the way for central bankers to really 'go to town'. Based on forward-looking indicators, there will probably be a little more "price inflation" than most people are expecting during the first half of 2015, but 2014's extension of the bearish trend in the commodity world and crash in the oil price probably ensures that there won't be enough upward movement in the high-profile price indices to cause the members of the monetary politburo to start fretting about what they call "inflation" until 2016 or later. This means that if the US economy enters a recession in 2015 the authorities will, once again, react by pumping up the money supply and creating incentives to go further into debt. The dominating and unwavering belief is that more money and more credit should be thrown at a problem caused by excessive growth in the supplies of money and credit. The US Stock Market Both the NYSE Composite Index (NYA) and the Russell2000 SmallCap Index (RUT) have moved up to near their double/triple tops, but neither has managed to break out to the upside. A move to new highs within the next two weeks followed soon after by a downward reversal would be similar to how the NYA topped on a long-term basis in 2000 and 2007. Gold Gold's price action was strange during the Christmas week. It first plunged from the $1190s to the $1170s for no apparent reason and then sprang back to the $1190s for no apparent reason. Over the course of the week it was roughly unchanged. Friday's $20 bounce in the gold price was made more interesting by the fact that it occurred alongside a decline in the copper price to its lowest daily closing level in more than 4 years, thus extending the divergence between gold and industrial commodities such as copper and oil that began in early November. This divergence, which has pushed the gold/GYX ratio (the gold price divided by the Industrial Metals Index) to near a 6-month high, is difficult to explain based on gold's true fundamentals, because gold's true fundamentals remain mixed-to-slightly-bearish. We favour the explanation that gold's relative strength is forecasting a downward reversal in the Dollar Index and/or the US stock market. In any case, while gold has been demonstrating impressive strength relative to some other important commodities since early November, in US$ terms a neutral price pattern has formed. For example, although gold rebounded strongly on Friday, it still closed the week below its 20-day and 50-day moving averages. A sign of strength would be a close above $1205 (the price at the end of last year) on Wednesday 31st December. Achieving this would require a net gain of only $9 over the next three trading sessions. Gold Stocks By reversing downward after touching their respective 20-day moving averages at the end of the week before last, the gold-stock indices (the HUI and the XAU) kept alive the possibility that some additional testing of the crash low would precede the start of a meaningful rally. Some additional testing is what we got, after which we got a rebound that, once again, ended just below the 20-day MA. Last week's price action therefore didn't achieve anything and the testing process might not yet be over. Tax-loss selling has now run its course, so one source of downward pressure on gold stocks in general and junior gold stocks in particular has been removed. All else remaining equal, this will enable many of the hard-hit junior gold-mining stocks to trade more positively. Some incredible bargains have been created by indiscriminate tax-related selling. From our perspective, the most obvious of these bargains is Endeavour Mining (EDV.TO) near last week's closing price of C$0.39. EDV's management hasn't put a foot wrong (yet) and the company has performed well on the ground, but the stock has been hammered down to a level at which it is one of the most extreme cases of mispricing we've seen in years. Updates on Stock Selections Clifton Star (CFO.V) remains immersed in a boardroom battle. Dissident shareholders of the company have now requisitioned a special meeting to remove the existing board and replace it with a slate of five new members: William Howald, Eric Owens, Mark Billings, Chantal Patenaude and Michael Pesner. The earliest the meeting can be held is Feb. 24, 2015, but it can't be held any later than March 10, 2015. Replacing the existing board with the above-mentioned new members would pave the way for the Duparquet option to be renegotiated. It is therefore important that the proposed board changes take place. Timmins Gold (TGD) announced that it has completed its ill-conceived acquisition of the Caballo Blanco PEA-stage gold project in Veracruz, Mexico, for US$10M in cash and 16M shares. TGD also announced that it has extended its $13M credit facility with Sprott Lending for 12 months (until 1st January 2016). The extension of the credit facility was probably made necessary by the Caballo Blanco purchase. TGD's stock price is poised to rebound strongly from its current depressed level, but the Caballo Blanco purchase appears to have reduced the stock's long-term upside potential. True Gold Mining (TGM.V) has drawn down an additional US$20.7M of its US$100M project financing facility. This brings the total amount drawn to US$57.7M. The company also has about $47.4M of cash. According to TGM, the construction of the 100K-oz/yr Karma gold mine (Burkina Faso) is on schedule and on budget, with about 42% of the estimated $131M initial capex haven't been spent/committed to date. Also according to TGM, the company is working to address the concerns voiced by certain individuals in the local community (as mentioned in a 9th December press release) and expects to reach a resolution shortly. No information has been provided regarding the nature of these concerns. Alert #228, Dec-01 2014* Due to the combination of thin holiday-interrupted trading in the US late last week and two big news events in quick succession (the OPEC announcement and the Swiss Gold Referendum), changes are happening rapidly in the gold market. In the Weekly Update posted on Sunday we guessed that in the likely event of a "no" vote in the Swiss Gold Referendum the gold market would soon successfully test its early-November low (a successful test of support is a test in which the support holds). This it did, with the price dropping to $1141 near the start of Asian trading on Monday. A remarkable turnaround then began. Gold not only managed to recoup the losses made in the knee-jerk reaction to the Swiss news, it recouped all of last week's losses and rose to a 1-month high. Moreover, it closed above its 50-day MA for the first time since August. Silver hasn't yet managed to get above its 50-day MA, but its reversal on Monday was even more impressive than gold's. The silver price rose by almost 20% from its intra-day low to its intra-day high after making a new multi-year low early in the day. The HUI also rebounded strongly on Monday, but it didn't get a chance to test its early-November low because gold had already turned positive for the day by the time the North American stock markets opened. If this sort of price action had happened in the opposite direction, that is, if gold had spike up to a multi-week high in reaction to superficially bullish news and then reversed direction during a period of thin trading to end the day at a multi-week low, the usual suspects would have screamed "manipulation" from the hilltops. However, when the difficult-to-explain intra-day price action happens in an upwards direction, the same pundits characterise it as gold's bullish fundamentals coming to the fore. On Monday 1st December there actually was a small, but significant, improvement in gold's fundamentals, in that the BKX/SPX ratio (the Bank Index relative to the broad stock market) broke out to the downside. Most gold analysts probably didn't notice this genuinely bullish fundamental development, though, because they were too busy looking at trading volumes (the volume imported by China, the volume sold by the mining industry, the volume added to or removed from the GLD or COMEX inventories, etc.). Charts illustrating Monday's important price moves have been posted at the TSI Blog. We have no opinion on whether there will be follow-though to the upside over the next 1-2 days, but Monday's huge reversals probably mean that gold, silver and gold-mining stocks will have an upward bias over the coming 2-3 weeks. Alert #227, Nov-06 2014 After a gold sector crash has continued for at least 5 trading days, the first up day usually signifies that the crash is over and that the price trend has reversed. Thursday's rise in the gold-stock indices and ETFs is therefore a signal that the crash is over, although the signal was weakened by a late-day sell-off that gave back almost half the preceding gains. If the crash is indeed over and a short-term trend change has just occurred, Friday should also be an up day. Putting it another way, the historical record suggests that even a small decline on Friday would negate Thursday's positive signal and indicate that there was going to be one more decline to a new low early next week. The situation is complicated a little by the fact that the next US monthly employment report will be released prior to the start of trading on Friday, although it should always be remembered that while these economic statistics often cause financial-market volatility, they never alter price trends. Consequently, a strong employment number would undoubtedly put some downward pressure on gold-related investments, but if the gold sector's short-term price trend has changed then the HUI should end the day with a gain regardless of whether or not there is a knee-jerk sell-off in the immediate aftermath of the employment news. On a different matter, we are occasionally impressed by how much mileage the speculating community can get out of the same 'fundamental' development. For example, on Thursday 6th November Mario Draghi said what he has been saying for months, which is that the ECB is prepared to provide additional stimulus. Yet again, however, the markets were apparently disappointed that he didn't give specific details of new measures, which, yet again, led to relative weakness in European equities and another wave of speculative euro selling. Somewhat counterintuitively, the market is demanding more monetary inflation from the ECB and is pushing the euro lower relative to the US$ whenever the ECB chief fails to announce specific tactics on how the inflation will be generated. Finally, please note that the coming Weekly Update will be a cut-to-the-bones edition. The reason is that we are making an unscheduled 2-day trip to Hong Kong this weekend to get a first-hand look at the "Occupy Central" protests (also known as the "Umbrella Movement"). Alert #226, Oct-30 2014 Although short-term price movements are often sentiment-driven and therefore not consistent with the "fundamentals", gold has been doing a good job of tracking the changes in its primary fundamental drivers. In particular, a significant rise in the real US interest rate during August-September led to a significant decline in the gold price. The gold price then rebounded as the real interest rate declined during the first half of October and dropped back to near its early-October low as the real interest rate moved back up with the stock market recovery. There is no evidence of emotion or irrationality in this gold-bullion price action, but the gold-mining sector tells a very different story. The gold-mining sector's recent decline, which accelerated in dramatic fashion over the past two trading days, cannot be explained by the so-called "fundamentals". It is not related to the end of the Fed's QE, as most market participants and observers have known for many months that the QE would end this week. It is, instead, primarily a sentiment-driven phenomenon that has fed on itself as price weakness led to forced selling and has resulted in one of the most extreme market-sentiment situations we've ever witnessed (charts illustrating the extreme have just been posted at http://tsi-blog.com/?p=1090). Although it is at the opposite end of the sentiment spectrum, the current situation in the gold-mining sector is, we think, close to the manic tech-stock sentiment near the NASDAQ's blow-off top in March of 2000. Interestingly, Thursday's extraordinary plunge in the gold-mining sector was led by institutional favourites such as Agnico Eagle (down 11.9% on 2.5-times average volume), Yamana Gold (down a massive 17.1% on 5-times average volume), and Goldcorp (down 13.5% on 4-times average volume). This suggests that the driving force was selling by institutions rather than selling by the general public, although the public would have been indirectly involved via fund redemptions. In an ideal world we would all take advantage of today's sentiment extreme in the gold-mining sector by methodically adding to existing positions or taking new positions in gold-mining stocks, because panics invariably exhaust themselves within a few days and are followed by rapid rebounds. However, nobody has unlimited financial resources, and the reality is that most long-term gold bulls would have had substantial exposure to the sector prior to this week's panic. The only action we took on Thursday 30th October was to make a small addition to our position in Dalradian Resources (DNA.TO). DNA announced very positive news in the form of an updated PEA prior to the start of trading on Thursday, which prompted us to place a buy order at C$0.51. Our order was priced at about 10% below the previous day's close and given the positive news from the company we doubted that it would be filled, but filled it was as the stock opened at C$0.48 and traded as low as C$0.46 (down 18% on the day) before recouping some of its losses and ending the day with a loss of 'only' 5%. We aren't planning to do any additional buying of gold-mining stocks in the immediate future, because we refuse to let our cash reserve fall below 25% and because it is the most inopportune time imaginable to free-up cash by selling some gold stocks to buy others. Also preventing us from wading deeper into the gold-mining pool at this time is the fact that while panics invariably exhaust themselves within a few days, the current panic is only two days old and could therefore continue for another 2-4 days. In situations such as this it is usually better to be one day late than 2-4 days early. In the coming Weekly Update we'll take another look at the big picture for the gold-mining sector. Alert #225, Oct-13 2014 The S&P500 Index (SPX) broke below short-term support at 1900 on Monday 13th October and has closed below its 200-day MA for the first time since November of 2012. This brings to an end one of the longest periods ever without an SPX decline to its 200-day MA. We think that 1800 (or thereabouts) is a realistic target for a short-term SPX bottom. We'll explain why in this week's Interim Update. Assuming this target is valid it could be reached within the coming five trading days, but considering the extent to which the market is now stretched to the downside it could also be reached following an intervening 2-4 week rebound or consolidation. For your information, our own account has a bearish speculation in the form of SSO (ProShares Ultra S&P500) January-2015 put options. We began averaging into this position way back in May (horrible timing) and added the final chunk in early-September. Thanks to Monday's sharp decline in SSO, an above-the-market sell order was filled on part of our put-option position. Our plan is to exit the balance if the SPX declines to the low-1800s this week and to purchase longer-dated put options following a multi-week rebound from whatever low is made in the near future. Gold has now done enough to confirm that a short-term bottom was put in place at the beginning of last week. However, it will encounter strong resistance in the low-$1240s. Over the past several days the gold stock indices and ETFs have shown increasing 2-way volatility. Just as the increasing 2-way volatility in the Dollar Index is a sign that its short-term upward trend is coming to an end, the increasing 2-way volatility in the gold-mining sector is a sign that its short-term downward trend is coming to an end. Alert #224, Sep-25 2014 The Dow Industrials Index fell 260 points on Thursday 25th September. There was a time when 260 points was a lot for a single-day move, but these days it is only about 1.5%. Like almost everything else, due to "inflation" a Dow point is now worth a lot less than it used to be. Thursday's market action didn't even manage to push the Dow below short-term support defined by its September pullback low or its 50-day MA, but equivalent support was breached for the S&P500 Index. This is the first evidence in the SPX's price action that something more than a minor pullback has begun. The purpose of this email is to note that Thursday's weakness in the broad US stock market MIGHT have brought about sustainable upward reversals in gold bullion and the gold-mining sector. The stock market weakness certainly helped gold-related investments, as they began the day under pressure in the face of yet another surge in the US$ but managed to reverse course despite the fact that the US$ remained firm. Neither gold nor the gold-mining indices have done enough to indicate that their short-term downward trends are over, but GDXJ's on-going relative strength suggests that a rally should soon begin if it hasn't begun already. Our short-term outlooks for gold and the HUI have therefore shifted to "bullish". These views will be proven wrong if gold and GDXJ close below their lows of the past four days ($1206 for gold, $34.22 for GDXJ). It could make sense for short-term traders to buy JNUG near its current price of around US$14, using a daily GDXJ close below $34.22 as an initial stop. JNUG is designed to have daily percentage changes that are three-times the daily percentage changes of GDXJ, so in percentage terms it will regularly have large swings and is not for the faint of heart. Alert #223, Jul-10 2014 Gold Stocks The gold-stock surge on Wednesday 9th July and the first hour of US trading on Thursday 10th July enabled the HUI to test intermediate-term resistance (the top of a major basing pattern) near 250. The HUI and most individual gold stocks reversed sharply lower following this test of resistance, which suggests that the Wednesday-Thursday surge was a minor extension to the upward leg that got underway at the end of May and not the beginning of a new multi-week upward leg. Resistance near 250 could soon be re-tested, but our guess is that it will be a few weeks before this resistance is decisively breached. In the meantime, downside risk for the HUI will continue to be defined by a confluence of moving averages in the 220s. Although we expect the HUI to stay in the 225-250 range for a few more weeks, we remain short-term bullish on the expectation that it will trade up to around 300 by the end of September. The HUI's quick rise to 250 created some profit-taking opportunities within the list of stocks we track at TSI. For example, in the 3rd July Market Update we wrote that Rio Alto (RIO.TO, RIOM) would be a good candidate for partial selling in the C$2.70-$2.90 range. RIO traded as high as C$2.85 on Thursday 10th July. For another example, in the 8th July Market Update we wrote that Premier Gold (PG.TO) would be a good candidate for partial profit taking if it moved up to around C$3.50 in the near future. PG traded as high as C$3.52 on Thursday before reversing course. Note that you don't have to watch the intra-day market action to take advantage of price spikes. In fact, closely watching the intra-day market action is counter-productive and should be avoided. The most effective way to profit from upward price spikes is to place above-the-market good-til-cancelled sell orders near (just below) potential resistance levels. Gold Bullion As we write, gold is trading at $1339/oz. At Thursday's intra-day high of $1347/oz it was probably close to a peak that will hold for a few weeks, but as long as it ends this week above $1330 we will have another piece of evidence that a new cyclical bull market has begun. The Currency Market Due to the European bank problems that are now bubbling to the surface and the recent weakness in European equities relative to US equities, our short-term and intermediate-term outlooks for the Dollar Index have shifted from "bearish" to "neutral". Note that heightened fear of debt default by banks in the euro-zone would be bullish for the US$ relative to the euro and bullish for gold relative to both the euro and the US$. Alert #222, Jun-10 2014 There is nothing in the price action of gold, silver or the HUI to suggest that this week's bounce is anything more than a counter-trend move within a continuing short-term downward trend. However, the outperformance of the junior end of the gold sector, as indicated by the GDXJ/GDX ratio, has gone from interesting to dramatic. Furthermore, GLDX, a proxy for exploration-stage juniors, has also begun to outperform GDX, and both GDXJ and GLDX have just closed above their 50-day moving averages for the first time since March. Significant upside in gold and the HUI is needed soon -- ideally within the next few days -- to confirm the bullish signals being sent by GDXJ and GLDX. In the absence of near-immediate confirmation there will remain plenty of uncertainty as to whether a turning point has finally been reached, but the evidence as it stands right now is enough to shift our short-term outlooks for gold and gold stocks (basis the HUI) back to "bullish". Alert #221, May-28 2014 As warned in the latest Weekly Update, there will be no Interim Update this week. However, due to the market action we are sending out the following brief notes: 1) The US Stock Market The NASDAQ100 Index (NDX) has just tested its March peak, but hasn't yet confirmed the S&P500's new high. Friday's NDX close will be important, in that a downward reversal over the final two days of this week would be another piece of evidence in support of the bearish case whereas a weekly close above 3740 (the March high) would remove support for the bearish case. 2) Gold Although we didn't expect it to happen, we mentioned the risk of a quick decline to the $1250s to end gold's downward correction. The gold price has dropped to the $1250s and must soon reverse upward to stay on track (from our perspective). Regardless of whether the current 'wash-out' ends in the $1250s or extends to the $1220s, gold will have to close above $1280 within the next few trading days -- marking this week's decline as a false downside breakout in the process -- for the short-term bullish scenario to remain intact. 3) Gold Stocks The HUI has clearly broken below its lows of the past two months and has also taken out support at 210. If it immediately reverses upward and ends this week above 220 it would remain in synch with the bear-market recoveries of the 1970s, whereas failing to manage a strong rebound over the next two trading days would constitute a significant departure from the previous bear-market recoveries. On the plus side of the ledger is the fact that this week's breakdown in the HUI was not confirmed by the GDXJ/GDX ratio. Consequently, the bullish divergence between the HUI and the GDXJ/GDX ratio remains in place. 4) Stock Selections In the 19th May Weekly Update there was a write-up on True Gold Mining (TGM.V), a development-stage gold miner with a technically-simple and economically-robust project in Burkina Faso (West Africa). At that time we wrote: "TGM offers reasonable value at last Friday's closing price of C$0.37, although at this price the reward/risk is not quite good enough for us. The current enterprise value (market cap minus $70M of cash) is only $78M, but we suspect that the short-term upside could be limited by the 65M C$0.47 warrants that expire in mid-August of this year. Our view is that the stock would be an excellent candidate for new buying in the low-C$0.30s and that the reward/risk would also be sufficiently attractive at C$0.35. A spike down to the low-$0.30s is possible within the coming fortnight to complete TGM's multi-month correction, although for TSI record purposes the stock will be bought if it trades at C$0.35." TGM traded at C$0.35 on Wednesday 28th May and has therefore been added to the TSI Stocks List. There appears to be strong support for the stock in the mid-C$0.30s, as even this week's breakdown in the gold-stock indices wasn't sufficient to push TGM below C$0.35. In the 5th May Weekly Update we added short-term trading positions in EDV.TO and EVN.AX, noting that both positions would be stopped out by a daily HUI close below 215. The HUI closed below 215 on Tuesday 27th May, so both trading positions have been removed from the TSI List. For TSI record purposes, the EDV trade resulted in a loss of 11.1% and the EVN trade resulted in a loss of 2.5%. New short-term gold-stock trading positions will be added to the TSI List after we get evidence of an upward reversal. Also, we will add a long-term position in Timmins Gold (TGD), a profitable junior gold producer operating in Mexico, if the stock trades at US$1.10 (the current price is US$1.23). Alert #220, Apr-14 2013 We will be AWOL until the middle of next week, but the price action of the past three trading days warrants an interruption to our vacation. Hence, this email. After looking like it was about to challenge resistance in the low-$1600s, gold bullion suddenly dropped back to support in the $1550s on Wednesday 10th April. The price decline followed a 'call' by Goldman Sachs (GS) to short gold, although we doubt that GS's bearish call had a big effect. Of greater importance was probably the new all-time high achieved by the S&P500 Index on the same day. Despite the lacklustre economic data, the fashionable line of thinking right now is that the world's various QE programs are setting the stage for a period of strong real growth. It's not possible that the QE really is working, but sentiment often trumps genuine fundamentals in the short term and the S&P500's new high undoubtedly reinforced the prevailing sentiment. In addition to being hurt by the weakness in gold bullion on 10th April, the gold-mining sector was hurt by news that the construction of the Pascua-Lama mine, Barrick Gold's most important development-stage project, had been suspended due to environmental concerns. The Pascua-Lama news caused Barrick's stock price to lose 8% on huge volume. It also applied downward pressure to the stock prices of the two major gold/silver royalty companies that hold Pascua-Lama royalties (RGLD and SLW) and dealt yet another blow to sector-wide sentiment. Downward pressure on all things gold (and silver) related ramped up on Friday 12th April. The catalyst appeared to be news that Cyprus's central bank was planning to sell its gold reserves as part of the effort to prop-up the country's banking industry. The 40 tonnes of gold that might be sold by Cyprus is neither here nor there, but the fear is that larger EZ countries will be prompted to take the same action (dump their official gold) for similar reasons. Bullish gold analysts/commentators have done such a good job of promoting the idea that central-bank gold buying is an important driver of gold's long-term price trend that any evidence of central-bank selling is now viewed as a major negative, even though, in reality, gold's long-term price trend does not depend in any way on whether the central banks are net buyers or net sellers of gold. Gold had successfully tested support at $1525-$1550 numerous times over the past two years, but on Friday 12th April this support gave way and the price plunged to $1480. We thought that support above $1500 would hold, so Friday's action came as a surprise to us (to put it mildly). Silver and the gold-mining stocks followed gold lower, with silver breaking slightly below support at around $26.50 and the HUI dropping from 320 to a new 4-year low of 301. Unfortunately, Friday's action doesn't tell us what's going to happen in the future. You certainly can't tell what's going to happen to gold, silver and the HUI by looking at price charts, although the breaches of major support that have just occurred will no doubt prompt 'chartists' to come up with some very bearish forecasts. Charts can tell you where support and resistance are likely to be encountered, the extent to which a market is overbought or oversold, and what has typically happened in the past under certain circumstances. Charts tell us, for example, that based on the weekly RSI the HUI is now more 'oversold' than it has been at any time since its inception in 1996 (the weekly RSI is now at 20.5, versus the previous all-time low of 22.3 reached in November of 2000). How much lower can it get? For another example, charts tell us what will likely happen during the weeks following a major bottom for the HUI (refer to the 8th April Weekly Update for details), but will never tell us in real time that a bottom has just been put in place. Charts also tell us that silver's next level of major support lies at $20-$22. A test of this support now looks possible, but not probable. Sorry, we can't be specific regarding short-term price targets, especially now that gold and silver have broken below levels that we didn't expect to be breached. We do not have the slightest doubt that the long-term gold and silver bull markets remain intact (for reasons that have been covered in past commentaries and that will be covered again in future commentaries), but in the short term we are dealing with the vagaries of mass sentiment. While the gold sector in particular and mining-related stocks in general are down in the dumps, other sectors and markets have 'gone parabolic'. The Utility and REIT sectors of the US stock market are good examples of the parabolic up-moves to which we are referring, but the best example is probably the Japanese stock market. The chart of DXJ, an ETF that tracks the Japanese stock market, looks like the chart of silver during the first few months of 2011. Most of the time this chart pattern will end in a crash. However, the timing of the eventual crash is always a big unknown. For example, by far our most profitable option trade ever (in dollar terms) was our purchase of silver put options during March-April of 2011, but the trade was very unprofitable for a while. This is because we started accumulating the puts when silver rose to around $35 in March, but silver continued along its near-vertical upward path to a peak of $50 in late April. The plan we had -- and executed -- at the time was to add to our position with every $2-$3 rise in price. Our final put-option purchase was made with silver trading at around $49 in late April, after which the price crashed and we began to harvest the gains. After a market 'goes parabolic', fundamentals no longer matter. Silver's long-term fundamentals were bullish in late April of 2011, but the preceding price action all but guaranteed an impressive plunge. DXJ's long-term fundamentals do not appear to be bullish, but even if they were it wouldn't alter the most likely ending of the current price pattern. That's why we are scaling into DXJ put options. The vagaries of mass sentiment continue to create terrific buying opportunities in the gold sector, but remember that in order to minimise risk it is important to always set limits regarding the amount of exposure to any one stock and any one market. Once those limits are reached an additional increase in exposure will not be appropriate, although it could still make sense to switch between stocks with the aim of improving portfolio quality. We continue to believe that new buying should be focused on profitable gold producers, such as EDV.TO and EVN.AX, and well-funded/relatively-low-risk gold explorers, such as AAU, AKG, PLG.TO, PVG and SBB.TO. If you want to avoid individual company risk, which can be a sensible approach as Barrick Gold has again proved via its mismanagement of Pascua-Lama environmental issues, then exposure to the gold juniors could be obtained via GDXJ and exposure to the gold seniors could be obtained via GDX. The only change we are going to make to the TSI Stocks List at this time is to remove Orvana Minerals (ORV.TO), which last traded at C$0.89, and add Pilot Gold (PLG.TO), which last traded at C$1.37. PLG has already been covered in detail at TSI due to the PLG warrants already being in the TSI List. Due to the recent price action, it can now be purchased only slightly above where it was trading just prior to the TV Tower gold discovery. Although ORV has current production and PLG's projects are all years away from production, in some ways ORV is riskier than PLG. Of special relevance in today's environment, ORV has a much weaker balance sheet. We will probably make one or two more changes within the next few weeks with the aim of lowering risk. In particular, we would like to add at least one more financially-strong gold producer to the List. That's all for now. Alert #219, Oct-11 2011 In response to the price action on Tuesday 4th October, we upgraded our short-term US stock market outlook from "bearish" to "neutral". Our thinking, at the time, was that the S&P500 had additional downside risk of 50-100 points, but that this downside risk was balanced by similar upside potential. The upside potential we perceived on 4th October has since been exhausted, but we are sufficiently confused to keep our short-term outlook at "neutral". It's possible that the rebound has run its course, but it's equally possible that the rebound will continue, in fits and starts, until the S&P500 reaches its 200-day moving average in the 1270s. In any case, the main purpose of this email isn't to confirm that there is no change to our short-term stock market outlook; it's to point out that events have rendered inapplicable our recommendation to buy Daylight Energy (TSX: DAY) near Friday's closing price of C$4.59. Due to a takeover bid for DAY that was announced a few hours after we posted our latest commentary, the stock should trade at around C$10/share when the Canadian markets open later today. If only they'd waited a few more days before announcing the bid! Some TSI subscribers apparently bought DAY following our brief mention of the stock in Market Alert Email #217 on 23rd September, but it was never a formal recommendation until the latest Weekly Update and thanks to the takeover bid there is no possibility of buying it anywhere near the formally recommended price. Consequently, for record purposes we'll assume that DAY was never part of the TSI Stocks List. Alert #218, Oct-04 2011 Due to the market action of Monday 3rd October and Tuesday 4th October, some of our short-term views have changed as outlined below. 1) Our short-term stock market outlook has changed from "bearish" to "neutral". The S&P500 Index spiked below its August low on Tuesday 4th October and then rebounded to close higher on the day. The spike to a new low was accompanied by some bullish divergences, but it was also accompanied by some bearish confirmations. We will mention these divergences and confirmations in Thursday's Interim Update. There is no basis for concluding that a significant bottom was put in place on Tuesday, but the remaining short-term downside risk is now counter-balanced by similar short-term upside potential. 2) Our short-term gold sector (HUI) outlook has changed from "neutral" to "bullish". In the latest Weekly Update we wrote: "The most likely place for a short-term low is support at 490-500..., but we will be more confident that the ultimate correction low is being formed if the HUI spikes below this support within the next two weeks." On Tuesday the HUI spiked below support at 490-500 (the low was 483) before rebounding by enough to end the day marginally above it. Does this mean that a correction low is now in place? No, it simply means that the chance of a low is better than it would have been in the absence of the spike below support. Of greatest interest to us is that the gold-stock indices just made new 52-week lows at the beginning of the 2-month time window when intermediate-term turning points in the gold sector often occur. This suggests to us that if Tuesday's intra-day low doesn't turn out to be the ultimate correction low, the ultimate correction low should soon be in place. 3) Our short-term US$ outlook has shifted from "bullish" to "neutral". We are looking for a Dollar Index pullback to near its 50-day moving average followed by a resumption of the dollar's upward trend. Alert #217, Sep-23 2011 If we are wrong, we like to find out quickly. With regard to our new short-term bullish view on gold, we found out quickly on Thursday when the October futures contract closed below the 'line in the sand' that we drew at $1745. Our short-term bullish view therefore survived for less than one day. It's distinctly possible that the gold price will bottom not far from its current level, but Thursday's action increases the risk that it will continue down to its 200-day moving average in the low-$1500s. Thursday's action also reduces the probability of the gold price moving to new highs within the next three months. Our short-term bullish view on the HUI was contingent upon it remaining above 575 on a daily closing basis. This view was therefore also proven wrong by Thursday's action. As is the case with gold bullion, there's a decent chance that the HUI will bottom near its current level. However, the decisive break below support in the low-580s shouldn't be ignored. This support will now revert to being resistance and will probably limit any rebound over the days ahead. Gold, silver, gold and silver mining stocks, stock indices such as the S&P500 and commodity indices such as the CCI will probably reach short-term bottoms within the next three weeks, and the short-term bottoms in these markets will probably coincide with short-term peaks in the Dollar Index and the T-Bond. Our guess is that the short-term extremes won't be far from Thursday's closing prices, but it's important not to have preconceived opinions as to where the next significant turning point will occur. It makes sense to buy into panic, but don't make the mistake of committing too heavily too soon based on the notion that prices can't go much lower. Always remember that the market is only rational on a long-term basis. On a short-term basis it regularly behaves as if it is clinically insane. We almost always do some buying on days like Thursday. Days such as these are when we sow the seeds that will grow into future profits. In this particular case we grabbed the opportunity to establish initial positions in some stocks at prices we knew were possible, but as recently as a few days ago didn't really expect to see. Here's what we bought: - Junior copper producer Capstone Mining (TSX: CS). We added CS to the TSI Stocks List at C$2.25 via yesterday's Interim Update, but if you had immediately acted on our recommendation you wouldn't have paid more than C$2.05 (the stock opened at C$2.05, so any orders that were in place at C$2.05 or higher were filled at the open at C$2.05). Buys in the low-C$2.00 area stand a good chance of doing very well over the next 6 months and it's quite possible that the stock price reached an intermediate-term bottom at C$1.97 on Thursday, but be prepared to scale in over the next few weeks because a market in panic mode is capable of almost anything. - Mid-tier oil/gas producer Daylight Resources (TSX: DAY). As a result of the recent plunge, DAY's dividend yield has risen to 10.5%. There's naturally a risk that the dividend will be cut, but for the most recent quarter the company's dividend payments amounted to less than 50% of its operating cash flow. - Major oil producer Total (NYSE: TOT) at US$40.50-$41.00. Due to the fear stemming from Europe's debt crisis, TOT has dropped back to near its panic low of Q4-2008. - Sandspring Resources (TSXV: SSP), an exploration-stage gold miner with a large, low-grade resource in Guyana. - Soltoro (TSXV: SOL), an exploration-stage silver miner with a 58M-oz M&I silver resource at a project in Mexico. Of these stocks, only CS is being followed at TSI. The others are potential future additions to the TSI List, but it's possible that we won't mention them again. Many junior resource stocks are now at levels where new buying could be appropriate, but near current prices we particularly like CS.TO (Thursday close: C$2.14), KGN (Thursday close: US$6.16), and THM (Thursday close: US$6.13). Chart patterns suggest that KGN and THM have additional downside potential of 10%-15%, but valuations are now very attractive. Alert #216, Aug-12 2011 By our calculations, the year-over-year rate of growth in US True Money Supply (TMS) has just risen to 14% and the quarterly rate of growth is now in excess of 20%. This dramatic acceleration in monetary inflation is due to recent large increases in demand and savings deposits at commercial banks. One implication: We might have just witnessed a very important peak in the T-Bond market. Another implication: The downside risk in the stock market is less than many people believe. We are downgrading our short- and intermediate-term T-Bond views from "neutral" to "bearish". As we write, the September T-Bond futures contract is trading at 136. More in the Weekly Update. Alert #215, Aug-09 2011 Stocks and Bonds: We've been bearish on the US stock market, but Monday's plunge wasn't expected. It looks like the market is hell-bent on squeezing a few months of downside into a couple of weeks. In the latest Weekly Update we argued that S&P's downgrade of US federal government bonds was not a good reason to be bearish on T-Bonds. There will come a time when the stock market and the T-Bond market will fall together, but that will only happen when the stock market is being driven downward by rising inflation expectations. In the current environment, substantial weakness in the stock market invariably leads to lower inflation expectations and, consequently, higher T-Bond prices. Given the carnage in the stock market, Monday's huge rally in the T-Bond was therefore 'par for the course'. A number of indicators had already reached extremes at the end of last week. These indicators generally became even more extreme on Monday. Of particular note, the NASDAQ's McClellan Oscillator ended at a 20-year low of -119 on Monday. This is slightly lower than the extreme it reached in October of 2008. We have to go back to the 1987 stock market crash to find a lower value. The stock market is probably in the early part of a 1-3 year cyclical decline, but this is definitely not the time to START positioning for a bearish outcome. It makes no sense to sell, or hedge, in the immediate aftermath of a crash. Gold and Silver: In addition to prompting a big up-move in Treasury bonds, Monday's market-wide flight to safety prompted a big up-move in the gold price and a moderate advance in the silver price. This had the effect of pushing the silver/gold ratio back to near its lows of the past three months. As noted in the latest Weekly Update, a break to new multi-month lows in silver/gold would be a clear sign that the shift away from risk was accelerating. Gold's chart is starting to look parabolic, which means that downside risk is increasing. Gold Stocks: Gold stocks have recently been pulled upward by the surging gold price and pushed downward by the collapsing stock market. The result is that while the HUI has just made a new 2-year low relative to gold, it has almost reached an all-time high relative to the S&P500 Index (the HUI/SPX ratio ended Monday's session within 2% of the all-time high reached late last year). In other words, the gold-stock indices continue to under-perform gold bullion, but they are holding up much better than the broad stock market. We could soon see a rebound in the broad stock market alongside a sharp pullback in the gold price, resulting in the HUI falling relative to the S&P500 but holding up better than gold. Updates on Stock Selections: In the Weekly Update we said we would add Dragon Mining (ASX: DRA) to the TSI Stocks List if it dropped to A$1.05. It traded as low as A$1.06 in Australian trading on Tuesday morning and then began to recover. As we write, it is at A$1.10. The stock appears to be well supported near the current level. We will therefore go ahead and add it to the TSI List at A$1.10. Actions to take: What you should do in response to the recent market turmoil depends on your current situation. If you are cashed up, you should be doing some buying while keeping plenty of cash in reserve. Here are some of the things we have done over the past 12 hours: 1. Took profits on our FXA (Australian Dollar) put options. We expect a lot more downside in the A$ over the next several months, but it has fallen sharply with the stock market and should rebound with the stock market. We will look to get re-positioned after a rebound. 2. Put a small portion of our large cash reserve to work by adding to our positions in Orvana Minerals (TSX: ORV) and the Global X Uranium Fund (NYSE: URA). Alert #214, May-02 2011 We interpret Monday's sharp decline in the silver/gold ratio as clear-cut evidence that an intermediate-term peak is now in place for this ratio. If this interpretation is correct, then the two most likely short-term scenarios are: 1. Gold and silver will make lows this week. Both will then strengthen for 2-4 weeks, with gold moving well above this week's high and silver doing no better than testing its high. This price action will result in a bearish divergence between gold and the silver/gold ratio (new highs in gold accompanied by lower highs in silver/gold) and will be followed by declines in the prices of both metals to their 200-day moving averages within the ensuing two months. 2. Gold and silver have just made intermediate-term peaks and will trend lower to the vicinities of their respective 200-day moving averages over the next two months. We think that the above scenarios have roughly equal probabilities. If the silver/gold ratio has reached an intermediate-term peak (as per our thinking), then it is likely that the Dollar Index will bottom on an intermediate-term basis within one month. We are therefore upgrading our intermediate-term US$ outlook to "bullish". For your information, we are always net-long both the Canadian Dollar and the Australian Dollar due to our C$- and A$-denominated investments and cash holdings. Our exposure to the C$ is much greater than our exposure to the A$, but we think the A$ has much greater downside risk than the C$ and will therefore be accumulating some insurance against large declines in both of the major commodity currencies via December-2011 FXA (Currency Shares Australian Dollar Trust) put options. Our current plan is to gradually scale into this hedge position over the next two months (the scaling-in process started on Monday 2nd May, with an initial position taken in the FXA December-2010 $100 puts). The mainstream press blamed Monday's declines in gold and silver prices on the news that Osama bin Laden had finally been killed. This explanation doesn't ring true, as only a corrupt government would have the audacity to portray bin Laden's extremely belated death as a success (10 years plus millions of innocent victims plus 100s of billions of dollars to kill one man) and only the most gullible members of the public could accept such a portrayal. Increasing margin requirements for silver was a more likely catalyst. In any case, the recent parabolic moves made sharp reversals inevitable. The only question was the exact timing. Alert #213, Mar-30 2011 In the latest Weekly Update we wrote: "For the bulls, the ideal short-term outcome would be for the HUI to consolidate between 550 and 580 for several days and to break above the 580 resistance area in early April. Price action along these lines would create a chart-based target of 670, which would stand a good chance of being reached by mid May." We've since had two more days of consolidation in the 550-580 range, with the HUI ending Tuesday's session at 557. At the same time, the April gold futures contract has dropped back to around $1410, which constitutes a roughly 50% retracement of the preceding 6-day advance, and the silver/gold ratio has not shown any signs of weakness. There's a reasonable chance that gold will break out to the upside within the coming week or so, leading to a similar breakout in the HUI. The rally that followed such a breakout would probably last only 4-6 weeks, but the rally's magnitude could be significant (>10%). Also of note is that the risk management parameters are currently clear, in that for this short-term bullish scenario to remain plausible the gold price should not close below $1380 during any additional 'corrective' action over the days ahead. Further to the above, we are upgrading our short-term outlooks for gold and gold stocks from "neutral" to "bullish". Unless advised otherwise, this short-term bullish view will be 'stopped out' if gold closes below $1380. Alert #212, Mar-15 2011 Some quick comments on the uranium sector: 1. The happenings in Japan had a huge effect on uranium-mining equities on Monday. Many of these equities were already 'oversold' prior to Monday's trading, but the damage done to some of Japan's nuclear reactors by last week's natural disaster caused a dramatic sentiment shift and panicked liquidation of uranium stocks. Most of these stocks fell 20%-25%. 2. The opening prices for the junior uranium stocks on Monday were generally near the lows of the day, which means that anyone who began the day with under-the-market buy orders within 20% of Friday's closing prices had his/her orders filled near the lows of the day. For example, Hathor Exploration (HAT.V) closed at C$2.86 on Friday and opened at C$2.05 on Monday, so all buy orders with limits of C$2.05 or higher would have been filled at the open at C$2.05. 3. We said that we would add UEX Corp. (UEX.TO) to the TSI List if it dropped to the C$1.50s. Anyone with an order to buy UEX in the C$1.50s would have been filled at the open at C$1.49, so UEX will be added to the TSI List at C$1.49. The stock traded as low as C$1.42 and closed at C$1.45. 4. It's important not to get excited by the low prices now on offer and go 'all in'. At this stage nobody knows the effect that Japan's nuclear-reactor problems will have on global uranium demand and there is no telling how low stock prices will fall. It's possible that Monday's lows will prove to be the ultimate correction lows, but significantly lower prices are also possible. In this case and in almost all cases, the correct approach is to scale in over time during periods of weakness. 5. Depending on the news from Japan, uranium stocks could soon start to rebound. However, in the absence of very positive company-specific developments these stocks probably won't exceed last Friday's closing prices at any time over the next few months. Also, a rebound that began immediately would probably be followed by a decline to test Monday's low. 6. Speculators who want exposure to uranium but want to avoid the hassle of selecting and following individual uranium-mining stocks should consider averaging into the Global X Uranium ETF (NYSE: URA). URA traded above US$22 last month, but on Monday it traded as low as US$14.38 and closed at US$15.73. 7. The uranium sector's recent price action exemplifies why it is important to take some money off the table after prices have rocketed upward, almost regardless of how much upside potential you think remains. The future is always uncertain. Alert #211, Jan-08 2011 The market action over the final two trading days of the week didn't provide much in the way of additional information. The US monthly jobs number reported on Friday was said to be less than expected, but the markets' non-reaction to this news suggested that not much more was actually expected. Gold futures broke well below support in the low-$1360s on Friday, but then rebounded to close the week above this support. Gold therefore remains range-bound. Also, last week's 3% decline in the silver/gold ratio wasn't sufficient to signal a trend change. An additional decline of 3% or more over the course of the coming week would, however, be sufficient. The HUI clearly broke below short-term support on Wednesday and fell a bit further over the remainder of the week, but this doesn't necessarily tell us anything meaningful about the future. It is quite possible, for example, that the HUI is now close to the end of a short-term correction and will soon commence an advance to new highs, while it is also possible that an intermediate-term peak is in place and that the next rally will end at a lower high. There is simply no way of knowing at this time. Fortunately, there is no need to know or to guess. Provided that you have a sizable cash reserve, you should now be planning to use the current weakness and whatever additional weakness occurs over the next fortnight to methodically scale up your exposure to the gold sector. You will then be in a position to take some profits after the market rallies, regardless of whether the rally turns out to be the continuation of last year's intermediate-term advance or a counter-trend rebound within a new intermediate-term decline. If the recent HUI decline is part of a routine short-term correction then it will probably end up looking like the correction that occurred during May-July of last year. Under this scenario the maximum downside potential would be defined by support at 500, and a drop to around 510 would create a good sector-wide buying opportunity. Shifting to the uranium sector, Energy Fuels (TSX: EFR) announced on Thursday that it has received the license it needs to commence construction of the Pinon Ridge uranium mill. In response, the stock price quickly rose to the high-C$1.30s, at which point profit-taking began to outweigh the increased demand prompted by the news. The stock ended the week at C$1.04. We will have more to say about this very positive -- although not unexpected -- EFR development next week. At this time we mainly wanted to note that the rise to the C$1.30s created a short-term selling opportunity and that a decline to the C$0.70s would create a new buying opportunity. While a decline to the C$0.70s currently looks like a long-shot, we expect that a lot of 'babies will be thrown out with the bathwater' once the broad stock market begins to trend downward. EFR could be one of the proverbial babies. We will be back to our normal commentary schedule with the coming week's Interim Update, which will be posted at around the usual time on Thursday. Alert #210, Jan-06 2011 The action in the gold and silver markets over the first three trading days of 2011 obviously deviated from what we thought was the most likely near-term outcome. In particular, we suspected that there would be a final 1-3 week surge prior to an intermediate-term peak, but this week's action has reduced the probability of such an outcome. Gold is still within the bounds of the consolidation pattern that began to form in October, and this will continue to be the case as long as it holds above support in the low $1360s. Furthermore, the silver/gold ratio hasn't yet weakened by enough to signal a reversal. This means that the recent market action has not eliminated the potential for a quick $100-$200 gold price advance to set an intermediate-term peak. However, March silver has just completed consecutive daily closes below its 18-day MA for the first time since July, and the HUI has broken below support in the low-550s. These are warning signs that an important reversal could have occurred a little earlier -- and from a lower level -- than expected. The junior gold and silver miners are generally holding up well. In fact, many of the juniors on our radar screen rose during Wednesday's trading session. Moreover, we continue to expect that plenty of juniors will make new 52-week highs during the first half of 2011 regardless of whether or not the HUI has already peaked on an intermediate-term basis. Note that if an intermediate-term peak is already in place it could actually mean that 2011 will turn out to be more BULLISH for gold and gold stocks than it would have been if an upside blow-off had occurred early in the year. The reason is that large near-vertical advances set the scene for large downturns. If you are conservatively positioned then this week's action shouldn't present a problem or necessitate a significant portfolio adjustment. The idea is to scale out (build up cash) into strength and to scale in during weakness. There was plenty of opportunity to build up cash over the past couple of months, but there hasn't yet been enough weakness to create a new sector-wide buying opportunity. Needless to say, buying opportunities in individual stocks often occur independently of the general sector-wide variety. We will endeavour to send out another brief email update on Saturday or Sunday. Alert #209, Nov-09 2010 Gold and silver stocks rocketed upward on Monday and continued upward at the beginning of trading on Tuesday, before reversing direction. Tuesday's action, comprising an initial surge and then a downward reversal, could aptly be described as dramatic, with most senior gold/silver stocks trading 2-3 times their average daily volumes and many juniors trading 5-10 times their average daily volumes. In general, the stocks that had run up the fastest over the past couple of weeks fell the most on Tuesday. During Monday and the early part of Tuesday, we did what we normally do in response to rapid price advances: we built up our cash reserve. This happened automatically due to the filling of above-the-market sell orders that had been placed with the aim of catching upward spikes. In other words, there was no need for us to watch the intra-day market action. The next step in the on-going process will be to put some of this cash back to work in gold/silver stocks after prices retreat to near support levels, mostly by placing below-the-market buy orders designed to catch downward spikes. As explained numerous times over the years, the idea is to scale in during the purges, scale out during the surges, and then 'rinse and repeat', all the while maintaining a substantial core position in synch with the long-term bullish trend. For the HUI, a logical target for the current pullback is former resistance (now support) at 520. The price action over the first two days of this week provided a good example of the increasing volatility that we've warned would occur as gold, silver and the related mining stocks approached intermediate-term peaks. More drama is likely over the next couple of months. Alert #208, Jul-23 2010 In this week's Interim Update we said that there were currently no Brazil-related bearish positions in our own accounts. The main purpose of today's brief note is to let you know that this is no longer the case. Due to the filling, on Thursday, of a well-under-the-market BZQ (ProShares UltraShort MSCI Brazil) buy order, we now have a small bearish position. We didn't think that this order would be filled, but Thursday's global stock market surge caused BZQ to plunge by 6% -- to just below our bid price. As per the discussion in the Interim Update, we will quickly exit this position if EWZ closes above $70. Thursday's stock market rally took the S&P500 Index above its 50-day moving average and a downward-sloping trend-line dating back to the April high. There has been a distinct lack of conviction on the parts of both bulls and bears over the past two months, resulting in minimal follow-through in either direction. It therefore won't come as a shock if the market reverses downward within the next couple of days. However, we wanted to point out that some additional upside into mid August would not be inconsistent with either our overall bearish outlook (we haven't been expecting a straight-line decline) or the Presidential Cycle Model that the market has been closely tracking since the start of the year. Alert #207, Jun-21 2010 A few brief comments in response to recent events and Monday's market action: China's government announced over the weekend that it would allow more flexibility in the Yuan's exchange rate, which probably means that it intends to allow the Yuan to gradually appreciate over the quarters ahead. We will discuss the implications of this policy move in Thursday's Interim Update, but the bottom line is that we don't think it is important. Or, to put it more aptly, we think it pales in comparison with issues such as the unfolding debt crisis in Europe, the US government's deficit-spending and debt build-up, planned increases in government theft (direct and indirect taxation) throughout the world, the likelihood that more problems will emerge over the months ahead in real estate and real-estate-related debt, central bank debt monetisation, and the unravelling of the economic recovery of the past 15 months. In the 14th June Weekly Update we cited 0.88 and 0.98 as, respectively, reasonable targets for the rebounds in the A$ and the C$. These targets were reached near the start of US trading on Monday. We took advantage of the China-related 'pop' in commodities and the commodity currencies to purchase some FXA December-2010 put options as a partial hedge on our long-side exposure to the A$. Our plan, at this stage, is to buy some more A$ puts if there is additional strength over the next few weeks. In the latest Weekly Update we mentioned that $1220 could be used as a demarcation level for gold. We don't pretend to know whether last week's upside breakout in the gold market will prove to be a bullish short-term omen or a 'fakeout', but we do know that gold should hold above $1220 on a daily closing basis over the coming fortnight if the breakout was genuine. Cash is always the best hedge, but SLV and SLW put options with expiry dates of December-2010 or later could also be used to hedge substantial long-term exposure to gold, silver, and gold/silver stocks. We were stopped out of UNG on Monday. Based on our April entry at 7.29 and Monday's closing price of $8.25, the profit on the trade was 13%. Alert #206, Jun-07 2010* The US$ gold price has moved up to within $10 of its May peak. In terms of momentum and sentiment indicators it is nowhere near as 'overbought' as it was at the December-2009 and March-2008 peaks, so the potential exists for significant additional gains over the weeks ahead. We are more concerned about the euro-denominated gold price. Gold/euro pulled back after reaching an 'overbought' extreme in May, but the surge of the past few days has already returned it to a similar extreme. In particular, gold/euro has returned to the top of the moving-average (MA) envelope that capped intermediate-term advances during 2005-2006 and 2007-2008. We will include a chart in this week's Interim Update to illustrate what we mean. The euro-denominated gold price has become far more extended to the upside than the US$ gold price because gold has been pushed upward by increasing investment demand associated with Europe's government debt crisis and the resultant weakness in the euro. This means that gold's ability to make significant additional short-term gains will probably depend on an increasing sense of panic about the euro-zone's prospects. If the crisis continues to escalate without much in the way of a respite then it won't matter that gold is very 'overbought' in euro terms, but if the sense of crisis temporarily abates then the gold market could experience a sharp correction. In other words, the next sizeable correction in the gold market could be accompanied by a strong bounce in the euro. Further to the above, one way of hedging long-term bullish exposure to gold at this time would be to purchase euro (or FXE) call options. This is something we have just begun to do for our own account (we have started averaging into September-2010 FXE call options). Silver sprang back by enough in response to gold's strength on Monday to negate Friday's breakdown, but its chart pattern still looks precarious. July silver has strong resistance at $18.50-$19.00 and critical support at $17.20-$17.50. The gold-stock indices largely ignored Monday's weakness in the broad stock market and followed the gold price upward. As noted in our last two commentaries, gold stocks are poised to make substantial catch-up moves at some point. The only question we have relates to timing. With the US$ bullion price having moved up to just beneath its May peak, the 'risk' has increased that the gold sector's anticipated catch-up move will start sooner rather than later. Consequently, we are upgrading our short-term HUI outlook from "bearish" to "neutral". In this case, "neutral" means that there is large upside AND downside potential over the next few months. Whether the next 70-100 HUI points are to the upside or the downside will very likely be determined by whether gold makes a sustained break above $1250 in the near future or rolls over to the downside after testing its May peak. We don't have any short-term bets on the gold sector at the moment, but those who do should seriously consider placing a 'stop' just below Monday's intra-day HUI low. Specifically, exit any long-side trades if the HUI closes below 440. Alert #205, May-21 2010 It's amazing what a difference four trading days can make. In the latest Weekly Update we noted that the HUI was 'overbought' (it was at the very top of its moving-average envelope and its daily RSI had just turned down from a high level), but just four trading days later it is already close to being 'oversold' on a short-term basis. This is thanks to a quick 12% decline. This week's action confirms that the gold sector made an important peak earlier this month and is consistent with our expectation that the intermediate-term correction that got underway on 2nd December of 2009 will continue until October of this year. Of course, it won't continue in a straight line, and as noted above the HUI is almost 'oversold' on a short-term basis. It is too early to be thinking about buying ETFs such as GDX and GDXJ, but it is not too early for speculators with substantial cash reserves to be thinking about accumulating junior gold and silver stocks. A good way to do so is to place bids well under the market (sometimes called "stink bids") with the aim of taking advantage of downward spikes caused by the panic selling of others. Be careful, though, not to make the mistake of buying too much too soon. Scaling in during weakness and scaling out during strength should be gradual processes. With regard to the broad stock market, some technical indicators have returned to the extremes of 6th-7th May, which, in turn, were similar to the extremes reached between October of 2008 and March of 2009. This means that there should be an upward reversal within the coming three trading days. Alert #204, Apr-13 2010 On Tuesday the HUI dropped back to test support in the low-430s, and then rebounded. This price action solidifies 430 as an important demarcation level. We have been operating under the assumption that the HUI's short-term upside potential was limited by resistance at 470. While the area around 470 remains the most likely place for the next short-term top, the price action of the past week suggests the potential for a rise to near the December high (520) over the coming month or so. Due to the increased upside potential we are upgrading our short-term HUI outlook from "neutral" to "bullish". The broad stock market is very extended to the upside and could reach an important peak at any time. Consequently, we are concerned about overall stock market risk and the effect that a sharp downturn in the broad market could have on the gold sector. However, individual market analysis should always take precedence over inter-market analysis, and in any case the risk parameters are now defined in such a way that it will only take a small amount of weakness from here to tell us that our short-term bullish view on the HUI is wrong. If the HUI closes below 430 within the next several days it will be a clear sign that we are over-estimating the short-term upside potential. Our short-term bullish stance is therefore predicated on the HUI remaining above 430 on a daily closing basis. Alert #203, Mar-16 2010 The gold market was quite firm at the beginning of the US trading session on Tuesday, probably in anticipation of the Fed leaving the "extended period" phrase in its monetary policy statement. The Fed didn't disappoint. Here is the relevant paragraph from Tuesday's post-FOMC Meeting announcement, with the most important parts shown in capitals: "The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to WARRANT EXCEPTIONALLY LOW LEVELS OF THE FEDERAL FUNDS RATE FOR AN EXTENDED PERIOD. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are nearing completion, and the remaining transactions will be executed by the end of this month. The Committee will continue to monitor the economic outlook and financial developments and will EMPLOY ITS POLICY TOOLS AS NECESSARY to promote economic recovery and price stability." Freely translated, this means that the Fed is a) planning to keep the real short-term interest rate in negative territory for many more months, and b) prepared to resume "quantitative easing" at a moment's notice if deemed necessary. After peaking on 3rd March the HUI completed a picture-perfect pullback. What we mean is that pullbacks within continuing short-term upward trends typically last 5-8 trading days, and the pullback from the 3rd March peak bottomed on the 8th trading day (Monday 15th March) after retracing only half of the preceding 5-day surge. Furthermore, the low on the 8th trading day was immediately followed by a definitive upward reversal. This doesn't guarantee any particular future outcome, but it does mean that the risk-management parameters are now clearly defined. Specifically, traders could operate under the assumption that short-term upward trends have resumed for the gold-stock indices and gold bullion unless the lows of the past three trading days are breached on a daily closing basis. The relevant lows are 409 for the HUI and $1097 for April gold. In the 17th February Interim Update we said we would exit our trading position in GDXJ following a rise to $28.00 or a daily close below $22.93. We are raising our upside target to $29.00 (we will exit if GDXJ trades at $29) and we are changing our stop to a daily close below 409 by the HUI (we will exit our GDXJ trading position if the HUI closes below 409). Alert #202, Feb-05 2010 Here's an explanation for Thursday's market action from Dow Jones Newswires: "Concerns about debt levels in the euro-zone's peripheral countries knocked investor sentiment Thursday, sending stock markets and the euro sharply lower. The cost of insuring Greece, Spain and Portugal's debt against default rose sharply, as the European Commission's endorsement Wednesday of Greece's deficit-cutting plan failed to assuage investors' fears. A lack of fresh or reassuring news from European Central Bank President Jean-Claude Trichet at the ECB's press conference Thursday compounded the problem. Portuguese credit-default swaps widened to more than 2.00 percentage points for the first time Thursday, indicating continued investor unease about that country's debt levels. A CDS spread of 2.00 percentage points means it would cost $200,000 a year to insure $10 million worth of Portuguese debt against default." And: "Upbeat U.S. factory orders, which increased by 1% in December, beating expectations for a 0.3% rise, failed to offset more signs that the U.S. labor market has yet to recover. Data showed the number of workers filing new claims for jobless benefits rose by 8,000, versus economists' expectations for a decline of 10,000, dampening sentiment about Friday's U.S. non-farm payrolls." Debt-related problems amongst the Euro Zone's peripheral countries are not "news". We've been emphasising the stresses within the European Monetary Union for more than two years and have stated, numerous times, that these stresses will likely increase until the Union begins to break apart and/or the ECB adopts an ultra-inflationary monetary stance. Evidence of weakness in the US labour market also doesn't qualify as "news". Rather than new developments, part of what we are seeing right now is a change in the primary focus of speculators -- from US economic/financial negatives to European negatives. Some time in the future the primary focus will undoubtedly return to the US and its trio of disasters known as the Fed, the Obama Administration, and the ocean of unfunded liabilities. The realisation that the euro's fundamentals are just as bad as those of the US$ shouldn't be bearish for gold, but sentiment is the dominant driver in the short-term and the gold price tanked on Thursday in sympathy with a broad-based plunge in commodity prices. Short-term support in the $1070s was decisively breached and the preliminary sign of an upward reversal that appeared on Monday was negated. The correction is obviously still in progress. The HUI held up reasonably well on Thursday considering what was happening around it, but it still managed to close at a marginal new low for the move. It is now clear that the gold sector did not reach a short-term bottom during the first half of this week, but this doesn't alter our risk-versus-reward assessment because we were already acknowledging the possibility that further capitulation could push the HUI down to the 350s. The downdraft could have culminated on Thursday, but an additional 1-2 days of weakness would create a better platform for a rally. As mentioned in our 25th January report, we will add Golden Star Resources (GSS) to the TSI List if it trades at US$2.55. Thursday's action opens up the possibility of our buy level being reached within the next couple of trading days. Lastly, although the gold sector could be close to an important low we caution against buying anything -- including gold stocks -- aggressively at this time. Rather than buying quickly in response to price declines or selling quickly in response to price rises, it is generally better to gradually scale into and out of positions over time. We will have more to say in the Weekly Update. Alert #201, Feb-01 2010 There is now preliminary evidence of an upward reversal in the gold market, so we are upgrading our short-term gold view to "bullish". This view will be 'stopped out' if the nearest gold futures contract (currently the February contract) CLOSES below $1070. Traders of gold, silver and gold stocks should consider managing risk by placing stops at, or just below, last Friday's intra-day lows. For example, the HUI bottomed at 373 on Friday, so short-term traders of gold stocks should plan to exit if the HUI now closes below 373. On a different matter, a Chinese nuclear corporation (CNNC) has made a C$0.96/share cash bid for Mongolia-based exploration-stage uranium miner Khan Resources (TSX: KRI). This bid is about 50% above the earlier bid from the Russian company (ARMZ), but is still a long way below KRI's net asset value. Strangely, after explaining in a press release just last week that KRI was worth around C$2.50/share, KRI's management are recommending acceptance of the C$0.96/share bid. This implies that management perceives a lot more risk with the ownership, permitting and implementation of the Dornod uranium project than they are publicly acknowledging. We suggest holding KRI for now in the hope of a better offer from ARMZ. Alternatively, owners of KRI shares could consider selling half now at around C$1.00 and holding the balance. Alert #200, Jan-12 2010 The gold-stock indices and many individual gold shares spiked upward in US/Canadian trading on Monday morning and then gave back most of their gains, despite firmness in both the bullion market and the broad stock market. This is bearish price action. Also, at Monday's high of 475 the HUI's rebound from its late-December low had achieved about as much as could reasonably be expected assuming that an intermediate-term peak was put in place in early December. The short-term risk is that a counter-trend rebound has just been completed and that the next move of consequence will be a decline to test, and possibly breach, the HUI's December low (416). We think the short-term risk/reward is now skewed towards risk and are therefore downgrading our short-term HUI outlook to "bearish". This view would be 'stopped out' by a daily close above 475, because such an event would greatly increase the probability that the 2nd December high was not the ultimate top. Short-term selling opportunities are beginning to regularly appear within the ranks of junior gold/silver stocks. For example, in the 21st December Weekly Update we said that Pediment Gold (TSX: PEZ) would be suitable for new buying at around C$1.30, and that some profit-taking would be appropriate at around C$2.00. The stock reached its profit-taking zone on Monday. Fortuna Silver (TSXV: FVI) is also a good candidate for partial profit-taking at this time. FVI, which traded as low as C$1.80 in December, traded as high as C$3.01 on Monday before closing at C$2.88. At the same time, some juniors are still at levels where new buying could be considered. Andina Minerals (TSXV: ADM) and Gold-Ore Resources (TSXV: GOZ) are two examples that spring to mind. With regard to the broad stock market, we suspect that April will be the optimum time for making bearish bets. However, the volatility implied by option prices -- as measured by volatility indices such as the VIX -- probably won't get much lower than it is at present. This creates an opportunity to make an indirect bearish bet by speculating on increasing volatility via VXX, an exchange-traded note (ETN) designed to mimic the return of VIX futures. VXX traded as high as US$120 during the first quarter of last year and ended Monday's session at a new 52-week low of US$28.98. There is almost no chance that it will move back up to its 2009 high within the coming 12 months, but it could double between now and October if the stock market follows the cyclical pattern described in last week's Interim Update. We have therefore decided to add VXX to the TSI List, with a 15% trailing stop (based on daily closing prices). Alert #199, Dec-08 2009 Gold/Silver Stocks: The HUI spiked down to 453 -- or to within 8 points of its 50-day moving average -- during the first hour of trading on Monday. It then recouped about half of its losses and ended the day at 461. Under the most likely bullish scenario the HUI is now three days into a correction that will probably last 2-4 weeks. Putting it in wave terms, under this scenario the HUI is in, or has just completed, the 'A' wave of an A-B-C correction, meaning that the initial decline from last week's top will be followed by a rebound and then a decline to a new correction low. Also, the ultimate correction low probably won't be far below Monday's intra-day low. The risk is that last week's top will turn out to be the intermediate-term variety, but even in this case there will likely be a rebound at some point over the next couple of months that results in a test of the peak. Moreover, even if a 52-week high is now in place for the HUI we expect that many junior gold/silver stocks will make new 52-week highs during the first half of 2010. Speculators in junior gold/silver stocks should, we think, select the companies in which they want to own a stake, or a larger stake, and simply average into positions as opportunities arise over the next few weeks. We have recently mentioned price levels at which some of our stocks would be suitable for new buying and will continue to identify candidates for new buying as appropriate in the TSI commentaries. Updates on Stock Selections: 1. International Royalty (TSX: IRC, AMEX: ROY) gained 50% on Monday in response to a takeover bid from Franco Nevada (TSX: FNV). The bid price is C$6.75, but IRC ended the day at C$7.06. This means that the market is anticipating a higher offer. Owners of IRC shares could reasonably decide to immediately sell, or to hold in anticipation of a better offer. FNV's bid is all cash, so the downside risk from here should be limited to the C$6.75 bid price. As far as the TSI Stocks List is concerned, we are going to close our IRC position at C$7.06 and lock in a 76% profit. 2. FNV's takeover bid for IRC was obviously good news for our IRC position, but on a short-term basis it was bad news for our FNV warrant (FNV.WT) position. Note, though, that on a longer-term basis FNV should benefit from the takeover IF it can be completed near the current offer price. The downward pressure on FNV's share price stemming from the proposed IRC takeover has created another buying opportunity in the FNV warrants. These warrants traded as low as C$4.25 on Monday and closed at C$4.70. They are suitable for new buying near the current price. 3. Andina Minerals (TSXV: ADM), an exploration-stage gold miner, has been trading much better since the recent completion of its equity financing. As part of this financing the company issued warrants with an exercise price of C$2.25 and an expiry date of 2nd June 2012. The warrants trade on the TSXV under the symbol ADM.WT. We like these warrants because a) their exercise price is only about 15% out of the money (the stock is trading in the low-C$1.90s), b) they have about 2.5 years of time to expiry, c) the underlying stock is very under-valued, d) near their current price of C$0.48 the warrants are fairly valued relative to the stock, and e) there appears to be reasonable liquidity for the warrants in the C$0.47-$0.50 range. We are therefore adding them to the TSI List at C$0.48. 4. The natural gas price has rebounded from its recent low. There is no evidence, yet, that a sustainable low is in place, but the rebound helps with risk management. This is because trading positions can now be protected by placing a stop just below support defined by last week's low. The United States Natural Gas Fund (NYSE: UNG) bottomed at US$8.50 last week and closed at US$9.22 on Monday. Importantly, Monday's closing price was only 1.8% above the fund's net asset value. On a 6-month basis we like UNG's risk/reward, especially now that a logical support level can be defined for risk management purposes. We are therefore adding UNG to the Stocks List as a trading position with an initial stop at US$8.45. The stop is effective on a daily closing basis. The Claymore Natural Gas Fund (TSX: GAS) could also be bought as a trade near its current price of C$5.20, with a stop placed just below last week's low of C$4.70. Alert #198, Sep-04 2009 The HUI ended Thursday's session at its 1st June peak. Also, Royal Gold (RGLD), a stock that we regularly use as both a proxy and a leading indicator for the overall gold sector, ended Thursday at intermediate-term resistance. Lastly, silver bullion is at intermediate-term resistance (US$16) and gold bullion is nearing major resistance at $1000. Some sort of peak is probably now in place in the gold sector or will be put in place via an intra-day spike on Friday. However, given that the HUI traded above its 1st June high during Thursday's session and that the XAU has just closed above its 1st June high, the odds favour additional gains over the coming month or two following a near-term pullback. In other words, our "Scenario #2", which involves the gold sector trending upward to an intermediate-term peak during October-November, is now the front runner. Note, however, that although the HUI probably hasn't yet topped for the year, money management discipline dictates that investors with substantial exposure to the gold sector now take some money off the table. We like to trade around core positions in our favourite stocks. To be more specific, we look for opportunities to do some selling following rapid advances (like right now) and some buying following rapid declines or lengthy periods of consolidation, all the while maintaining a core holding in synch with the long-term upward trend. Alert #197, Feb-24 2009 The S&P500 Index has now fallen for 6 days in a row and ended Monday's session at its November-2008 low. We think the first up-day will mark an important bottom and signal the start of a tradable rally. On Monday the HUI tested support at 310 yet again. That makes it 7 days in succession that this support has been successfully tested. The HUI will very likely break out of its 310-325 trading range before the end of this week and begin to move quickly up to the mid-300s (if the breakout is to the upside) or down to the 280s (if the breakout is to the downside). We think the odds favour an upside breakout, but regardless of whether the direction of this week's break is up or down the HUI is likely to reach higher levels within the coming two months. There was mixed news from our gold/silver stock selections on Monday. First, US Silver (USA.V) announced after the close of trading on Monday that its 2009 silver production is forecast to be 2.9M ounces. This is more than we were expecting and can certainly be classed as good news. USA.V has pulled back to support at C$0.10-$0.12 and is suitable for new buying near its current price. Second, according to Monday's press release the ramp-up of production at Minefinders' (MFN) new gold/silver mine in Mexico is proceeding as planned, which the market naturally took as good news. We highlighted MFN as a buy on two occasions over the past month at an average price of around US$4.50. The stock closed at US$6.50 on Monday and is well on its way to our intermediate-term objective of US$9-$10, but it now looks a little extended on a short-term basis. A pullback to around US$5.50 would create a new buying opportunity. Lastly, Great Basin Gold (GBG) announced that it is doing a large equity financing. In our opinion, this financing has been poorly timed and is very much in the bad news category. Furthermore, the company has proceeded with the equity offering without first locking in a price for the new shares. This, in our opinion, was a stupid thing to do. The financing news pushed GBG down to support at US$1.40, which would ordinarily constitute an opportunity for new buying. In this case, however, we would wait until the financing price has been determined and the market has had time to fully digest the effects of the share dilution before doing any new buying. Alert #196, Feb-18 2009 Tuesday's sharp drop in the US stock market broke the S&P500 Index (SPX) downward from its short-term consolidation. More importantly, it resulted in a new bear-market low for the BKX/SPX ratio and was a deviation from the typical post-crash pattern. The risk has therefore increased that something other than a routine post-crash rebound is occurring. Having said that, this is probably a good time to be giving the market the benefit of the doubt. The reason is that the Dow Industrials Index ended Tuesday's session right at last November's bear-market low of 7552, meaning that it is now at an important support level and hasn't yet negated the rebound scenario. Additionally, the S&P500 Index ended Tuesday's session 1% above long-term support at 780 and about 5% above its November-2008 closing low, so it, too, has not yet weakened enough to negate the rebound scenario. One of the most likely outcomes is that the Dow spikes to a new bear market low this week while the S&P500 and NASDAQ100 Indices make higher lows. Both gold and the Dollar Index strengthened in response to Tuesday's stock market weakness. Any causal relationship between the US$ gold price and the US dollar's foreign exchange value has effectively been eliminated, at least on a temporary basis, as both are now responding independently to the daily ebbing and flowing of economic confidence. It just so happens that both are being purchased in response to increasing fears of economic disaster, creating the illusion that there is a causal positive relationship between the two. Based on the way the financial-market story has unfolded over the past few weeks, short-term tops for both gold and the US$ are likely to coincide with a short-term stock-market bottom. It is reasonable to expect that the gold sector of the stock market -- the only sector of the market performing well at this time -- will take a breather once the broad stock market reverses upward. The way we see it, the average gold stock could be hampered by some weakness in the bullion market once the stock market bottoms, but at the same time the gold sector should continue to benefit from a powerful tail-wind in the form of a dramatic increase in the profitability of gold mining. Considering that gold will probably be the only sector of the stock market generating good earnings results over the months ahead and that the current prices of most gold stocks do not fully reflect the improvement in gold-mining profitability brought about by the developments of the past 6 months (the large rise in the gold price relative to the costs of mine construction and gold production), we suspect that the investing community will be eager to buy pullbacks in the gold sector. We made a partial exit from three of our gold stocks on Monday and plan to do some additional selling if prices spike upward over the days ahead. This selling was done purely for money-management purposes. Specifically, due to recent price gains our exposure to the stocks in question became larger than we were comfortable with, so we took advantage of Tuesday's surge to do some pruning. None of the gold/silver stocks we follow are close to being fully valued at their current prices, but if, like us, you have very substantial exposure to gold then it makes sense to raise cash on the way up. This is not just because doing so is good risk/money management practice, but also because it reduces stress. Finally, we note the following changes to TSI trading positions: 1. The general stock market rout caused the trading positions in FCG and KOL to hit their trailing stops, resulting in losses of around 4%. 2. We are going to add a trading position in Precision Drilling (NYSE: PDS) to the TSI List at Tuesday's closing price of US$2.50. The stock has fallen for 6 days in a row and on 13 of the past 14 days. Furthermore, it is now 33% below the level at which a large 'bought deal' financing was done just one week ago. We are not going to use a protective stop at this stage due to the stock's low price and high volatility. Alert #195, Jan-05 2009 There are no significant changes to any of our short-term expectations for the markets we follow, so there is no real need for a market alert email at this time. However, since we've been out of action (on a beach in Malaysian Borneo, most of the time) for the past couple of weeks we thought we'd send out this message just to keep in touch. Gold: The February gold futures contract has edged above resistance in the $850-$870 range and looks like it is about to test the more important resistance that lies in the $920s. A solid move above the aforementioned resistance would break the sequence of declining tops and signal an end to the correction that began last March. We doubt that the gold market will make substantial gains over the next 3 months, but breaking the sequence of declining tops would lend support to our opinion that a multi-year rally is in its early stages. Gold Stocks: The HUI pulled back during the second half of December and then reversed higher without becoming even slightly 'oversold'. It has moved back to near its 17th December peak (311.4), but has not made a new recovery high. It is quite possible, therefore, that the short-term correction is not yet complete. IF the HUI breaks decisively above 311 over the coming days then a test of resistance in the low-350s will probably soon follow. The low-350s is where the September rebound ended and where the final plunge in the gold sector's major correction began, so it's a price area where selling pressure is likely to increase. In particular, there are probably many people who regret not selling near September's rebound peak who will view a return to this level as a great opportunity to cut losses or take profits. We would also view a move up to around 350 within the coming fortnight as a short-term selling opportunity, but we doubt that such an event would mark an intermediate-term peak (a peak that holds for 6-12 months). Intermediate-term advances in the gold sector usually last at least 6 months, so on this basis the overall advance should continue until at least the second quarter. The US Stock Market: We continue to expect that the stock market will have an upward bias during the first few months of this year. The T-Bond Market: The T-Bond's recent downward reversal indicates that a peak of at least short-term significance is in place. The Currency Market: The commodity markets have joined the broad stock market in 'rebound mode', and, as expected, this is leading to relative strength in commodity currencies such as the AUD. This trend should persist over the first few months of 2009. TSI Stock Selections: The only TSI stock requiring an immediate update is Resolute Mining (ASX: RSG). The Australia-listed RSG completed its capital raising last week and re-commenced trading today (Monday 5th Jan). As we write, it is trading at A$0.48. RSG ended up raising A$54.7M by issuing convertible notes and new shares. This was less than anticipated, but should be sufficient to take the company's most important project (the Syama project in Mali) through to commercial production. A smaller capital raising will probably be arranged within the next few months -- hopefully after the share price has rebounded to well above A$1. RSG's management handled the financing issue in a way that put unnecessary downward pressure on the stock price, but shareholders could have mitigated the effect of the poorly executed financing (reduced their average cost) by participating in the capital raising (as suggested in TSI commentaries). Furthermore, existing shareholders who did not participate in the capital raising and investors who don't own any RSG shares can still take advantage of the situation by buying shares on the ASX at A$0.50 or lower. Significant financing and execution risk remains, but there is huge upside potential given that the company is slated to produce more than 400K ounces of gold this year and has a current market cap of only US$140M. For record purposes, we will assume that exposure to RSG was doubled at A$0.50 via the capital raising. We will return to our regular report-posting schedule with this Thursday's Interim Update. Alert #194, Dec-17 2008 The Fed gave the markets what they were hoping for on Tuesday, plus a bit more. We'll discuss the Fed's 'generosity' in Thursday's Interim Update. In the latest Weekly Update we wrote: "...we think it will be prudent for traders to take some money off the table IF gold spikes upward during the hours/days following this week's main event [the Fed meeting]. As noted in earlier commentaries, resistance at $850-$870 would be a reasonable price range in which to take some gains." And: "If the HUI were to spike up to the high-200s this week it would, we think, present a short-term selling opportunity." And: "...if the HUI moves up to the high-200s at some point over the coming week it might make sense, for those who can handle the risk and the lack of liquidity, to shift some money out of the larger/more-liquid stocks with the aim of accumulating a batch of microcaps during the final 1-2 weeks of the year." The HUI closed at 296 on Tuesday and gold moved up to the middle of the $850-$870 resistance range, so we have reached the point where it might make sense for traders to take some money off the table. Alternatively, traders could choose to tighten their stops, thus preserving the bulk of the recent gain whilst retaining the ability to capitalise on any additional upside over the coming days. Although there is no evidence that a short-term peak is in place we are downgrading our short-term HUI outlook from "bullish" to "neutral". The words "bullish" and "bearish" only have meaning to us in terms of risk versus reward. As things currently stand, we think 350 represents the HUI's maximum short-term upside potential whereas a normal correction would take the price back to the 250s. This means that risk and reward appear to be roughly in balance on a short-term basis, hence our decision to shift back to "neutral". A drop to the 250s over the coming weeks would almost certainly return us to a "bullish" short-term stance. The Dollar Index has plunged anew and closed at 80.2 on Tuesday. On a risk versus reward basis there is no longer a good reason to be short-term bearish on the Dollar Index, so we are upgrading our view from "bearish" to "neutral". We think that the main commodity currencies (the A$ and to a lesser extent the C$) have the most upside potential as far as the coming few months are concerned. We are going to exit our Yamana Gold (AUY) trading position at Tuesday's closing price of US$6.97 and record a profit of around 40% based on our 8th December entry at $4.94. We are also looking for an opportunity to salvage some value in our AUY Jan-2009 $9 call options. AUY will probably have to spike $1-$2 higher in the near future to inject significant value into these options, which is not likely but is not out of the question. We will exit these calls if they trade at US$0.90. Alert #193, Dec-02 2008 We noted in the Weekly Update that the HUI's 5 consecutive up-days to resistance at 250 along with RGLD's almost vertical rise to resistance at $40 had increased the risk of a near-term pullback. A normal pullback would have taken the HUI back to around 225 over the space of several days, but it seems that the markets are not yet capable of managing "normal" pullbacks. In the space of a single day the HUI plunged from resistance to well below the aforementioned support level. It was a similar story with the broad stock market. A normal pullback would have taken the S&P500 Index back to support at 840-850 over the space of several days, but, instead, there was a single-day plunge to well below this support range. The mainstream financial press attributed Monday's market action to the belated acknowledgement by the official arbiter of US recessions (the NBER) that the US economy has been in recession for 12 months. This explanation makes no sense because the markets are always forward-looking and have been busily discounting a serious recession throughout this year. In other words, the recession news wasn't really news at all. In our opinion, Monday's sudden decline was simply a reaction to the fact that the stock market had just completed a huge 5-day rise, prompting some profit taking, combined with the fact that traders remain unusually jittery. From our perspective Monday's drama didn't change anything. In particular, we continue to expect that the gold sector will gain a lot more ground over the months ahead. Furthermore, although most stock indices have overshot support levels, there are many positive divergences. For example, there were only 98 new lows on the NYSE on Monday versus more than 1000 new lows the last time the S&P500 Index was near its current level. Gold also took a hit on Monday, but unlike the stock indices it managed to hold at short-term support (as mentioned in the Weekly Update, December gold has support at $770-$780). In other developments, the US$ didn't receive a significant boost from Monday's declines in the equity and commodity markets. This supports our view that the dollar is in the process of topping. Lastly, there was sufficient weakness on Monday to stop us out of our trading positions in Yamana Gold, Hudbay Minerals, New Gold and Silver Wheaton at profits of 37.8%, 12.0%, 7.1% and 14.8%, respectively. An opportunity to establish new trading positions will hopefully emerge within the next three weeks. Alert #192, Oct-16 2008 The Stock Market: With the benefit of hindsight it is clear that last Friday morning's plunge in the gold price warned of an upward reversal in the broad stock market and that Thursday's plunge in the gold price carried a similar message. At this stage it looks like Thursday's intra-day low for the S&P500 Index was a successful test of last Friday's bottom, although it would be unusual for the final test to occur so soon after the bottom. We should therefore allow for the possibility that there will be another test of the low within the next few weeks prior to the start of a multi-month rally. Given the historic extremes being registered by fear indicators and the likelihood that a successful -- albeit, probably not the final -- test of the low has just occurred, we are upgrading our short-term US stock market outlook to "bullish". Over the past 6 weeks many stocks and stock market sectors have been pushed to very under-valued levels, and one set of stocks that stands out are the Canadian 'gassy' trusts. The current prices of these trusts would only make sense if large distribution cuts were on the cards, but in our opinion there will not be any distribution cuts provided that the downward trend in the natural gas price is close to an end (we think it is close to an end or has already ended). All of the energy trusts that we follow at TSI should rebound strongly over the coming months, but if we had to single out one of them for new buying we'd choose Daylight Resources (TSX: DAY.UN). DAY.UN has a distribution yield of about 23% at Thursday's closing price of C$6.71. With regard to the trusts that trade in the US as well as in Canada we'd be inclined to direct new buying towards Precision Drilling (NYSE: PDS), which yields about 14% at Thursday's closing price of US$9.80, and Penn West Energy (NYSE: PWE), which yields about 22% at Thursday's closing price of US$15.80. Gold and Gold Stocks: The gold stocks continue to confound. With the gold price down by $50-$60 and the Dow down by around 300 points during the early going on Thursday it was not surprising to see the HUI down by another 10%, but after the gold price stabilised and the Dow reversed sharply higher it was very surprising that the HUI failed to recover its losses. The risk is that gold bullion drops back to the $730s to test its September low, but gold mining stocks already appear to be factoring in a lot more gold price weakness than that. This doesn't suggest to us that gold bullion is about to tank; rather, we think it means that indiscriminate selling of gold stocks to meet margin calls has caused the prices of these stocks to become temporarily disconnected from the underlying business fundamentals. The stage has been set for a very fast rebound in the gold sector. Traders could attempt to play this via GDX call options with expiry dates of Jan-2009 or later, although this is not a trade that we will be doing in our own accounts because we already have our maximum exposure to the gold sector. The Currency Market: Thursday's test of last Friday's stock-market bottom coincided with a test of last Friday's US$ peak. The Dollar Index is 'overbought' and should pull back over the coming weeks as long as financial tensions soon begin to ease. Alert #191, Oct-08 2008 A number of stock market indicators have moved to their most extreme levels in history, which really means the most extreme levels of the past 10-30 years because for earlier periods we don't have data for indicators such as put/call ratios, volatility indices, and percentages of stocks above 200-day moving averages. We suspect that if we did have longer-term historical records of these indicators they would show that similar extremes were reached on a few occasions during the 1930s. The action over the first two days of this week doesn't invalidate the idea that an important low is close at hand in terms of time. Actually, it greatly increases the probability that an important low will soon be in place. Furthermore, what's happening now is consistent with what happened during the final few weeks of the 1937-1938 decline. In particular, the US stock market lost about 25% during the final 4 weeks of the 1938 decline and eventually bottomed about 12 months after the 1937 peak. At Tuesday's close the S&P500 had fallen about 23% within the space of 5 weeks and was nearing the 12-month anniversary of its October-2007 peak. Wednesday is shaping up to be another volatile day on Wall Street. Asian stock markets tanked again (Japan's market fell 9% and the Hong Kong market dropped 8%) and S&P500 futures are down by 28 points (almost 3%) as we write, so the stage is set for a down opening in the US. But as markets plunge, so does the intermediate-term downside risk in these markets. For example, the Dow Jones Industrials Index lost 875 points over the first two trading days of this week, and yet the fundamentals are no worse now than they were last Friday. This means that there is now 875-points LESS intermediate-term downside risk in the Dow than there was at the end of last week. The still-high valuation of the S&P500 Index suggests that the bear market in US equities is not yet close to its end in terms of either price or time, but the intermediate-term risk/reward is now skewed towards reward. We are therefore upgrading our intermediate-term stock market outlook to "bullish". The most important new development so far this week is the establishment of a new Fed/Treasury lending programme called the Commercial Paper Funding Facility (CPFF). Refer to http://www.federalreserve.gov/newsevents/press/monetary/20081007c.htm for details. The Fed has been providing hundreds of billions of dollars of short-term loans to financial companies. Thanks to the CPFF, it will now be able to do the same for non-financial companies. The predictable inflationary response to the crisis continues. The inflationary actions of the Fed and the Treasury may now be sufficient to offset the positive impact of the global de-leveraging on the US dollar's exchange value. Alert #190, Oct-03 2008 How many times are market participants capable of panicking within the space of just one month? The answer is: a lot more times than we thought was possible at this time last month. The extreme volatility, especially amongst commodity-related equities, is making it virtually impossible to efficiently manage risk by exiting in response to evidence of weakness. For example, at the close of trading on Wednesday the AMEX Gold BUGS Index (HUI) appeared to be experiencing a routine pullback, but by the close of trading on Thursday it had given back all the gains achieved since the September bottom. There was no reason for us to suggest selling after Wednesday's close because a normal pullback appeared to be nearing its conclusion, and there is no reason for us to suggest selling now because we are suddenly back in the vicinity of last month's major bottom. The only positive that we can take from Thursday's plunge in the gold sector is that it should lead to an October low, with the October low representing a test of the September low (ideally, the HUI will spike below its September below and then quickly reverse upward). This would be a plus because there is a strong tendency for important gold-sector turning points to occur during October-November, and, thanks to the past week's action, any October-November turning point would now have to be a reversal from down to up. The action in the gold sector of the stock market is consistent with what's happening to almost all commodity-related equities, meaning that 'investors' are exiting the commodity realm indiscriminately. Even the agricultural sector, which shouldn't be particularly sensitive to economic weakness, was clobbered on Thursday, with the Agribusiness ETF (AMEX: MOO) taking a 17% hit. We seriously doubt that there will be less grain consumed over the coming 12 months than there was over the past 12 months, and risks on the supply side of the equation remain high. However, the current market action has very little to do with commodity fundamentals and a lot to do with the de-leveraging of hedge funds and other speculators. We suggested a trade in Patriot Coal (NYSE: PCX) in Thursday's Interim Update, but the 'stop' on this trade was hit just one hour into Thursday's session. The coal sector should be very profitable over the coming 12 months because even though the price of thermal coal has dropped by around 30% from the high reached earlier this year it is still very high by historical standards. Coal stocks should therefore rebound strongly once the panic ends. Stock market participants are panicking, and so is the Fed. The Fed expanded its balance sheet by $254B during the one-week period ending 1st October, which follows a $204B expansion during the preceding week. As a result, the Fed's balance sheet has grown by almost 50% within the space of just two weeks. This, we believe, is unprecedented. As we'll explain in Sunday's Weekly Market Update, the Fed's recent actions have begun to have a significant effect on our favourite measure of total money supply. Alert #189, Sep-30 2008 The US House of Representatives rejected the $700B bailout package on Monday afternoon. This was a surprise to us, but based on the way the markets traded from the 'get go' on Monday it wasn't a surprise to everyone. We say this because many hours before the vote was taken, the equity, bond, commodity and currency markets were already trading as if rejection were the most likely outcome. The House did the right thing by saying no to the bailout, although for the wrong reason. Most congressmen voted against the legislation solely because it was unpopular with their constituents, and the reason for its unpopularity was the perception that Wall Street was being rescued at the expense of the average taxpayer. However, a rescue package involving a massive increase in government spending would be a bad idea regardless of who the short-term beneficiaries happened to be. We suspect that some form of bailout package will eventually be passed by both houses of the US government, but with or without such a package it is apparent that powerful inflationary forces have been set in motion. For example, we noted in the Weekly Update that the Fed created 204 billion new dollars last week, and, in the process, drove the Fed Funds rate to well below its 2.0% target. This amounted to a 22% expansion of the Fed's balance sheet in just one week. The rate of monetary inflation ratcheted up even further on Monday. In particular, the Fed issued a press release on Monday (http://www.federalreserve.gov/newsevents/press/monetary/20080929a.htm) in which it confirmed that the total amount of money available to banks under the Term Auction Facility (TAF) would be increased by $300B (from $150B to $450B) over the next several weeks, and that the quantity of dollars made available by the Fed to other central banks would immediately increase by $330B (from $290B to $620B). The way things are going, the amount of new money created by the Fed will soon dwarf the $700B bailout package. With regard to the markets, Monday's panic pushed the spot gold price above $900. The wild oscillations will probably continue in response to new developments on the 'bailout front', so we won't hazard a guess as to whether the move back into the $900s will be sustained over the days immediately ahead. Clearly, though, the financial and economic backdrops are becoming increasingly gold-bullish. The HUI traded as low as 311 on Monday and might have just completed the "right shoulder" of a "head and shoulders" bottom. Although it doesn't feel like it, Monday's action significantly REDUCED the downside risk in the broad stock market. Panic could continue for another day or three, but the intermediate-term upside potential now appears to be at least as great as the intermediate-term downside risk. We are therefore upgrading our intermediate-term stock market outlook from "bearish" to "neutral" and will probably upgrade our short-term stock market outlook from "neutral" to "bullish" as soon as an upward reversal is signalled. There is very little chance that the bear market has ended, but this bear is probably about to hibernate. Alert #188, Sep-19 2008 We mentioned in Thursday's Interim Update that the perceived risk of a major breakdown in the stock market would provoke official intervention. The intervention came during Thursday afternoon's trading in New York as news of a massive US Government rescue plan for the entire banking industry hit the wires. The details are scant at this stage, but the plan being discussed apparently involves the government taking illiquid assets off the balance sheets of private banks and putting them 'somewhere else'. Refer to http://biz.yahoo.com/ap/080918/financial_meltdown.html for more info. The solutions being proposed to resolve the on-going crisis are becoming increasingly inflationary. The government has no money and it certainly won't be raising taxes in the current environment, so how is the government going to buy all these illiquid assets currently held by private banks? Quite likely, using new money created 'out of thin air'. As the solutions become increasingly inflationary, the situation becomes increasingly bullish for gold. However, as was the case following the bailout of the FNM/FRE bondholders the initial market reaction has been weakness in gold and strength in the USD. This should create another good short-term buying opportunity in the gold market, although we doubt that prices will go anywhere near last week's lows. Our guess is that gold will, at worst, drop back to the low-800s (as we write, gold is trading in Asia at around $845). The volatility throughout the financial world is quite extraordinary right now, which makes it even more difficult than usual to garner meaningful information from the day-to-day fluctuations. However, at this stage it looks like a short-term bottom was put in place on Thursday in the stock market and that temporary tops were put in place for gold and the HUI. The HUI could drop back to the 290s over the coming days, but we do not expect last week's lows to be re-tested in the near future. We are going to exit the RGLD Jan-2009 $30.00 call options that were added to the TSI Stocks List in June. Based on our entry price of $3.70 and Thursday's closing price of $9.25, the profit on the trade was 150%. In our own account we had RGLD $30 and $40 call options. We took profits on the $30 calls on Thursday and have retained the $40 calls on the expectation that the stock will move to new highs following a quick pullback. Our interest in coal has been rekindled by the combination of attractive valuations and evidence that this beaten-down sector of the market has just bottomed. Traders should consider taking positions in the coal sector and setting initial 'stops' just below this week's lows, with the Coal ETF (KOL) and Patriot Coal (NYSE: PCX) being two reasonable candidates for new buying. At this stage we aren't going to make any coal-related additions to the TSI Stocks List, but we are increasing the coal exposure within our own account. For example, we took a small position in PCX in the high-$20s on Thursday and will look for an opportunity to add to this position over the coming days. On Thursday we also made a small addition to our natural gas exposure by purchasing some more Precision Drilling (NYSE: PDS). PDS is a bargain near its current price. Alert #187, Sep-16 2008 All of our readers are probably aware of the news that prompted Monday's plunge in the US stock market. Here is our quick take on the short-term market implications: 1. As cataclysmic as the situation appears to be, there's a reasonable chance that Monday's plunge and whatever follow-through to the downside occurs on Tuesday will prove to be a successful test of the July lows for the S&P500 and the Dow, and a successful test of the March low for the NASDAQ100. 2. Sentiment indicators are naturally showing high levels of fear, but the fear is not out of proportion with the price action. 3. The most interesting -- and potentially most significant -- technical indicator at this time is the number of new 52-week lows on the NYSE. There were 792 new lows on the NYSE on Monday, which is very high but not as high as at the previous interim stock-market lows of the past 15 months. Ideally, there will be sufficient additional weakness on Tuesday to push the number of new NYSE lows above 1000 because this would generate a very reliable bottom signal. In fact, on every occasion over the past 40 years when the number of new NYSE lows has exceeded 1000 it has marked a bottom of at least short-term significance. There have been no exceptions. 4. Although Tuesday could turn out to be another short-term bottom, there's very little chance of it being the ultimate low for the equity bear market. Furthermore, we would NOT place trades on the basis that some sort of bottom could be close at hand for the broad stock market. 5. In the Weekly Update posted on Sunday we didn't mention Tuesday's FOMC Meeting because at that time there appeared to be no chance of the Fed making any change whatsoever at this meeting. However, the rapid emergence of more problems within the financial sector and the reactions of various markets to these problems opens up the possibility that the Fed will cut its targeted rates this week. The TBill yield is currently about 1.0% and the 2-year Treasury Note yield is currently about 1.7%, compared with a current Fed Funds rate target of 2.0%. This suggests that the debt market is now discounting a near-term Fed rate cut. 6. It is likely that a rate cut by the Fed at Tuesday's FOMC Meeting would be followed in short order by similar moves on the parts of other central banks, including the ECB. 7. We continue to believe that the gold sector offers a good short-term risk/reward, with risk being limited by placing stops just below last week's lows. Alert #186, Sep-12 2008 Sometimes there are months between our market alert emails, but this makes the third such email within the space of only four days. These are interesting times! The illiquid junior gold and silver stocks will often be moved by the trades of small non-professional investors, but significant gains or losses in the liquid large-caps will usually be driven by the pros. The continuing selling pressure within the ranks of major gold stocks therefore indicates that some large investors are still heading for the exits. Now, we doubt that any professional investor would be CHOOSING to sell at current levels. Rather, the selling pressure that continues to be evident is most likely stemming from the FORCED liquidation of positions in response to margin calls or, more generally, a need to raise cash at any cost. However, the market for gold shares finally appears to have reached the point where the forced selling of some investors is being offset by the new buying of bargain-hunters. On Thursday the gold-stock indices dropped back to Wednesday's intra-day lows and then rebounded. They ended the day with losses, but the net result of the past two days is small gains in the gold-stock indices combined with a $35 fall in the spot gold price. This is a positive divergence. For its part, gold is testing important support at $725-$735. For those with the financial capacity to do so this is a very good time to be buying gold bullion and gold stocks, either as trades or for long-term investment purposes. As noted in Thursday's Interim Update, traders taking positions in gold-stock ETFs or highly liquid major/mid-tier gold stocks (the only ones suitable for short-term trading) should place protective stops just below this week's lows. There are obviously no guarantees and it is possible that gold and gold stocks will continue to decline from here, but the risk of being wrong (again) can now be limited by placing protective stops as mentioned above. If the gold-stock indices break decisively below Wednesday's intra-day lows then traders could quickly move to the sidelines and await the next signal. Those who do not have the financial capacity to COMFORTABLY take-on new positions should either sit tight or use the market-wide weakness to switch from higher-risk to lower-risk gold stocks. Do not buy on margin or attempt to make up for past losses by taking larger-than-usual risks. Just for information: On Thursday we purchased some gold bullion (via bullionvault.com) at around $740, some Yamana Gold (AUY) call options, and some Great Basin Gold (AMEX: GBN, TSX: GBG) shares. This dropped our cash position to around 25%, which is as low as we will let it get (physical gold is counted as part of "cash"). Due to the nature of the positions we hold we have considerable leverage to gold, but none of this leverage is via the use of debt. In fact, we have ZERO debt and plenty of cash, and plan to keep it that way. We will not increase our overall exposure to the market beyond the current level, but as opportunities present themselves we will add to positions in some stocks and scale back in others. On a separate matter there was very good news from uranium junior Energy Fuels (TSX: EFR) on Thursday, which the stock market totally ignored. EFR reported that it had received the final permit for its Whirlwind uranium mine in Colorado. The company now has two fully-permitted uranium mines in the US and is poised to move into production. EFR has about C$14M of cash and a market cap, at Thursday's closing price of C$0.43, of C$22M, meaning that it currently has an enterprise value (market cap minus net cash) of only $8M. In other words, the stock market is saying that fully-permitted uranium mines with near-term production capability in a politically secure location are worth almost nothing. Try to make sense of that. Alert #185, Sep-10 2008 We know that people who are heavily invested in gold and commodity stocks are currently suffering large portfolio drawdowns and that rapid changes in portfolio value often cause emotions to run high, but it's always important to look at the financial markets through objective eyes. Here's our quick (and objective) assessment of the current situation: 1. Major support for the HUI at 275-285 has been decisively breached, which we obviously didn't expect. This is belated confirmation that a primary correction, or cyclical bear market, is underway. 2. Knowing that the correction is the primary type doesn't help us much at this stage because the "belated confirmation" has probably happened close to an important price low and has almost certainly happened within three days of a low that will hold for at least a few months. The October low that we were anticipating prior to this week will probably either not occur or prove to be a successful test of this week's low. 3. A multi-month rally will very likely begin from whatever low is made this week, but at this time there's no way of telling whether this rally will be a rebound within a continuing bear market or the first leg of a new bull market. 4. It would have been good to have panicked when prices were much higher, but now is not the time to panic. 5. Market Vane's bullish percentage has dropped to 35% for silver and 26% for platinum. We don't have a lot of historical Market Vane data, but these are the LOWEST levels that we can ever recall seeing for these sentiment measures. Market Vane's bullish percentage for gold is currently 61%. The gold price has held up much better than the prices of silver and platinum, and as a result gold's bullish percentage has also been more resilient. 6. The sharp across-the-board declines in commodity-related equities that have occurred of late will undoubtedly lead some analysts to conclude that the markets have begun to discount deflation. We've mentioned in TSI commentaries that a deflation scare is likely within the coming 12 months, but the recent market action looks more like the forced unwinding of leveraged long-commodities/short-financials trades than the discounting of a deflationary outcome. 7. The government takeover of the two largest GSEs supports our view that genuine deflation (a sustained contraction in the money supply) is extremely unlikely, for two reasons. First, the methods that will be used to plug the gap between the assets and liabilities of the two GSEs will likely add hundreds of billions of dollars to the US money supply. Second, the government's latest actions confirm its willingness to do whatever is necessary to keep the inflation going. 8. For the first time since August of 2007 the broad stock market and the gold sector have become oversold at the same time. They are likely to rebound together from this week's lows. Suggested action: If you purchased some gold-sector trading positions on Tuesday then you should wait for evidence of an upward reversal before doing any more buying. If you didn't do any buying on Tuesday, but have the financial capacity to do so, you should wait for an upward reversal before taking action. This week's low could then be used as an initial 'stop' for new positions. The above-mentioned upward reversal is likely to occur on Wednesday or Thursday. Finally, if given the opportunity to do so over the coming days we would be buyers of physical bullion (via bullionvault.com) in the $725-$740 range. As we write, gold is trading in Asia at around $770. Alert #184, Sep-09 2008 Monday's initial market reaction to the news that Fannie Mae and Freddie Mac were going to be nationalised was to push the US$ downward and the prices of gold and commodities upward. However, the dollar subsequently reversed upward and the commodity markets gave back most of their gains. We think the markets' initial reaction was correct because the nationalisation of the two largest GSEs will eventually result in hundreds of billions of additional dollars being borrowed into existence by the US Treasury, but in the short-term it seems that the financial landscape is being dominated by the forced liquidation, on the part of over-leveraged hedge funds, of long positions in commodities and commodity-related equities. This liquidation has been more evident in the stocks of commodity producers than in the commodities themselves, and has obviously had a huge impact within the relatively small universe of gold mining stocks. The price action suggests that other commodity-focused hedge funds will soon have to follow the lead of the Ospraie fund and shut themselves down. Gold bullion is holding up well and continues to diverge from the euro. However, the major gold stocks are being hammered due to the exodus of over-leveraged hedge funds, and the small gold stocks are still falling under the weight of the sweat-drenched towels being thrown by retail investors. The plunge in the gold sector over the past three trading days has, in fact, been severe enough to cause our HUI/Gold Oscillator (HGO) to generate a second buy signal (the first was on 11th August). This is not the first time that the HGO has generated two closely-spaced buy signals, but it is the first time that the HUI has made new lows more than three weeks after the initial HGO buy signal. This is one of several indications that gold stocks are now more oversold than they have ever been. The odds favour an October low for the gold sector, but the dramatically oversold state of this market combined with the close proximity of major HUI support at 280 suggests that some new buying should be done at this time. We will add the Yamana Gold (AUY) Jan-2009 US$9.00 call options (AUYAL) to the TSI Stocks List if they trade at US$1.15 before the end of this week. AUY closed at US$8.49 on Monday and has major support at US$8.00. Our buy price for the options assumes that AUY will spike down to the low-$8 area. The RGLD Jan-2009 $30 call options and the SLW Dec-2008 $10 call options would also be suitable for new buying at or below current levels. Alert #183, Sep-03 2008 The first reason for this email is to make some comments about Tuesday's rather dramatic action in the markets. These comments could probably have waited until the Interim Update scheduled to go out later this week because at this stage we aren't sure if Tuesday's action changes anything, but we suspect that many of our readers would like to have our thoughts on the events as soon as possible. Prior to Tuesday's US trading session it appeared as if gold and the gold-stock indices were preparing to break out to the upside from multi-day consolidations, but Tuesday's action makes it look like the rebounds from the mid-August lows were "ascending wedge" patterns that have just resolved to the downside. If so then gold is probably on its way to $725-$750 and the HUI is probably on its way to 280 -- levels at which stronger and more sustainable rallies would likely commence. In other words, if we focus solely on the charts of gold and gold stocks then Tuesday's action implies additional near-term price weakness. However, when we look beyond the basic charts of gold and the HUI we see a few positives, or potential positives, for gold-related investments. For example, the broad US stock market's price action was also bearish on Tuesday in that the S&P500 Index spiked upward to near its mid-August peak and then reversed downward, ending the day with a loss. The gold sector and the broad stock market have been trending in opposite directions over the past year, so unless the relationship between the two is about to change, which is unlikely, it is reasonable to conclude that one of these markets generated a FALSE bearish signal on Tuesday. Also, some positive divergences have recently developed between gold, gold stocks and the euro. Specifically: the HUI has out-performed gold bullion over the past three weeks and the euro's drop to a new low for the move on Tuesday was not confirmed by gold. The above-mentioned positives cast doubt on the superficial bearish message being sent by Tuesday's sharp declines in gold and gold stocks. Hopefully, Wednesday's action will help clarify the situation. Tuesday's ups and downs in all the markets had a lot to do with the oil market's reaction to Hurricane Gustav. Although the oil price didn't rise by much in anticipation of Gustav disrupting oil production in the Gulf of Mexico, it plunged as soon as it became apparent that the hurricane would not have a material effect on oil supply. The plunge in the oil price led to the whole-scale liquidation of long positions throughout the world of commodities, which suggests that there is still a lot of 'hot money' on the bullish side of the commodity fence regardless of what the Commitments of Traders data are indicating. Weakness in oil and other commodities boosted general equities and the US dollar at the start of trading on Tuesday, but general equities couldn't hold onto their gains. The oil market is probably not yet close to its ultimate correction low, but as a result of the decline that has already occurred the short-term risk/reward no longer appears to be skewed towards risk. We are therefore upgrading our short-term assessment of the oil market from "bearish" to "neutral". The natural gas market has fallen much harder than the oil market over the past several weeks and should be much closer than oil to its ultimate correction low. Based on this market's strong seasonal tendency an important low was/is expected to occur during August-September. The second reason for this email is to add a UNG (United States Natural Gas Fund) call option position to the TSI Stocks List. UNG is designed to track changes in the natural gas price. We are adding the UNG January-2009 $36.00 calls (UNEAJ) at Tuesday's closing price of US$3.35. Alert #182, Aug-12 2008 Gold stocks plunged again on Monday, and this time they were accompanied by gold bullion. Gold futures have now fallen for 7 days in succession, a rare losing streak. Also, gold spiked lower in Tuesday morning's Asian trading session (as we write it is down about $17 from its New York close), which, for better or worse, allowed us to finally get filled on a buy order at $810 that we've had in place for several months. Spikes in Asian trading following extended moves to either the upside or the downside tend to mark short-term highs or lows. To be more specific, if there's a sharp upward move in Asian trading following a strong rally it will tend to mark a short-term peak, and if there's a sharp downward move in Asian trading following a strong decline it will tend to mark the end of the decline. Our HUI/Gold Oscillator generated a buy signal last Friday. As we noted in an email alert last week: "A buy signal from the HGO could mark the day of the correction low, but such signals have sometimes preceded the ultimate low by up to three weeks. Therefore, if the HGO generates its buy signal we will be very confident that the gold sector is within three weeks of a very important low. Furthermore, since the beginning of the gold bull market someone who averaged into a basket of major gold stocks during the three-week period following a buy signal from the HGO has ALWAYS been presented with an opportunity to realise a sizeable profit -- ranging from 20% to 80% -- within 6 months of the signal." To put it another way, the HGO indicates that we are within 3 weeks of a very important low and that there will be an opportunity over the next few months to realise good profits on positions in the major gold stocks that are averaged into within this 3-week period. Our opinion is that the gold sector is experiencing a sharp bull-market correction, but in any case the rally that follows the current steep decline should retrace a big chunk of the decline REGARDLESS of whether or not the bull market remains intact. Alert #181, Aug-06 2008 The HUI unexpectedly (from our perspective) broke below support at 385 earlier this week and is quickly approaching the sort of extreme that would enable us to make a high-confidence prediction regarding its likely direction over the next few months. In particular, the HUI/gold ratio has fallen fast enough over the past week to bring our HUI/Gold Oscillator (HGO) to within 1% of a rare buy signal (the HGO will generate a buy signal if the HUI is down by 1% or more relative to gold bullion at the end of Wednesday's US trading session). The HGO tends to generate one buy signal every 12 months or so, although the most recent one was way back in June of 2006. It came very close to generating a buy signal in August of 2007, but the gold sector began to rebound just prior to the requisite extreme being reached. A buy signal from the HGO could mark the day of the correction low, but such signals have sometimes preceded the ultimate low by up to three weeks. Therefore, if the HGO generates its buy signal we will be very confident that the gold sector is within three weeks of a very important low. Furthermore, since the beginning of the gold bull market someone who averaged into a basket of major gold stocks during the three-week period following a buy signal from the HGO has ALWAYS been presented with an opportunity to realise a sizeable profit -- ranging from 20% to 80% -- within 6 months of the signal. The past week has obviously been a lousy time for investors with heavy exposure to the gold sector, but the sell-off has created a great opportunity for those with plenty of cash in reserve. It's possible that the opportunity will get even better over the next three weeks even if the HGO generates a buy signal at the close of today's (Wednesday's) trading session, but this possibility can be accounted for by scaling into new positions. As mentioned above, for the HGO buy signal to be generated the HUI must decline by at least 1% today RELATIVE TO GOLD. If the signal is avoided the odds will still favour a strong rebound, but there will be less certainty. By the way, we did some buying for our own account on Tuesday thanks to a few under-the-market orders getting filled. Specifically, we were filled on small buy orders for NGD, HL and RGLD. These three stocks are good places to start with any new buying. At current levels we are also becoming very interested in Silver Wheaton (SLW). New buying at this time should focus on major and mid-tier stocks such as the ones mentioned in the preceding paragraph because these are likely to rebound the fastest once the bottom is in. As previously advised, there will be no Interim Update this week. Alert #180, Jul-31 2008 The HUI plunged well below support at 400 near the start of Wednesday's trading session and then rebounded to end the day with a small gain, even though the gold price fell $11. As a result, the break below support looks false. Furthermore, Wednesday's low for the HUI was roughly the same as its early-May low, so we might have just witnessed a successful test of the low. False downside breakouts are more reliably bullish than upside breakouts, so Wednesday's gold-sector action was certainly constructive. The only negative was that the rebound in gold stocks appeared to be at least partly driven by the rebound in oil. When are traders going to realise that gold miners are oil CONSUMERS and therefore get hurt by a higher oil price and helped by a lower oil price? Royal Gold (RGLD) and Hecla Mining (HL) look like reasonable short-term trades here with stops placed just below this week's lows. New Gold (NGD) could also work well as a short-term trade. Despite what we said in the Interim Update posted prior to the start of Wednesday's trading session, we have decided to exit our October-2008 USO put options. If these options had an expiry date of January-2009 or later we would definitely not be exiting at this time, but if the counter-trend oil rally mentioned in the Interim Update has just begun then the October puts will lose a lot of their value over the next few weeks. We will look for an opportunity over the next several weeks to position ourselves in some longer-dated USO puts. In the 21st July Weekly Update we said that while oil had just begun to turn down from an intermediate-term peak, the oil sector of the stock market was probably nearing an intermediate-term BOTTOM. We went on to say that the XOI would ideally work its way down to around 1250 (it was at 1327 at the time), but traders and investors should be looking for opportunities to buy, rather than sell, oil-related equities. It looks like the XOI bottomed on 24th July at 1264 and is now in the early part of a new upward trend. In our opinion, the best way to play this upward trend is via natural gas equities. Alert #179, Jul-15 2008 There were 1304 new lows on the NYSE on Tuesday, a new ALL-TIME high. This suggests two things: 1. A short-term bottom (a bottom that will hold for at least one month) was probably put in place on Tuesday and will almost certainly be in place by early next week. 2. A new equity bull market is NOT about to begin. The expected pattern following the sort of 'washout' that occurred on Tuesday is a multi-week rebound and then a pullback to test the low. The 2-3 month outlook for gold and gold stocks remains bullish, but Tuesday's action has bearish connotations as far as the coming few weeks are concerned in that gold bullion closed higher for the 5th consecutive day while the gold-stock indices opened higher and then reversed downward to end the day with significant losses. Both short-term gold stock scenarios recently discussed at TSI -- relentless strength for a few months as per the "1973 Model" or choppy action during July-August followed by a big rally during the final 4 months of the year -- remain feasible. Alert #178, May-08 2008 The following observations could probably have waited until Sunday's commentary, but we thought we'd send them out a little earlier because Thursday's market action MIGHT have signaled a reversal. 1. It's only marginal at this time, but the HUI appears to have gained enough ground on Thursday to generate the bullish MACD signal that we mentioned in the most recent two TSI commentaries. Over at least the past 6 years, whenever the HUI has become as oversold as it became last week an upward reversal in the MACD has always meant that the correction's price low was in place. In other words, we have some evidence that the HUI's 1st May intra-day low of 384.5 will prove to be the ultimate price low for the correction that began in mid March. The risk of a sharp decline over the next two weeks has not been eliminated, but it has been materially reduced. 2. The HUI appears to have reversed upward before coming close to fulfilling the downside potential indicated by its preceding break below support at 420, meaning that we could have a "downside breakout failure" on our hands. In our experience, downside breakout failures are more reliably bullish than upside breakouts. 3. Although the rebound in the gold sector is minor at this time, it has been accompanied by a modest widening of yield and credit spreads as well as relative weakness in financial stocks. This improves the chance that the gold sector has seen its lows. 4. There is a high probability that the HUI/gold ratio, which has been in an intermediate-term decline since Oct-Nov of last year, has bottomed. 5. Even if the HUI's ultimate correction low was put in place on 1st May there is a good chance that the low will be tested before a powerful upward trend gets underway. July-August is the most likely time for such a test. 6. Several high-profile industrial commodities are probably close to important price peaks. If these industrial commodities begin trending lower then a knock-on effect, at least initially, will be increased selling pressure within the gold market. This general commodity-related selling is a likely catalyst for the above-mentioned July-August test of the gold sector's May low. Additional strength in the US$ is another likely catalyst. We upgraded our short-term outlook on gold stocks (as represented by the HUI) from "bearish" to "neutral" at the end of last week, and are now, based on items 1-3 above, going to upgrade our short-term outlook to "bullish". We are leaving our short-term outlook on gold bullion at "neutral" because the bullion market hasn't yet signaled an end to its correction. Alert #177, Apr-30 2008 Quick gold sector update: The gold sector continues to sell off. Significant additional weakness -- with or without an intervening rebound -- will probably occur before a correction low is in place, but the way things are going there's a good chance that a correction low will be put in place within the coming three weeks. Our HUI/Gold Oscillator (HGO), which only generates buy signals at extremely oversold conditions (it typically generates only one or two buy signals every 12 months), was within spitting distance of 'buy territory' at the close of trading on Tuesday. We're not there yet, though, in that the HUI would have to fall by at least 4% relative to gold bullion on Wednesday to cause the HGO to generate a buy signal. For example, if the gold price were unchanged then the HUI would have to drop to around 370 on Wednesday for such a signal to occur. We suspect that a HGO buy signal will be avoided at this time. The recent acceleration of the gold sector's decline appears to be related to the prospect of the Fed dropping its Funds Rate target by 0.25% on Wednesday and simultaneously putting its rate-cutting campaign 'on hold'. If this is, indeed, what the markets have been discounting then a 0.25% rate cut combined with words implying a pause in the monetary easing could lead to a gold-sector bounce (a sell-the-rumour-buy-the-news situation). Of course, if the Fed surprises almost everyone and decides to 'go on hold' without first implementing another 0.25% cut then there may well be enough weakness in the HUI on Wednesday to push the HGO down to 'buy territory'. Unlike gold-stock indices such as the HUI, the junior end of the gold-share universe has been very weak for many months. This weakness has already prompted many holders of small-cap gold/silver stocks to 'throw in the towel', and if our near-term outlook proves to be close to the mark then there will be a lot more 'towel throwing' over the next few weeks. However, it is times like these that the big money is made in the stock market. Specifically, the big money is made by buying stocks that are in long-term bull markets but have been beaten down to absurdly under-valued levels due to temporary factors. The mood of the market is always -- ALWAYS -- ebullient near tops (when you should be selling) and depressed/fearful/disgusted near bottoms (when you should be buying). Additional downside probably lies in store for the gold-stock indices, but most individual stocks will bottom either before or after the indices. In fact, some of our stocks have probably bottomed already. For example, it's quite possible that last week's panic out of European Minerals (TSX: EPM) established its correction low, and that Gryphon Gold (TSX: GGN) bottomed when it traded at C$0.39 last Friday. Given the high-quality nature of its gold deposit, its low valuation and the fear-driven exodus that has occurred over the past 5 trading days, Keegan Resources (TSXV: KGN) might also be at, or close to, its ultimate low for the move. On the other hand, some other stocks will hit their ultimate lows well after the indices. This is one of several reasons why it makes sense to scale into positions over a period of time. With respect to our own portfolio, we exited our hedge position in GDX put options near Tuesday's lows and did a small amount of new buying. For a few of our favourite stocks we've also placed buy orders around 10% below current prices in the hope of catching downward spikes brought about by the 'towel throwing' mentioned above. Alert #176, Mar-19 2008 The 10-day moving average of the equity put/call ratio hit a 10-year high of 0.97 on Monday. We suspect that this was actually an ALL-TIME high, but we don't know for sure because our put/call data doesn't go back further than 1997. Also, the single-day put/call reading achieved on Monday was one of the highest ever. Monday's extraordinary put/call readings were obviously a response to the Bear Stearns collapse and the resulting "who's next?" fear. Interestingly, though, the Dow Industrials Index did not trade below its January low and actually ended the day with a small gain. The S&P500 Index did trade below January's intra-day low on Monday, but it didn't close below this level. Up until now the January lows have therefore held, meaning that the amount of fear in the market is way out of proportion to the price action. The stock market reversed upward on Tuesday in similar fashion to the way it reversed upward on Tuesday of last week. Last week's reversal didn't stick, but the latest reversal looks a bit more convincing because it was accompanied by downward reversals in gold and gold stocks. There were also minor upward reversals in the US$ and the T-Bond yield. It is too early to state with any confidence that Tuesday's reversals will have staying power, but the sentiment backdrop combined with the price action across all the markets has prompted us to upgrade our short-term US stock market outlook to "bullish". There's a significant risk that there will be one more test of the January low prior to the start of a multi-month counter-trend rebound (a rebound within a bear market), but the sentiment extremes registered over the past week indicate that a decisive break below the January lows probably won't happen anytime soon. Note that the above-mentioned short-term bullish view will be proven wrong if the S&P500 Index CLOSES below Monday's intra-day low (1256). Gold spiked upward and then reversed downward over the first two days of this week, and the gold-stock indices fell by enough on Tuesday to negate their recent upside breakouts. At this stage none of these moves look particularly significant on the charts, but short-term traders should have exited long positions on Tuesday just to be on the safe side. We haven't yet seen anything resembling an upside blow-off in either the gold futures market or the gold-stock indices. Also, the average gold stock remains at a depressed level relative to gold bullion. Therefore, we seriously doubt that this week's downward reversals in gold-related investments have marked peaks of intermediate-term significance. The likely alternatives, in our opinion, are: 1. A multi-month rebound has begun in the broad stock market, in which case 2-3 months of consolidation are probably in store for gold and gold stocks prior to the resumptions of their intermediate-term upward trends. 2. The bounce from Monday's 'oversold' extreme in the broad stock market will be followed, within the coming month, by yet another test of the January low, in which case we could still get the sort of explosive upward move in gold-related investments that normally occurs prior to an intermediate-term peak. Further to the above, we remain intermediate-term "bullish" and short-term "neutral" on gold. Alert #175, Mar-12 2008 There was a huge rebound on Wall Street on Tuesday in response to news that the Fed was offering to take up to $200B of mortgage-backed securities off the collective hands of the private financial industry (commercial banks, investment banks, non-bank mortgage lenders and brokerages) in exchange for Treasury securities. The Fed has, in effect, offered to replace financial corporations' relatively illiquid securities with securities that can be quickly and easily sold. Equity bear markets tend to be littered with large rebounds lasting 1-3 days, so Tuesday's rally doesn't necessarily have longer-term significance. However, given how 'oversold' the market had become it was certainly vulnerable to a positive surprise and Tuesday's Fed-generated positive surprise may well mean that a short-term bottom was put in place on Monday. In any case, the main reason for this email is to note that the gold sector is presenting another short-term trading opportunity with an attractive risk/reward. This is due to the potential for an upside blow-off over the coming weeks and the establishment of a logical 'stop-out level' within 5% of Tuesday's closing price. Specifically, the trading idea is to take a 'long' position in GDX near the current price with the intention of making a quick exit if the AMEX Gold BUGS Index (HUI) CLOSES below Monday's intra-day low (469). We also wanted to reiterate our bullish outlook for Patriot Coal (NYSE: PCX). In a recent commentary we mentioned that a pullback to the high-$40s by this stock would constitute a buying opportunity, but the combination of general market weakness and a temporary production disruption at one of the company's mines has taken it back to the mid-$40s (it closed at $45.97 on Tuesday). PCX is suitable for new buying near the current price as a longer-term investment or as a trade with an expected holding period of 6-12 months. Alert #174, Jan-23 2008 There were more than 1100 new lows on the NYSE on Tuesday, which is something that has only happened on four prior occasions over the past 40 years. It happened in May of 1973; it happened on the day of the 1987 stock market crash; it happened on 31st August 1998 (the day of the US stock market's bottom during the 1998 financial crisis); and it happened at the peak of last August's financial market panic. We'll review the historical record of '1100+ new-low days' in Thursday's Interim Update, but right now we'll briefly note that: a) There is a high probability that a short-term bottom was put in place on Tuesday b) There is a high probability that Tuesday's bottom will be successfully tested within the next three months c) There is a possibility that the ultimate correction low was put in place on Tuesday, with a test of the low at some point over the next three months being followed by a major rally to new all-time highs. However, at this stage we favour the idea that a choppy multi-month rebound will be followed by a large decline to well below Tuesday's low. Tuesday's panic by the Fed confirms that the gold sector offers the best risk/reward ratio in both the short- and the intermediate-term. Alert #173, Jan-22 2008 When a market becomes extremely oversold and sentiment becomes overtly pessimistic the market will usually bounce. The low-probability alternative is that the pessimism and fear evolve into outright panic, leading to a 'wash out'. For example, as at the end of last week the Australian stock market had fallen for 10 days in succession. This was a highly unusual losing streak that would normally be followed by some sort of bounce, but, instead, the market accelerated to the downside as panic set in. Australia's stock market has now fallen for an incredible 12 days in a row, topped off by a 7.3% 'wash out' in today's session. The Hong Kong stock market has also just experienced a 'wash out', having dropped by almost 14% from last Friday's close to today's low. In fact, the Hong Kong market's decline now falls into the "crash" category. Financial panics are always painful for those caught on the wrong side of them, which would be most people right now since few investments have been left unscathed over the past week. But they are also always brief. Panic conditions can only ever persist for a very short while because panic is an emotional peak. The plunges that have occurred in non-US stock markets since the beginning of this week and the likelihood that the US market will follow suit may well prompt the Fed to cut interest rates today (Tuesday), but it would be better if the Fed just let the US stock market 'wash out' and find a natural low. A natural low will occur within the next day or two simply because any 'longs' who are susceptible to panic will soon be out of the market. On the other hand, if the Fed were to cut rates prior to the start of US trading today it would engender considerable hope and prompt many of the remaining weak hands to hold on, without actually changing anything. Our junior resource stocks were hammered in Canadian trading on Monday and in Australian trading earlier today. Such occurrences will make most shareholders feel some degree of consternation, although it's easier to keep your head when all about you are losing theirs if you are not financially over-extended and if you have a clear understanding of the underlying value of each stock you own. Keep in mind that the underlying values aren't changing. All we are seeing is a financial market event whereby people whose minds are clouded by fear are selling indiscriminately in a mad rush to 'get liquid'. Figuring out how much an ounce of in-ground gold or a pound of in-ground uranium is worth is not an exact science, but most people would agree that the non-extracted commodity does have significant value, especially during a long-term commodity bull market. At the moment, however, the market capitalisations of some exploration-stage uranium stocks are roughly the same as the amount of cash these companies have in the bank. The stock market is therefore saying that in-ground uranium is almost worthless, even though utilities are prepared to pay $90/pound for the aboveground stuff. We did a small amount of buying in Canada on Monday due to the filling of a below-the-market buy order for Sabina Silver (TSXV: SBB). We placed the order to buy the stock in the C$1.50s a few weeks ago and had almost given up any hope of it getting filled, but someone on Monday obviously decided it was a good idea to sell us in-ground silver at only C$0.30/ounce and to throw in a huge pile of zinc for free. We have no idea whether this latest purchase will look smart or dumb a week from now, but we are very confident that it will look smart a year from now. We have a below-the-market buy order in place for another junior resource stock that may get hit during North American trading today, but we aren't buying aggressively at this time. One reason is that we already have substantial exposure to our favourite stock-market sectors and wish to maintain our cash reserve at its present healthy level. Another reason is that regardless of how low this week's low turns out to be, it will probably be tested within the next 3 months. On an entirely different matter, aside from the request that we be more accurate with our short-term forecasts the most common request from subscribers over the past year has been for a search function at the TSI web site. The good news is that a search function has just been added to the bottom of the Market Analysis menu page at TSI (this is the page you automatically get taken to after you log on at http://www.speculative-investor.com/new/market_logon.asp). Alert #172, Dec-31 2007 Our overly short vacation in the tropics (Malaysian Borneo) ended yesterday and we are now back in the wintry cold of Shanghai, ready and willing to tackle the never-ending puzzle known as the financial markets. While on vacation we always keep track of the major news events affecting the markets and quickly scan each day's closing prices, but we naturally don't do any in-depth analysis. Upon return it then usually takes us a few days to get totally back into the 'swing of things', although we've found that spending just 2-3 hours going through a "watch list" of about 300 charts is an efficient and relatively painless way of getting partially up to speed. This chart review told us that some interesting things happened while we were away, but none of these things were particularly surprising or appear to have earth-shattering significance. We'll update our views on the markets we follow in Thursday's Interim Update and Sunday's Weekly Update, but here are some quick thoughts on the gold, currency and equity markets: GOLD One of the interesting, but not unexpected, developments over the past several trading days was gold's upside breakout from a multi-week consolidation. In US$ terms gold has already moved back to near last month's peak and will probably soon move to new all-time highs. Moreover, it has been strengthening against all the major currencies. We expect that the monetary metal will remain on an upward-sloping path over the coming 1-2 months, although we don't have any upside price target in mind at this time. Gold bullion's strength has pulled the AMEX Gold BUGS Index (HUI) above 400. This has increased the probability that the recent plunge below 400 was yet another 'head fake', although it certainly hasn't ruled out the possibility that an intermediate-term peak was put in place last month. In any case, we expect to see some interesting upside within the realm of small-cap gold (and silver) stocks over the next 1-2 months regardless of whether the HUI is on its way to much higher levels or is experiencing nothing more than a counter-trend rebound. In fact, we are anticipating a general recovery in junior resource stocks, not just the gold and silver juniors, during the first quarter of 2008. CURRENCIES Our view continues to be that the Dollar Index is immersed in a bottoming process that will take about 3-5 months to complete. Based on the pattern that the market has tended to follow at intermediate-term US$ lows over the past 25 years, this bottoming process will probably entail one or two tests of the November low. The first rally in the dollar's bottoming process appears to have ended last week. THE STOCK MARKET The US stock market did very little while we were away (the S&P500 Index managed a net gain of just 1.2%). With the US economy probably in recession and with the likelihood that the on-going debt crisis will necessitate more large write-offs by financial companies it is difficult to imagine the US stock market making sizeable gains over the next few months. At the same time, though, it is difficult to see where additional downside leadership is going to come from given that the problem-plagued sectors have already been crushed. For example, the downturn in the homebuilding sector of the stock market from its July-2005 peak to its November-2007 low is roughly equivalent to the Dow's 1929-1932 decline and the NASDAQ's 2000-2002 decline. This suggests that the stock market has already discounted the worst. Alert #171, Nov-20 2007 We upgraded our short-term views on gold and gold stocks in Sunday's market update on the basis that a) the HUI had pulled back as far as it should if the intermediate-term trend was positive, b) gold had dropped to within about $20 of the most likely level for a correction low (its 50-day MA), and c) if we were wrong we would find out quickly via a relatively small (3% or more) decline in the HUI. The HUI closed 3.3% lower on Monday, indicating that we might have been wrong to upgrade our short-term views. Most of the markets we follow have done strange things this year, with the gold sector's price action being a prime example. Here's what we mean: Based on the financial market backdrop at the time the HUI should not have plunged to new lows for the year during the first half of August, but it did. The rally that followed August's drop to new lows for the year should then have topped by the third week of September at well below resistance defined by the May-2006 peak, but the HUI stayed on a steep upward-sloping path and eventually broke decisively to new all-time highs. And lastly, when the HUI traded as much as 15% above its May-2006 peak in early November it signaled that a new major upward leg was underway, meaning that the next downward correction should do no more than take the index back to the vicinity of its 50-day MA and support in the low-400s; however, it closed at 398 on Monday. In closing below its breakout level (support defined by the peak of the preceding upward leg) on Monday the HUI has done something it has never done during any of the prior major upward legs of its long-term bull market. This either indicates that the surge in the gold sector from mid September through to early November was a giant 'head fake' or that Monday's break below support was simply an extension of the strange/deceptive market behaviour that has characterised 2007 thus far. The nature of the rebound that follows the current decline should give us clues as to which of these alternatives is closer to the mark. On the positive side of the ledger, gold's real trend remains bullish and actually became more bullish on Monday courtesy of widening credit and yield spreads. As long as the debt crisis continues to fester then the investment demand for gold should continue to increase and sell-offs should be relatively brief. Also on the positive side of the ledger, the downward pressure currently being put on gold stocks (as opposed to gold bullion) by general stock market weakness could soon abate because the broad US stock market is probably close to a short-term low. We do not have a strong opinion on what gold and gold stocks will do over the next couple of days. A further sell-off would not surprise us, but neither would a rebound. (Note that a quick rebound in the HUI to above 400 would not wash away the bearish implications of Monday's break below support.) We will have more to say in Thursday's Interim Update, but the upshot of Monday's market action is that we are going to maintain our short-term bullish views on gold and gold stocks for at least one more day because gold bullion's correction has not yet done anything out of the ordinary and the bullion market's price action over the course of this year has been more 'telling' than that of the major gold stocks. However, some of our other short-term market assessments have changed as follows: - the US stock market changed from "bearish" to "neutral" (there is no evidence that a bottom is in place, but we no longer believe that this market's short-term downside risk exceeds its upside potential) - the US T-Bond changed from "bullish" to "neutral" (there is no evidence that a top is in place, but the upside potential from here looks minimal) Alert #170, Nov-13 2007 The Airlines The oil price pulled back sharply on Monday and, in response, the airline sector bounced. This ends a sequence of 8 down-days for the AMEX Airline Index (XAL) and creates a relatively straightforward risk management set-up in that traders can place "sell stops" just below last week's intra-day lows (the idea would be to exit an airline stock if it CLOSED below last week's intra-day low). Further to what we said in the Weekly Update, we bought some airline shares for our own account near the start of yesterday's US trading session. To be specific, we bought Continental Airlines (NYSE: CAL) and Copa Holdings (NYSE: CPA) (Copa is the national airline of Panama). We don't yet have a full position and will therefore probably make some additional purchases within this sector IF price action confirms a bottom over the coming weeks. For example, we might buy some shares of JetBlue (NYSE: JBLU) following signs of strength. Note, though, that we won't average down to any greater extent than we've already done. The extension of oil's rally to well beyond the bounds of normality has distorted the airline sector's seasonal pattern. As a result, rather than just a 2-3 month seasonal rebound in parallel with a routine correction in the oil market there is now a decent chance of a 6-12 month bull market in the airlines. The risk is that the oil price resumes its advance following a brief pullback, but this risk can be managed by placing "stops" as noted above. The Large-Cap Techs In the 5th November Weekly Update we said we'd be buyers of Microsoft (NASDAQ: MSFT) on a pullback to around US$33. The stock traded as low as $33.02 on Monday, prompting us to take an initial position. MSFT recently broke upward from a 7-year base and is now pulling back to 'test' the breakout. Gold The gold market's extremely overbought condition finally took its toll on Monday. We are currently just two days into a correction that should last at least two weeks, but the bullion market might have got the bulk of its 'corrective' price decline out of the way in a single day. The same thing applies to the gold sector of the stock market. In fact, if we are seeing a correction within a continuing intermediate-term advance then it is almost mandatory that the HUI does not decline much further. This is because a drop of only 3% from yesterday's closing level of 408 would breach important support. It is reasonable to do some buying while the HUI is in the low-400s on the assumption that support will hold, with the plan to quickly scale back to "core exposure" if it doesn't. Previous corrections within intermediate-term upward trends have often taken the HUI and gold back to their respective 50-day moving averages. The 50-day moving averages are rising and should be close to current levels by this time next week, so the markets will have to do nothing more than trade sideways over the coming week or so in order to touch these moving averages. General Not coincidentally, the recent interruptions to a number of powerful upward trends have occurred alongside strength in the Yen. We don't think the rally in Japan's currency is close to being over, but December Yen futures reversed lower from the vicinity of an important resistance level (resistance defined by the May-2006 peak) on Monday so a top might be in place on a very short-term basis. If the Yen pulls back or consolidates then the markets that were hammered over the past four trading days will probably 'breathe easier' for a short while. Alert #169, Sep-21 2007 It's never a bullish omen for the broad stock market when gold is consistently the strongest sector. The markets are now, in effect, saying that the Fed messed up by commencing its rate-cutting campaign with a 0.50% reduction. Given the preceding reductions in market-controlled interest rates a 0.50% cut in the Fed Funds rate was probably reasonable; but, rightly or wrongly, the underlying message interpreted by the markets is that the Fed Chairman is going to live up to his "Helicopter Ben" nickname. The HUI briefly traded above its May-2006 peak on Thursday and closed just below it. This suggests to us that additional gains are likely over the coming 1-2 months, but a sharp intervening pullback is also likely. The small-cap end of the gold sector -- the area where the bulk of our interest lies -- showed definite signs of life on Thursday. If the gold-stock indices pull back over the coming 2-3 weeks before rising to take-out this week's highs then the small-cap gold stocks will probably go ballistic, but the immediate issue is that the indices are now as overbought as we've ever seen them. It is worth noting that whenever the indices have reached similar overbought extremes in the past there has been much broader participation in the preceding rally. As discussed in yesterday's Interim Update, the narrowness of the current advance doesn't necessarily mean much because intermediate-term rallies in the gold sector tend to begin this way; however, the current advance appears to be uncommonly narrow even by the standards of initial upward legs, as evidenced by the fact that when the HUI nudged above its May-2006 peak on Thursday only a handful of gold stocks were trading at new highs. This is a red flag, but as mentioned above a sizeable 2-3 week pullback in the HUI followed by a break above this week's highs should lead to a lot more speculation further down the food chain. We've always been better at figuring out what to do in response to situations than at predicting short-term outcomes. For example, when the HUI plunged to the 280s on the morning of 16th August we had no idea what would happen over the ensuing weeks, but we knew we had to do some buying at that time. Right now, with the HUI kissing up against its May-2006 high, we know we have to do some selling. We've been slowly selling into strength since the HUI was trading in the mid-320s, but we haven't been able to identify many selling opportunities because we haven't owned the three gold stocks that were rocketing upward. We are, however, now 'biting the bullet' and taking some money off the table in stocks that are neither overbought nor over-valued, simply because it is appropriate to build-up cash at this time. As always we are maintaining substantial "core" exposure to the gold sector, but by the end of Friday's session we expect to have boosted our cash reserve to around 40%. We may also buy some GDX put options for insurance purposes. Alert #168, Sep-07 2007 The following discussion was intended to be part of Sunday's Weekly Market Update (and still will be), but due to the dramatic price action within the gold sector we thought it was important to get something out to subscribers in advance of our regular publishing time. It seems as if the gold sector is suffering from Bipolar Disorder because over the past two months it has gone from manic to depressive and now back to manic. The net change in the gold stock indices over this period has been small, but the extreme volatility has meant that the market has ended up going nowhere in an incredibly interesting way. We aren't sure what to make of Thursday's moon-shot. We anticipated the rise in the October gold futures contract to around $700 (our view has been that October gold was headed for $695-$710) and had allowed for the possibility that the gold stock indices would make some additional gains during the first half of September before topping out, but we were surprised by the magnitude of Thursday's gold-stock rally. This means that short-term moves in the gold sector (as represented by the HUI) have surprised us on three occasions over the past two months. Specifically: we were surprised by the amount of strength in both the HUI and the HUI/gold ratio between late June and mid July (we had been expecting only a modest rebound); we were surprised by the ferocity of the July-August decline (we had been expecting a normal pullback from 370 to around 340, but we ended up getting a plunge to the 280s); and, as noted above, we were surprised by Thursday's phenomenal surge (we had been expecting the HUI's rebound from its 16th August low to top-out during the first half of September at no higher than 350). In a nutshell, while making little progress on a net basis the HUI is now regularly surprising us with the amplitude and frequency of its oscillations. A plausible explanation for the recent extreme volatility is that hedge funds are quickly moving in herd-like fashion between the long side and the short side of the market. If this is the case it not only explains the volatility, it also explains why the action has been concentrated within the realm of large/liquid gold stocks. For example, there was frenetic buying on Thursday of Barrick Gold, the largest and most liquid of all the gold stocks, causing its price to jump 8.4% on more than double the average daily volume. At the same time, with a few exceptions the small exploration-stage gold stocks made little headway on below-average volume. It was a similar story during the June-July moves by the gold stock indices to the tops of their 52-week trading ranges in that almost all the action was in the sorts of stocks that offer sufficient liquidity to be of interest to hedge funds. The public has largely been absent, although small-scale retail investors obviously puked-up their gold stocks when the HUI broke below support in mid August. The volatility is creating a lot of false signals, especially for those of us who pay close attention to the way the gold stocks perform relative to the metal. For example, the HUI/gold ratio broke-out to the upside and reached a new high for the year during the first three weeks of July, only to reverse course and plummet to new 52-week lows during August. In fact, the HUI/gold ratio fell so quickly during the first three weeks of August that it almost caused our HUI/Gold Oscillator (HGO) to generate a rare major BUY signal (extreme weakness in the gold stocks relative to the bullion only ever occurs near intermediate-term bottoms, which, in turn, usually only occur about once every 12 months). HUI/gold has since rebounded strongly, but based on what has transpired over the past two months we wonder if this recent strength means anything or if it will effectively be cancelled-out during the second half of this month. In summary, the recent price action has been extraordinary. We aren't sure what to make of it, so we aren't keen on positions whose success requires the market to do anything in particular over the next few weeks (accumulating under-valued gold stocks with the plan to hold for 1-3 years makes sense, but buying for a short-term trade does not). It's possible that a multi-month rally began at the 16th August low, but in our view the risk remains high enough to warrant a cautious stance. One of the main risks is that the broad stock market will soon return to its downward path. Over the long-term the gold sector trends inversely to the broad stock market, but over the short-term it will usually get taken along for the ride when the stock market experiences a steep decline. Furthermore, this risk is perhaps more relevant now than ever if we are right to assume that the switching of positions by hedge funds is presently the gold sector's dominant short-term driver. The reason is that if the broad stock market starts to tank then these funds will probably be forced to liquidate long positions regardless of whether or not these positions are justified by the fundamentals. Another risk is that the Dollar Index surprises almost everyone by rallying. Lastly, we previously said that we would downgrade our short-term outlook for gold bullion to "bearish" once the October contract moved above $690. The October contract is currently trading at $696, so we are now short-term "bearish". This does not mean that we are forecasting an imminent sharp decline in the gold price; it simply means that with gold having reached our short-term target range we now perceive significantly greater downside risk than remaining upside potential. We will need to re-think this position if October gold closes above $715. Alert #167, Sep-03 2007 We noted in last week's Interim Update that our travel schedule would prevent us from producing a Weekly Market Update on Sunday 2nd September, but that we would send out a brief e-mail on Monday 3rd September to report any changes to our market views. This is the promised e-mail. We turned short-term bearish on the US stock market on 27th August, even though we thought that the market's rebound would probably continue into early September. Our reasoning was that the short-term upside potential had become substantially less than the downside risk. Using similar logic, we are now downgrading our short-term outlook on the gold sector -- as represented by the AMEX Gold BUGS Index (HUI) -- from "neutral" to "bearish". As was the case when we recently turned short-term bearish on the US stock market we suspect that the HUI will make some additional gains over the coming week or so, but with the recent rebound having retraced about half the July-August decline our opinion is that the short-term risk/reward ratio is now decisively skewed towards risk. As discussed in recent commentaries, our view is that the odds favour a decline to an October-November low from whatever peak is put in place during the first half of September. Further to the above, we think it will make sense for anyone heavily exposed to the gold sector to 'lighten up' over the next several days. No drastic action should be required -- just make sure you will be in a position to take advantage in case a steep decline occurs over the coming 1-2 months. Obviously, there is no guarantee that such a decline will occur, which is why core positions should be retained. It is simply a matter of obtaining some protection -- ideally by building up cash reserves -- in recognition of the risk that currently exists. Building up cash is generally the best way to hedge against a decline because such a risk-management approach will not lead to a portfolio drawdown if a tradable decline fails to occur, but investors in gold stocks may also consider buying some protection in the form of GDX put options. Of course, buying protection in the form of put options WILL result in a portfolio drawdown if a sizeable decline does NOT materialise within the expected timeframe. Note, as well, that put options on a gold stock ETF such as GDX may not prove to be an effective hedge for a portfolio dominated by small-cap gold stocks because, as we saw during the July-August downturn, the small-cap stocks can fall a lot faster than the large-caps. That being said, those who choose this risk management tactic should consider scaling into the GDX December-2007 $37 puts (GDXXK) into strength over the next few days. Moving on to gold bullion, we continue to expect that the $695-$710 range (basis the October futures contract) will be tested before the next meaningful decline gets underway. Friday's bounce to the mid-670s lent some support to this view. We perceive less downside risk in gold bullion than in the gold shares, so we remain short-term "neutral" on the metal. However, unless advised otherwise we will immediately shift our short-term gold market view to "bearish" if the October contract trades above $690. All other views are unchanged. In response to the shift in our short-term outlook for gold shares we are going to exit the European Minerals warrants (TSX: EPM.WT.A) that were added to the TSI Stocks List at the end of July. EPM offers one of the best risk/reward ratios in the gold sector and the warrants don't expire until April-2010, so we have no specific concerns about this position. The concern (reason for selling) is that we added the warrants to the List on the basis that significant short-term gains were likely, but our perception of the facts has since changed. We are therefore taking the opportunity provided by the recent rebound to exit the position at around breakeven. We will, though, be retaining exposure to EPM (the stock). Shortly before we added the EPM warrants to the TSI Stocks List we added a position in Kinross Gold warrants (TSX: K.WT.B). We have decided to retain these Kinross warrants because: a) they are materially under-valued relative to the stock (at Friday's closing price of C$12.92 for the stock we estimate that the warrants would be fairly priced at around C$2.60, versus their actual closing price of only C$1.90), b) their expiry date is four years into the future (September-2011), and c) we have no other exposure to Kinross Gold. Lastly, we will be on the lookout for opportunities to exit the NEM and GFI call options added to the TSI Stocks List at the end of July. Alert #166, Aug-17 2007 Things are happening incredibly fast. The HUI's close below the 335 support level on Tuesday was the signal that the short-term bullish scenario wasn't panning out (the HUI closed at 330 on Tuesday), prompting us to send an e-mail to subscribers in which we said: "...we will be doing a modicum of selling in our own account today (Wednesday). We hate selling into weakness, but risk management considerations dictate that we increase our cash position at this time." As it turned out, it would have been reasonable to have done some selling of the largest and most liquid gold shares on Wednesday morning in response to the prior day's breach of support, but as noted in yesterday's Interim Update: "...panicked liquidation is currently underway at the junior end of the market. The gold-stock indices have fallen by less than 10% over the past two weeks, but the prices of many junior mining stocks have collapsed in response to "get me out at any price" selling by retail investors. As a result, any selling of the juniors in the current environment would necessarily be done at ultra-depressed levels. In fact, it would be done at prices that are bound to look extremely low 18 months from now, and perhaps even 6 months from now. It is therefore unlikely that we will significantly scale back on our exposure to junior gold stocks at this time. Instead, most of the cash building will be done in the more liquid positions we own." In other words, we noted that it was NOT appropriate to do significant selling of junior gold stocks in the current market environment. In the Interim Update we also said: "An extension of the current decline that takes the HUI down to the 280s would almost certainly take us back to a bullish stance because at that point the short-term downside risk would, given the favourable fundamentals, be significantly less than the upside potential. On the other hand, a rebound over the coming 1-2 weeks that alleviated the oversold condition would most likely shift us to a short-term bearish stance." In discussing an extension of the current decline down to the 280s we were thinking in terms of 2-4 trading days, but the extension to the 280s happened immediately (during the first hour of trading on Thursday, actually). Quite extraordinary! When we saw that the HUI was trading in the 280s we ADDED to positions in a few of our favourite junior gold/silver stocks. As a result, rather than reducing our exposure to the gold sector, as had been our intention when we wrote the e-mail following Tuesday's breach of support by the HUI, we now have greater exposure to the sector than we had at the beginning of the week. As we said at the start of this message, things are moving incredibly fast. We don't know if a sustainable low was put in place on Thursday morning, although our best guess is that it wasn't. In order to create such a low the HUI will probably have to decline again today (Friday) and yet again early next week, taking out Thursday's intra-day low in the process. Rather than establishing the ultimate correction low over the next few days the gold sector might rebound for a few weeks before dropping to new lows for the move during October. In fact, even if a sustainable low is put in place as a result of some additional weakness over the coming days we would expect the low to be tested during October-November. In any case, the panic selling of the past few days has created some exceptional value amongst the junior gold/silver stocks. We can only assume that the people who were selling these stocks on Wednesday and Thursday either didn't understand what they were selling (people who don't have a good understanding of what their stocks are worth probably won't be able to 'stay the course' during a sharp decline) or were left with no choice because they had bought on margin. Buying on margin is something you should never do because as soon as you do it you become a 'weak hand', that is, you become someone who will likely be forced out of his/her position at the worst possible time. To summarise: we did some buying on Thursday morning because exceptional value was being presented to us and because the plunge to the 280s had greatly reduced the market-related risk. On a different matter, it is becoming increasingly likely that an intermediate-term peak has been put in place in the oil market. The oil price could rebound over the next few weeks, but in the absence of an unexpected supply shock such a rebound would probably be of the counter-trend variety. As a consequence, it is becoming increasingly likely that the airline sector of the stock market is close to an intermediate-term bottom. The best time to buy the airline stocks for a trade is usually during September-October in anticipation of a seasonal rally into a December-January high. In fact, the tendency of the airline stocks to rally from a Sep-Oct low to a Dec-Jan high is one of the most reliable pieces of stock market seasonality we know of. However, if oil peaked in July then the seasonal low for the airline stocks could occur 1-2 months earlier than usual this year (as, by the way, was the case last year). We therefore think it makes sense to START accumulating the airline stocks now for a trade with an anticipated holding period of 4-6 months. Unfortunately, there doesn't appear to be a convenient way to buy a basket of airline stocks (as far as we know, there is no airline ETF). Traders would, therefore, have to create the basket themselves, perhaps by scaling into all or some of the components of the AMEX Airline Index (XAL). Alternatively, traders prepared to take greater risk in exchange for greater upside potential could select a highly leveraged airline stock such as JetBlue (JBLU) as their trading vehicle (JBLU closed at US$9.17 on Thursday, which is just above intermediate-term support). Further to the above, we have decided to add the Airline Index (XAL) to the TSI Stocks List to represent this trading idea. XAL closed at 42.94 on Thursday. Alert #165, Aug-15 2007 The Yen carry trade continues to unravel, leading to strength in the Yen relative to the US$ and strength in the US$ relative to the other major currencies (the worst of all worlds for the asset markets). This hasn't yet had much effect on the gold price, but it has resulted in the broad stock market dropping to new closing lows for the move and the general stock market weakness has hurt the gold stocks. In the latest Weekly Update we wrote: "...if the HUI were to CLOSE below 334 at any time in the near future it would be a clear signal that the story was not unfolding as expected. If this were to happen we would quickly move to exit short-term trading positions in the gold sector, but we wouldn't disturb core positions." The HUI closed below 334 on Tuesday (it closed at 330). We are no less positive on the gold sector now than we were at the end of last week, but this week's price action does not mesh with our outlook (the price action is a warning that we might be wrong). We haven't yet decided what, if any, changes will be made to the TSI Stocks List, but we will be doing a modicum of selling in our own account today (Wednesday). We hate selling into weakness, but risk management considerations dictate that we increase our cash position at this time. We could be selling at a short-term bottom, but so be it. Note that we would do some more selling if the HUI were to close below 328 and would retreat to our "core exposure" to gold stocks if the HUI were to close below 317. The main source of pressure on the gold sector at this time is the weakness in the broad stock market, but this pressure is of a short-term nature only (on a longer-term basis the gold sector tends to benefit from weakness in the broad stock market) and it might soon abate due to a stock market rebound. There's a reasonable chance of a stock market rebound commencing within the next few days due to the current mismatch between sentiment and price action (the level of fear/pessimism within the stock market is out of proportion to the magnitude of the price decline). We'll discuss this mismatch in tomorrow's Interim Update. Alert #164, Jul-27 2007 Those who were wondering what effect the unwinding of the Yen carry trade would have on other markets got an example of Thursday. In the 23rd July Weekly Update we said we'd upgrade our short-term outlook for the gold sector (as represented by the HUI) following a 5-8% pullback and upgrade our short-term outlook for gold bullion following a pullback to the $660s. At Thursday's intra-day lows the HUI was down 9% and gold was trading in the $650s, so the aforementioned requirements have obviously been satisfied. The correction probably has further to go in terms of time, but if the trend has turned positive it should be very close to complete in terms of price. Our short-term outlooks for gold and gold stocks have therefore changed to "bullish". Although it might not feel like it, the intermediate-term outlook for gold-related investments has improved over the past few days due to a significant widening of credit spreads. We have therefore also upgraded our intermediate-term outlooks for gold and gold stocks from "neutral" to "bullish". Alert #163, Feb-28 2007 We certainly didn't anticipate Tuesday's wild market action, but the moves were generally in line with our views. In particular: a) The US$ moved sharply lower in line with our short-term bearish outlook while T-Bonds moved sharply higher in line with our short-term bullish outlook. b) Over the past week we've reiterated short-term bullish views on the Yen and the Swiss Franc, two of the strongest currencies on Tuesday. c) Although we are short-term bullish on gold and gold stocks, we have warned that a multi-week correction would probably soon begin. d) We've been concerned about the failure of the NASDAQ100 Index (NDX) and the Broker/Dealer Index (XBD) to confirm the new highs in other stock market indices, but were waiting for more evidence before bringing our short-term stock market view into line with our bearish intermediate-term outlook. That the US stock market and stock markets around the world have turned down prior to bullish confirmations from the NDX and the XBD suggests, to us, that stock market corrections of at least intermediate-term significance have commenced. Furthermore, it is quite possible that major peaks (the type that will hold for more than 12 months) have been put in place, but note that major peaks are usually tested before large multi-quarter declines get underway. In other words, if a major peak has just been put in place then we should expect the initial decline from the February high to be followed, within the next few months, by a rally that 'tests' the high. The catalyst for Tuesday's sell-off was a plunge in China's stock market in response to additional steps being taken by Chinese authorities to curb the rampant credit-fueled speculation that caused the Shanghai Stock Exchange Index to 'go parabolic' over the past several months. This appears to have prompted a general downgrading of the 'China growth story' in the minds of speculators throughout the world, thus leading to a move away from risk and, perhaps, a partial unwinding of the Yen carry trade. (The Yen carry trade has been extensively used to finance speculations, so the exiting of these speculations might have prompted a partial unwinding of the associated financing arrangements. This is a potentially self-reinforcing trend in that Yen strength resulting from the unwinding of some carry trades makes the carry trade less appealing, causing the unwinding to accelerate. That is, increasing risk aversion leads to a shift away from the Yen carry trade, which leads to Yen strength, which prompts a further reduction in the overall extent of the carry trade, and so on.) IF the unwinding of the carry trade picks up steam then the Yen will make large gains over the coming few months. This is a big 'if', but the Yen's short-term risk/reward continues to look attractive. The market sectors and stocks that have recently done the best were generally the worst performers on Tuesday. Particularly hard hit were the emerging market ETFs and the commodity-related stocks -- investments that have been bid-up on the basis that global growth would remain strong. These investments were naturally hit hard when fears of a China-inspired growth slowdown suddenly moved to centre stage. The financial backdrop became slightly more 'gold bullish' on Tuesday due to the modest widening of credit and yield spreads as well as the rapid pricing-in of a second 0.25% Fed rate cut (prior to Tuesday the Fed Funds Futures market had been anticipating a single 0.25% rate cut by year-end), but this didn't prevent gold and gold stocks from selling off along with growth-oriented investments. This is not unexpected, though, as we've previously warned that counter-cyclical gold would likely be taken down along with cyclical investments during the INITIAL phase of a market-wide sell-off. If growth expectations continue to ramp down then the financial backdrop will become increasingly favourable for gold, so investors should take advantage of short-term weakness to build-up their exposure to the yellow metal. TSI's main focus will remain on the small-cap end of the gold share universe because this is where the most attractive long-term risk/reward ratios can be found. It's too early to be buying gold stocks aggressively because the gold market is just one day into a correction that will probably last 3-6 weeks, but note that different stocks will hit appropriate levels for new buying at different times. The timing of new buying should therefore be determined on a stock-by-stock basis, not on the basis of what the gold stock indices happen to be doing. The approach we typically adopt in situations like this -- and are adopting now -- is to place below-the-market buy orders for the stocks we want to accumulate. Alert #162, Jan-02 2007 Nothing momentous happened in the financial markets during our 2-week Xmas vacation and the US markets will only be open for one day between now and our next scheduled commentary (Thursday's Interim Update), so this e-mail alert is probably superfluous. However, we thought we'd send it anyway just to quickly note a couple of things. A major market top is a sequence if events, not a single event, and we are currently seeing some of the things we would expect to see during the early part of a major topping process in the US stock market. In particular, a bearish divergence between the NASDAQ100 Index (NDX) and the Dow Industrials Index has now been in progress for more than 5 weeks. This is not long enough to signal a change in the market's intermediate-term trend, but when we consider the downturn in the NDX/Dow ratio alongside some of the other things that are going on -- we'll cover these other things in Thursday's report -- we come to the conclusion that the time has come to downgrade our intermediate-term stock market view from "neutral" to "bearish". In a nutshell, our thinking is that: a) the NDX/Dow ratio has almost certainly peaked, b) the NDX has probably peaked, and c) the S&P500 and Dow Industrials Indices have probably not yet peaked but will do so within the next 4 months. We remain short-term bullish on gold and gold stocks, but the expected path has changed. Rather than peaking in January it now looks like the rally that began in early October will extend a few months into 2007. There has been a bearish divergence between gold stocks and gold bullion since mid December (a $21 rise in the gold price has been accompanied by a small decline in the XAU), which meshes with our view that gold bullion has a much better chance than the gold stock indices of moving to new multi-year highs during the first half of 2007 (in our opinion it's very unlikely that the HUI and the XAU will exceed their May-2006 highs during the first half of 2007, although many individual gold stocks -- small-caps in particular -- will probably make new highs). Here's hoping that 2007 will be the best year yet in every respect! Alert #161, Oct-05 2006 As previously advised, there'll be no Interim Update this week. Our next regular commentary will be the Weekly Market Update on 8th October, but we wanted to send out this brief note to mention some changes in our short-term outlook. First, gold and gold stocks have dropped to near important support levels and, in the process, have made new multi-month lows during a time-window (October-November) when we've been expecting an intermediate-term bottom to occur. This is a good thing, as is the recent minor positive divergence between the HUI and the HUI/gold ratio (this week's new low by the HUI was not confirmed by HUI/gold; at least, it hasn't been confirmed at this stage). On the negative side of the ledger is the fact that Wednesday's test of the HUI's June low was not preceded by a sequence of 5-8 down-days (when they occur in markets that have been trending lower for some time, such sequences regularly lead to important lows). It is also of some concern that liquidity indicators are neutral-negative for gold and that copper looks like it might be about to break down. A breakdown in the copper price would be an intermediate-term positive for gold to the extent that it was warning of a downturn in global growth, but it would be a short-term negative because many traders mistakenly lump the monetary metal (gold) in with the industrial metals. The bottom line, though, is that the short-term upside potential now appears to outweigh the short-term downside risk. We are therefore upgrading our short-term views on gold and gold stocks to "bullish". Second, we are going to upgrade our short-term view on oil to "bullish". The oil market is, we think, immersed in a bear market that will extend well into 2007, but our expectation is that a multi-month counter-trend rebound will follow this month's low. Third, preliminary evidence supports the idea that the natural gas price made an intermediate-term bottom in September. However, the improving fundamental backdrop is yet to help the unit holders of gas-oriented energy trusts as the prices of these trusts have continued to slide. The public continues to panic out of these investments, thus creating superb buying opportunities. Daylight Resources Trust (TSX: DAY.UN) appears to have been depressed by merger-related selling and offers excellent value near the current price of C$10.95. Fairborne Energy (TSX: FEL.UN) is also worth singling-out as a 'buy' at its current price of C$10.95. Alert #160, Sep-08 2006 We've seen the stock market react to news in so many strange ways over the years that it's rare for us to be totally surprised by any news-related reaction. However, we were very surprised by the way the shares of First Majestic Resources (TSXV: FR) responded to the company's latest press release. Actually, "gobsmacked" would be a more apt description of our reaction to the stock market's reaction. After closing at C$4.76 on Wednesday, FR traded as low as $2.97 on Thursday morning in response to news that the Dios Padre silver project probably doesn't contain enough economic silver mineralisation to warrant the construction of a mine. This was definitely bad news because it had been expected that Dios Padre would be developed into a significant silver producer over the coming 12-18 months, but the market's reaction was totally out of proportion to the impact, of the news, on the company's future prospects. FR has several projects that have the potential to be developed into mines over the next two years and with the loss of Dios Padre the company will no doubt focus its efforts elsewhere. The important thing to remember, though, is that FR is not an exploration play. By the end of this year the company will already have annual silver production of 3.5-4.0M ounces and at current metal prices a production rate of 3.5M ounces per year should justify a market capitalisation of around US$210M. Allowing for the fact that FR will have to spend about US$50M over the next 2 years to complete its acquisition of First Silver Reserve (TSXV: FSR), this gives us a value of around US$160M ($210M - $50M) for FR assuming zero future growth. Using a fully diluted share count of 51.7M, we arrive at a base valuation for FR of around US$3.10/share (around C$3.40/share). In other words, at yesterday's closing price of C$3.41 the market appears to be saying that FR will not be able to grow its production at all from the current level. Our expectation is that FR will be able to grow its production to around 5M ounces/year by the end of 2007 just from expanding its two current operating mines (La Parrilla and San Martin) and will be able to add at least another 2M ounces/year, over the coming 2 years, from its other projects. When a stock makes a panic low in response to unexpected news the price will usually rebound and then pullback to test, or breach, the panic low before a sustained advance gets underway. It therefore won't be surprising to see FR trade down to the C$2.50-C$3.00 range within the next 2 months. However, investors should focus on buying value and at prices below C$3.50 there is good value in FR. For our own account, we scaled-out of half our FR position on the run-up to the May peak, replaced half of what we sold following the May-June downturn in gold/silver shares and replaced the other half following Thursday's news-related plunge. We'll probably buy more if the stock drops below C$3, although there's certainly no guarantee it will trade that low. Of more immediate concern to us right now is the performance of the overall gold/silver sector. Thursday's decline in the HUI was greater than it really should have been if it were just a pullback within a short-term upward trend (as opposed to the start of a downward trend). If the HUI closes lower again on Friday then we will assume that the September peak we've been anticipating has occurred about 2 weeks earlier and about 5% lower than originally expected. As a precaution we are immediately going to exit Apex Silver (AMEX: SIL). SIL looks fine, both technically and fundamentally, but it is our only short-term speculation in the gold/silver sector and is therefore the only TSI stock for which a complete exit makes sense at this time. The profit on the trade, based on our June entry at US$12.85 and Thursday's closing price of US$17.04, is 33%. We mentioned in this week's Interim Update that a close outside the 1.275-1.295 range by September euro futures would signal the direction of the next multi-week move in the currency market. The September euro closed below 1.275 on Thursday, shifting the odds in favour of a euro decline (US$ advance) over the next few weeks. We are therefore going to upgrade our short-term US$ outlook from "neutral" to "bullish". A US$ rally would normally be a negative for gold, but at this time last year the US$ and gold rallied together. It's possible that the same thing is about to occur, so we will leave our short-term bullish view on gold in place unless the December contract closes below $615 (it is trading at $625 as we write). Alert #159, Jul-01 2006 In this week's Interim Update, posted a few hours prior to the opening of the US markets on Thursday, we said: "...if gold, industrial metals, the C$ and the stock market rally during the days following Thursday's Fed rate hike it will be a clear sign that monetary policy is not yet tight enough and that additional rate hikes are going to occur regardless of what the Fed happens to say in its monetary policy statement." Well, Thursday's and Friday's market action was about as clear a sign as the Fed is ever going to get that its monetary policy is not yet tight enough. As long as the markets continue to celebrate every rate hike as if it were the last one, the rate hikes MUST continue. The US stock market had become so 'oversold' of late that it wasn't going to take much to ignite a sharp rally. As it turned out all it took was some less-than-hawkish language from the Fed, but if the catalyst for the rally hadn't been the Fed it would have been something else. The bottom line is that too many people had positioned themselves for additional weakness, making some sort of counter-trend rebound highly probable. Our best guess, at this stage, is that the 'choppy' recovery that began on 14th June will continue for another 2-3 months. Gold has broken out to the upside from its 2-week consolidation, creating a short-term target of around 640. Gold continues to do what it has been consistently doing for the past year: rally when the stock market rallies and fall back when the stock market falls back. This means that gold is still being traded as part of a general liquidity play alongside global equities, emerging market debt and industrial metals, which, in turn, means that it is not yet attracting a significant monetary premium. The best part of the gold bull market -- the part where the yellow metal makes substantial gains relative to almost all other investments -- lies ahead of us and will almost certainly coincide with a) contracting financial market liquidity, and b) a pronounced widening of the US yield-spread. We've had 340 in mind as a maximum upside target for the HUI's initial rebound from its June low and this level was almost reached on Friday (the HUI traded as high as 338 and closed at 337). We expect that slightly higher levels will be seen within the next 3 months, but we think the short-term downside risk is now at least as high as the upside potential and are therefore changing our short-term view on the gold sector from "bullish" to "neutral". A drop below 300 over the coming month or so would probably take our short-term outlook back to "bullish". Alert #158, Jun-14 2006 Gold and Silver Stocks This week's additional decline in the gold sector leaves us with no doubt that an intermediate-term correction is underway (this was already our view, but the HUI's close below the March low has provided conclusive evidence). Since the beginning of the long-term bull market in gold stocks no intermediate-term correction has lasted less than 6 months; hence our expectation that the next intermediate-term advance won't begin until at least November of this year. However, it is quite common for the PRICE low to be put in place during the first 2 months of a correction with subsequent declines during the remainder of the correction proving to be tests of the low; hence our view that the low that has just been put in place, or will be put in place over the next couple of weeks, will turn out to be the ultimate price low for the correction. Furthermore and as discussed in the latest Weekly Update, we think there's a high probability that the HUI's correction low will be above 260. If our interpretation is valid then there is less than 5% of downside risk in the HUI from Tuesday's closing level of 274. Many small exploration-stage gold/silver stocks are down by 50% or more from last month's highs, a dramatic turn of events but not out of the ordinary for this section of the stock market. In fact, the sort of gut-wrenching action we have seen over the past few weeks tends to be a yearly occurrence in the gold sector and leads to low-risk buying opportunities. Such an opportunity is upon us, but because the overall correction is likely to last many more months it is important to keep a lot of cash in reserve. In other words, it makes sense to do some buying now, but not to become 100% invested right now. As far as our own accounts are concerned, the cash reserve has been reduced from 45-50% to around 35% over the past 2 weeks thanks to stock prices falling far enough to hit under-the-market buy orders. The best value can be found amongst the smallest exploration-stage stocks, but at this stage of the correction we'd be inclined to direct most new buying towards some of the larger exploration-stage stocks (NovaGold Resources and Metallica Resources, for example), or junior producers (First Majestic Resource or Northern Orion Resources, for example), or the major South African gold producers (Harmony and Gold Fields Ltd). With the exception of Gold Fields (NYSE: GFI), the aforementioned stocks are already in the TSI Stocks List (Harmony is represented by the HMY January-2008 $10 call options and Northern Orion by the Feb-2010 warrants). And this exception will now be eliminated with the immediate addition of GFI to the TSI List at Tuesday's closing price of US$16.46. At this price GFI is within a few percent of long-term support defined by the top of its 2002-2005 consolidation. We will also add Minefinders (AMEX: MFN) if it trades at US$6.15 (last sale: $6.65) and New Gold (AMEX: NGD) if it trades at US$7.55 (last sale: $7.99). These are advanced-stage explorers that are a) priced at attractive levels based on the quantity/quality of in-ground resources, and b) poised to move into the producer category during 2007. First Majestic Resource (TSXV: FR), a junior silver producer and one of our long-term favourites, traded down to the C$3.50s on Tuesday. In the latest Weekly Update we identified the C3.50s as the ideal price-area for new buying. We'd just like to point out that an interesting arbitrage situation has developed between FR and First Silver Reserve (TSX: FSR). FR currently owns 63% of FSR and recently made an offer of 1 FR share for every 2 FSR shares OR C$2.16 in cash (FSR shareholders who accept the offer can elect to receive FR shares or cash in exchange for their FSR shares) to acquire the remaining 37%. FSR closed at C$1.81 on Tuesday, or at a discount of around 15% to FR's cash offer. By buying FSR near Tuesday's closing price speculators can therefore gain exposure to FR with very little short-term downside risk. For example, if you buy FSR at C1.81 and the FR stock price continues to fall then you can elect to receive C$2.16 in cash in exchange for your FSR shares if/when the deal is consummated. Alternatively, if the FR stock price moves up to the point where the shares are more attractive than the cash then you can elect to receive the FR shares (the shares will be more attractive if FR is trading above C$4.40). We bottom-fished Apex Silver (AMEX: SIL) late last month, buying at $14.61 and setting a protective stop at $12.80. Unfortunately, Tuesday's selling squall took the stock below our 'stop' so we have exited SIL at a loss of around 12%. We are, however, going to immediately return it to the List at Tuesday's closing price of US$12.85 because its upside potential appears to be much greater than its downside risk over both the short- and the intermediate-term. With this new trade we aren't going to set a protective stop at this stage. Gold and Silver Bullion Over the past 2 months we've had $8.50 in mind as an intermediate-term downside target for silver. Although this remains a reasonable objective, we think a buying opportunity has arrived. In particular, with July silver trading at $9.56 (as we write) the 200-day moving average has been reached and the maximum downside risk has, in our opinion, been reduced to less than 15%. If you do most of your buying within 15% of intermediate-term bottoms then you should end up in good shape. Gold is probably closer than silver to its ultimate correction low, especially since the investment demand for gold should begin to increase if financial liquidity continues to contract. Furthermore, Tuesday's plunge has taken the gold price down to an area of intermediate-term support. We are therefore going to upgrade our short-term view on gold from "neutral" to "bullish". By the way, Central Fund of Canada (AMEX: CEF) -- a fund that holds gold and silver bullion -- is presently trading at a 12.8% premium to its net asset value. Those looking for a convenient way to obtain exposure to gold and silver bullion should therefore avoid CEF at its current elevated level and consider, instead, buying shares of GLD and SLV. The Stock Market There was a positive divergence in the broad stock market on Tuesday in that the NASDAQ100 Index held up better than the Dow Industrials Index. However, both indices closed at new correction lows so the divergence wasn't significant. The absence of significant positive divergences suggests that new lows will soon be seen. However, we think that those holding the QQQQ and DJX put options we've recommended in the past should begin to scale out of these positions during the next several days. A reasonable approach, we think, would be to exit about HALF of these positions into weakness over the coming fortnight. The reason for cutting back on put-option exposure at this time is that the market has become sufficiently oversold to support a sharp counter-trend rally. This rally could wipe-out most of the gains in bearish positions that have been made during the recent decline. Final Note We will be posting an Interim Update on Thursday at roughly the normal time, but it will be an abbreviated commentary because we are currently 'on the road' (we'll most likely end up writing most of the commentary while sitting in an airplane). Alert #157, Apr-21 2006 Just a few quick comments on Thursday's interesting action in the markets. In the 10th April Weekly Market Update we said: "...when silver peaks following a large multi-month advance it usually doesn't leave you guessing for long. Unlike peaks in the stock and bond markets, which will sometimes be gradual affairs, peaks in the silver market almost always feature violent downward reversals." Thursday's decline in the silver price certainly qualifies as a "violent downward reversal". In our opinion, Thursday's action indicates that the silver price has probably made an intermediate-term peak and that the silver/gold ratio has almost certainly made an intermediate-term peak. Due to the speed of silver's decline a short-term bottom will probably be put in place very soon (within the next two trading days, in all likelihood), after which there should be a rebound. At this stage it's too soon to have an opinion on whether gold and gold stocks have also just made intermediate-term peaks. What we can say is that the downside risk for gold is a lot less than for any other metal and that the intermediate-term risk/reward for many exploration-stage gold stocks remains very attractive. We do not, however, think that the stocks of most large and mid-tier gold producers are attractive investments near current prices. There is some evidence that the Dollar Index has just completed a successful test of short-term support at 88. Given this and our view that the maximum downside risk is around 2 points (a drop to test intermediate-term support at 86), we are upgrading our short-term view on the dollar from "neutral" to "bullish". Alert #156, Apr-19 2006 Over the past two weeks we've said that a close below 1700 by the NASDAQ100 Index would prompt us to change our short-term stock market view from "neutral" to "bearish". The NDX closed below 1700 on Monday, but then immediately rebounded to well above 1700 on Tuesday. Monday's downside breakout was therefore a 'fake-out' and we are back to a "neutral" stance. We don't think there's much upside potential from here, but the market is not yet ready to break down. The initial catalyst for the broad-based stock market surge on Tuesday 18th April was, we think, a rebound in the bond market, but the rally was given a boost during the afternoon by 'evidence' (the release of the minutes of the latest FOMC Meeting) that the Fed was near the end of its rate-hiking campaign. Not surprisingly, therefore, interest-rate sensitive stocks led the stock market rally with the homebuilders, the utilities and the banks all making good gains. Once again the markets are discounting an end to the rate hiking, but, as we've previously explained, it's extremely unlikely that the Fed will actually end its rate-hiking as long as the prices of almost everything keep rising. We recently turned short-term bearish on the CRB Index, but this was based on our expectation that the stock market was about to embark on a substantial decline (the commodity rally and the stock market rally are 'joined at the hip'). We suspect that the stock market rebound that began on Tuesday will prove to be short-lived, but the current price action doesn't warrant us being short-term bearish on either stocks or commodities. We are now short-term "neutral" on everything except bonds. (Bonds could, we think, rally a bit more over the coming 1-3 weeks, but are likely to trade much lower within the coming 2 months. We therefore remain short-term bearish on bonds.) We can't be short-term bullish on stocks, commodities or gold because we expect the rallies to end soon and because the short-term downside risk appears to be as great as the upside potential, but neither can we be short-term bearish given the price action. For similar reasons, we can't be anything other than short-term "neutral" on the US$ (the Dollar Index is more likely to move lower than higher over the coming fortnight, but we think the maximum downside potential from here is only about 2 points). Even though buying anything now would entail considerable short-term risk, it's still not that difficult to find good value amongst the exploration-stage gold and commodity stocks. Amongst the junior gold stocks in the TSI List, European Minerals (TSX: EPM) looks particularly interesting at its current price of C$1.13. The stock market seems to be oblivious to the fact that EPM has substantial copper exposure (at today's metal prices about 37% of EPM's revenue would come from selling copper). The stock is no doubt being weighed down by the large equity financing that was completed last month. Also, at its current price of A$2.24 the Australian-listed Lion Selection Group (ASX: LSG) is trading at a discount of at least 10% to its net asset value and offers relatively low-risk exposure to junior gold and other metal stocks. Amongst the non-gold commodity stocks in the TSI List, we like Northern Orion (TSX: NNO, AMEX: NTO) because its current market cap is underpinned by the cash flow being generated by its 12.5% stake in the low-cost Alumbrera copper/gold mine while substantial leverage to metal prices is provided by its 100% ownership of the huge Agua Rica copper/gold project. NNO is getting close to our short-term upside target of C$6.00, but from a longer-term perspective the current price looks quite cheap. Also, International Royalty (TSX: IRC) provides relatively low-risk exposure to metals (primarily nickel) at its current price while Mawson Resources (TSXV: MAW) is an exploration-stage uranium play with a very attractive risk/reward (it's high-risk, but the potential reward is much higher still). Alert #155, Jan-10 2006 Just a few quick comments on Monday's market action: 1. Gold's move above last month's peak doesn't negate the possibility that a double top is in the process of being formed. This is because the second top can be a few percent above or below the first top. 2. Yesterday's strong upward move in the gold price to a new high was not confirmed by either the Canadian Dollar or the major gold stocks. In particular, it was potentially significant that the HUI and the XAU ended the day with small losses despite a $10 rise in the gold price AND strength in the broad stock market. 3. The small-cap end of the gold share universe is becoming a bit crazy. For example, a few months ago the stock price of Exeter Resource (TSXV: XRC) was completely oblivious to good news, but yesterday the stock gained 24% on large volume on NO news. Amongst the exploration-stage stocks these types of moves have been regularly occurring over the past couple of weeks. They are, in part, being driven by 'price-is-no-object' speculative buying emanating from Germany. 4. There are still some small gold/silver stocks that are yet to do very much. These stocks could well make catch-up moves over the next few weeks because the market's fascination seems to be shifting from one stock to the next on almost a daily basis. However, the short-term risk is high and becoming higher by the day. 5. The stock price of NovaGold Resources (TSX and AMEX: NG) broke out above resistance in the low-C$11 area on Monday, thus projecting a move up to the C$14-C$15 range within the next few months. However, we would NOT be doing any new buying of this stock following Monday's 9% surge and nor would we be doing any new buying of the NovaGold warrants (TSX: NG.WT) following Monday's 18% surge. 6. Based on many of the indicators we follow the broad US stock market is now quite overbought on a short-term basis, so the excitement generated by the Dow moving back above 11,000 will probably soon lead to the start of a significant pullback. We suspect that there is more upside in store for the senior US stock indices over the next three months, but not a lot more. We are therefore downgrading our short-term stock market view from "bullish" to "neutral". Alert #154, Nov-16 2005 In the latest Weekly Market Update we said: "We are presently short-term bullish on the gold sector and think it's likely that the HUI will test its 30th September high (250) within the next few weeks. If this happens then the stage will be set for another important November PEAK. A lower-probability alternative is that the current rally fails over the coming few days (a daily close below 222 would indicate a rally failure) and we get a fast sell-off. Although this would create some short-term pain for holders of gold and silver stocks it would potentially turn the intermediate-term outlook more positive by establishing an important November LOW." What we described as a "lower probability alternative" in the Weekly Update now looks like an even-money bet. The HUI has not yet closed below 222, but Tuesday's 2.6% decline in this index in the face of a flat gold price and only minor weakness in the broad stock market was decidedly bearish price action. If the HUI immediately moves back above 230 then Tuesday's decline was a 'storm in a teacup', but just be aware of the now significant risk of there being a 10% fall over the coming week or so. Also, depending on what else was happening in the markets at the time such an outcome could have intermediate-term BULLISH implications by putting in place an important November LOW. With the odds of the next 10% move in the HUI being to the downside now appearing to be about the same as the odds of it being to the upside, we will switch our short-term view on the gold sector back to neutral. By the way, the AMEX Oil Index (XOI) seems to be tracing out a similar pattern to the HUI and has similar near-term downside risk. We'll have more to say in Thursday's Interim Update. Alert #153, Nov-02 2005 The first two trading days of this week were very interesting, but they didn't resolve anything. Gold and silver pulled back sharply to support while the Dollar Index moved up to once again test resistance at 90. Most gold and silver stocks did very little, which was a notable sign of strength considering what happened in the bullion market. The price declines in gold and silver over the past two days have significantly improved the short-term upside potential in each of these markets because the upside targets we've previously mentioned ($490s for gold and $9.00 for silver) remain viable, but the probability that larger downturns are underway has also increased. The situation is most clear in the gold market in that Tuesday's drop took the price to the base of what COULD be a topping pattern. If it is a topping pattern then any additional weakness from here will project a move down to the low-440s. IF we do get sufficient additional weakness in the gold market over the next several days to take the gold price down to the 440s it would most likely create a good short-term buying opportunity. This would particularly be the case if gold shares continued to resist the decline in the bullion market and there was a large reduction in the speculative net-long position in the futures market. As we keep stressing in the TSI commentaries, however, the monetary backdrop does not yet support a bullish intermediate-term outlook for either gold or gold stocks. As a result, it's appropriate to do SOME buying during the dips but it's not, in our opinion, the right time to have anywhere near maximum exposure to these markets. That time will likely not arrive until after the Fed has made its final rate hike. On a different matter, at the close of trading on Tuesday Aflease Gold and Uranium (Pink Sheets: AFLUY) was trading at a 23% discount to Southern Cross Resources (TSX: SXR) based on the proposed value of the merger between the two companies. This merger is scheduled to be finalised at the end of this month, so the discount will soon have to disappear. It could, of course, disappear in a number of ways, such as by SXR moving down to AFLUY or by AFLUY moving up to SXR. Clearly, though, with the stocks near current prices anyone considering an investment in the combined company should purchase AFLUY and not SXR, and current holders of SXR should consider switching into AFLUY. Also, those who followed our suggestion to take partial profits in AFLUY when the stock was trading at US$10.35 in September should consider re-purchasing near Tuesday's closing price of US$6.75. Lastly, those who currently don't own the stock and who don't have much exposure to uranium should consider taking an INITIAL position now. Alert #152, Oct-14 2005 There was an impressive downward reversal in the US$ on Thursday, confirming the importance of resistance at around 90.5 for the Dollar Index and substantiating our view that this resistance will hold for now. Once this resistance is breached -- and we'll be very surprised if it is not breached within the next few months -- we think the Dollar Index will move up to the mid-90s in quick time, but as far as the next few weeks are concerned the odds remain in favour of a dollar pullback. Thursday's downward reversal in the dollar was accompanied by a pretty good upward reversal in the HUI following a test of support in the mid-220s. If we are correct to anticipate another important October-November (most likely November) peak in the gold sector then Thursday's low of 224.8 for the HUI should turn out to be the bottom for the current pullback. Also, the HUI/gold ratio closed marginally below its 40-day moving average on Wednesday so if a final rally is going to happen it should begin now. Our view is that the HUI has short-term upside potential of about 20-30 points versus downside risk of about 10 points IF we are, in fact, going to get an October-November peak this year. We are therefore going to shift our short-term view on the HUI to "bullish". This bullish view will be 'stopped out' if the HUI closes below 219. As discussed in TSI commentaries over the past few weeks, we think silver and silver stocks have more short-term upside potential than gold and gold stocks. Alert #151, Sep-27 2005 With reference to the US stock market, in Sunday's commentary we said: "...a break of the sequence of rising lows would clearly be a bearish development and would put the odds in favour of a sharp decline into a traditional October low. A failure of the S&P500 to close above 1225 during any rebound over the next few days would also be a short-term bearish omen." The 'Rita relief rally' pushed the S&P500 up into the low-1220s on Monday morning (from Friday's closing price of 1215), but the market then proceeded to give back most of its gains and ended almost flat on the day. Time will tell, but this was potentially a significant reversal. We'd be more enthusiastic about the prospects of a sizeable decline over the next few weeks if the European markets hadn't been so strong on Monday, but we've seen enough to alter our short-term view on the US stock market from "neutral" to "bearish". If the S&P500 closes above 1228 over the coming days then Monday's reversal was NOT significant at all and we will return to a "neutral" stance. A break of the sequence of rising lows -- requiring a daily close below 1200 -- would solidify the short-term bearish case. The AMEX Gold BUGS Index (HUI) had a good upward reversal on Monday and although it hasn't yet exceeded its 19th September intra-day peak the potential for a spike above last week's high over the coming days is clear. However, our short-term view is unchanged. The current strength is, we think, creating a good opportunity to take some money off the table (whilst maintaining substantial exposure to the long-term bull market). What we generally do in our own account when we think a sector-wide rally is in its final stages -- particularly with regard to our dealings in the small exploration-stage gold stocks -- is to place sell orders well above the current market price such that we automatically get taken out of PART of our position if there's an upward spike in a stock. Usually we end up getting filled on less than half of these above-market sell orders, but at this stage of the bull market there's no urgency to sell. It shouldn't be a big problem, for instance, if we miss an opportunity to take profits during the current rally because an opportunity to sell at an even higher price is likely to occur within the next 12 months. However, taking some profits during buying spikes helps mitigate downside risk. Alert #150, Sep-22 2005 As mentioned in last weekend's commentary, we aren't doing an Interim Update this week. However, as promised we are sending out this e-mail to briefly update our thoughts on the Fed meeting and the markets. This was expected to be an interesting week and it has lived up to expectations. The Fed and the Markets Greenspan and Co. did what we expected them to do: hike the Fed Funds rate by 0.25% (to 3.75%) and confirm that they are 'staying the course'. In particular, the Fed confirmed that it still considers monetary policy to be accommodative and that it still plans to remove this accommodation at a measured pace. Unless there's a large decline in the stock market over the coming 6 weeks we think it's safe to assume that the Fed Funds Rate will be increased to 4.0% at the 2nd November FOMC Meeting. As expected, the 'monetary easing' plays turned down in response to the Fed's actions/words. However, no sooner had the markets begun to react to the prospect that monetary easing was still some way off than another potentially devastating hurricane-related threat emerged. If Hurricane Rita -- a Category 5 storm that looks set to hit Texas over the next few days -- does anywhere near as much damage as Hurricane Katrina, then the Fed's resolve will be severely tested the US Government will be borrowing a huge pile of money into existence in addition to the huge pile of money it has already said it will borrow into existence to re-build New Orleans. As a result, after beginning to discount a postponement of monetary easing on Monday afternoon and throughout Tuesday's trading session in the US, the 'monetary easing' plays have once again sprung to life. Furthermore, after moving up to 3.52% in the wake of Tuesday's rate hike the 3-month T-Bill yield plunged to 3.34% on Wednesday. The T-Bill market is therefore acting as if the Fed Funds rate was on its way to 3.25%, not 4.0%, meaning that there is presently a big divergence between what the Fed is intimating it will do over the next few months and what the market is anticipating it will do. Gold and Gold Stocks Gold and gold stocks -- the ultimate 'monetary easing' plays -- rocketed higher during the three weeks following the New Orleans disaster in anticipation of a) less-stringent monetary policy from the Fed, and b) a surge in money supply growth courtesy of a Federal Government borrowing binge. They then pulled back early this week as it became apparent that the Fed would not be changing course, but strengthened anew on Wednesday after Hurricane Rita evolved into a substantial threat. The AMEX Gold BUGS Index (HUI) spiked sharply higher on Monday morning, but ended slightly lower on the day despite a $7 gain in the gold price. This was an impressive downward reversal. Gold bullion then spiked higher and reversed lower and Tuesday while the HUI fell 2% to confirm Monday's downward reversal. Since then gold has moved to a new high for the year, but despite a strong bounce on Wednesday the HUI and most of the major gold stocks have not yet exceeded Monday's spike high. If fears regarding the latest hurricane threat and the associated monetary response to this threat continue to build then the HUI could well move above Monday's high over the coming 2-3 trading sessions. But even if Monday didn't give us a short-term peak for the gold sector we think it's reasonable to interpret the downward reversal as a 'warning shot across the bow'. If a short-term peak is not already in place we suspect that it will be put in place over the next few days. We don't, however, have an opinion on whether this next peak (or Monday's peak if a higher high is not seen within the coming few days) will prove to be the ultimate high for the rally that began in May or whether new rally highs will be seen during October-November. As far as the 6-month outlook is concerned, the more bullish scenario would entail a peak about now followed by a sharp decline into an October-November low. The more bearish scenario would entail a 1-2 week consolidation followed by a continuation of the rally into an October-November high (October-November highs in the gold sector tend to precede 6-12 months of BEARISH price action). By the way, if you are an investor in gold stocks there isn't any need to have an opinion on what is likely to happen to prices over the next few months. If you are confident that a secular bull market is in progress then the aim would be to do some buying following the periodic sharp sell-offs (such as during April-May of this year) and to do some selling during the buying spikes (such as right now), all the while maintaining a sizeable core investment. This should be an automatic -- almost mechanical -- process that does not necessitate having any opinion on short-term price direction. For example, we had no inkling of what was about to occur when we suggested, during the final two days of August and the first few days of September, that it was time to do some buying of selected gold/silver stocks; some stocks had simply dropped to levels at which the risk/reward looked very favourable and, therefore, at which new buying looked like a good idea. Doing SOME buying at that time would have been the right decision even if stock prices had subsequently moved lower. By the same token, deciding to do SOME selling now -- especially if there's a Rita-related upward spike over the next 2-3 days -- would make sense even if it turns out that prices continue their relentless upward march for a few more weeks. Note, though, that selling so much now that you no longer have a sizeable core position in gold/silver stocks would NOT make sense. The Stock Market The US stock market ended Wednesday's trading session in an interesting position in that several indices are now hovering just above important support levels. For example, the NASDAQ is now 6 points above the important support that exists at 2100, the NASDAQ100 is 11 points above the 1550 support level, the S&P500 is 10 points above the 1200 support level, and the Semiconductor Index is 8 points above the 450 support level. Therefore, either the market rebounds from here or there will be some significant breaks below support. If the indices break below support within the next few days we don't think the short-term outcome will be cataclysmic. Rather, the implications of near-term breaks below support would, in our opinion, be that peaks for the year are in place and that the next rally in the market will end with the senior indices below their August highs. The US stock market has not yet reached an oversold extreme, but it could get there within 2-3 days. The Currency Market The euro was very weak on Monday in response to Angela Merkel's failure to achieve a decisive victory in Germany's elections, but it then rebounded on Wednesday as Hurricane Rita prompted the markets to focus on US inflation. There's not much else to say at this stage other than to note that the Dollar Index is poised at its 50-day moving average. A weekly close above this moving average would be a bullish omen, but the best opportunity to buy the dollar would come about as a result of a pullback to near the major support that exists at 85.50. Updates on Stock Selections Metallica Resources (TSX: MR, AMEX: MRB) announced on Tuesday that further progress had been made in overcoming the legal obstacles that caused the construction of its Cerro San Pedro gold/silver mine to be suspended last year. One issue remains, but the company is now in a position to re-commence construction. This, obviously, is very good news. Despite gaining 60% over the past 7 weeks the stock continues to offer good value. Technically, it has broken out to the upside and appears to be on its way to US$2.00 (it closed at US$1.62 on Wednesday). Whether it reaches $2 in the near future or following a pullback will, however, be largely determined by what happens in the overall gold sector. In the latest Weekly Market Update we said we would exit our HMY Jan-2007 $7.50 call options if they traded at $4.00. The options have traded as high as $4.20 over the first three days of this week, so we will now remove these options from the Stocks List. The profit on the trade was 202%. Our intention is to exit the HMY Jan-2007 $12.50 calls if they trade at $2.00 within the next few weeks. Alert #149, Sep-02 2005 The more we read about the damage to oil delivery/refining/distribution infrastructure and general import/export infrastructure caused by Hurricane Katrina the more we think a recession is on the cards for 2006. In fact, the evidence shows that a significant slowing of US economic growth was already underway prior to Katrina so this week's disaster has probably just converted a 2006 recession from being a 'likely prospect' to being a 'done deal'. The financial markets have recognised this and have, as a result, 'steepened' the US yield curve considerably over the past two days (by taking rates at the short end of the curve lower relative to rates at the long end of the curve) in anticipation of a reversal of the Fed's monetary policy. The market is probably right that the Fed SHOULD reverse direction, or at least end its rate hiking. However, whether it WILL reverse course or not is another matter. We think there's a good chance that the Fed will continue to hike rates regardless of the devastating effects of this week's hurricane. The markets are currently acting as though the Fed will adopt an easier monetary policy and, judging by this week's strong rebound in growth-oriented investments, that this monetary easing will solve the problems. But even if the asset markets prove to be right about a change in Fed policy they aren't likely to be right about the effects that this change will have. Recall that when the Fed first began to cut interest rates in early-2001 there was a feisty multi-week rally in the stock market in anticipation of the positive effect that the monetary easing was supposedly going to have on the economy, but that all gains quickly evaporated once it was realised that a few rate cuts weren't going to solve anything. As things currently stand, if the markets continue to anticipate an imminent reversal in Fed policy, and especially if the Fed confirms the markets' anticipation by actually signaling a reversal, then we could get a 1-2 month rally before reality starts to set in. Turning to the action in the gold and currency markets, Newmont has broken decisively above $40, the HUI/gold ratio has moved further above its 40-day moving average and Thursday's price gains in the gold sector were confirmed by a surge in trading volume. Also, gold moved above resistance in the low-440s, thus indicating that the recent decline from the mid-450s to the low-430s was a correction within an on-going short-term upward trend and not the start of a new downward trend. And December silver has provided clear evidence that a short-term bottom was put in place earlier this week. It would be normal if the gains of the past two days were followed by some consolidation, but it looks like gold and the gold stock indices are headed to new multi-month highs. Perhaps we are, after all, going to get a typical (from a seasonal perspective) September peak in the gold sector. We continue to expect that the gold sector will make an important low during either October-November of this year or the first quarter of next year, depending on when the Fed reacts to the deteriorating US economic situation, but no longer think the odds are in favour of the HUI dropping below its May-2004 and May-2005 lows. Our strategy essentially remains the same now as it has been throughout the past 9 months: to accumulate high-potential gold stocks during 2005's selling squalls in preparation for the next upward leg in gold's long-term bull market (expected to begin during 2005-2006 and extend through to 2008-2009). There will be buying opportunities in different stocks at different times, and following the sell-off on Tuesday (30th August) we sent an e-mail alert to subscribers to highlight several gold stocks that had moved to levels where we thought new buying was appropriate. Although these stocks -- NovaGold (TSX and AMEX: NG), Harmony Gold (NYSE: HMY), Resolute Mining (ASX: RSG), Golden Star Resources (AMEX: GSS) and Desert Sun Mining (TSX: DSM, AMEX: DEZ) -- have rebounded strongly over the past two days, they are still at levels where they offer good value and where some buying would be reasonable for those who don't have much exposure to the sector. At this time we'd also like to highlight First Majestic Resource (TSXV: FR), Nevsun Resources (TSX and AMEX: NSU) and DRDGOLD (NASDAQ: DROOY) as being suitable for new buying near yesterday's closing prices. As far as our own account is concerned, the only change we have made is that we've done enough buying this week to reduce our cash reserve from around 40% to 35%. The market environment remains very risky and volatility is likely to increase over the coming weeks, making it very difficult to have confidence in any short-term view. This would likely have been the case anyway, but Katrina has markedly increased the degree of difficulty. For example, while gold is PROBABLY on its way to a new high for the year the extremely lopsided traders' commitments mean that any downward correction will have the potential to turn into something dramatic. We are therefore going to switch our short-term views on gold, gold stocks and the US$ to "neutral". Previous Email Alerts