We are going to take profits on our March QQQ put options on Wednesday and
plan to take advantage of any general market strength over the next week to
buy some June QQQ put options. Specifically, we plan to buy the QQQ June $30
puts at $0.75 or lower. The risk is that the market doesn't rebound enough
to allow us to 'get set' at the right price, but that's a risk we're
prepared to take because the March options expire in only 4 weeks and any
time premium in these options will therefore now evaporate very quickly.

The recent huge run-ups in many gold stocks left large air-pockets (a lack
of natural support levels) beneath current prices, thus increasing the risk
of sharp declines. Furthermore, the ownership quality of the high-profile
gold stocks has undoubtedly deteriorated over the past month, adding to the
short-term downside risk in these stocks. (When we refer to the ownership
quality having deteriorated we mean that large volumes of shares have been
bought by traders simply because the shares were going up. These 'buy high
sell higher' proponents are weak hands in that they will exit at the first
sign of a reversal.) As such, we've recently warned of the prospect of a
sharp downward reversal in gold stock prices and noted that the downside
risk in the bullion price was much lower than in the gold mining shares.
Tuesday's decline, which saw recent high-price buyers with little knowledge
of what they had bought dumping their gold shares in response to a slight
waning in upside momentum, was therefore to be expected. The only real
question was when it would occur, a question that has now been answered.

The good news is that sharp declines in bull markets tend to end quite
quickly. At this stage we don't know how long the correction will last (it
could be over within 1 week or it could extend for 2 months), but we'll
continue to assess sentiment indicators, inter-market relationships and
price action in an attempt to identify the next short-term buying
opportunity.

Alert #69, Feb-08 2002
Although we trade almost every day for our own account we usually try to
avoid concentrating on the short-term stuff as far as our TSI commentaries
are concerned. However, ignoring the daily fluctuations is becoming more and
more difficult because these fluctuations are, we think, linked to changes
in long-term trends. We appear to be in a transition period. In the next
Weekly Update we will step back and review the big picture, but for now here
are some more thoughts on the small picture.

The stock market only moved marginally lower on Thursday morning before
turning higher, so we weren't provided with a good opportunity to exit half
of our put option position (as per the suggestion in yesterday's Interim
Update). However, the late fade on Thursday means that such an opportunity
might be provided on Friday. Once again, we will take profits on half of our
QQQ March $35 put options if the market spikes down during the first hour of
trading. A price of around $1.90 for these puts looks achievable
(yesterday's close was $1.70).

The stock market has been unable to sustain any up-move over the past week
for longer than a few hours, even when ostensibly-good news is announced.
This suggests that we are headed lower over the next several weeks, even
though a bounce is still likely to occur very soon. Furthermore, it is worth
noting that Cisco plunged below its 200-day moving-average on Thursday. The
200-DMA has held during every pullback that has occurred since
early-November...until now. This moving average (prior strong support) will
now act as resistance during any oversold bounce. We mention Cisco because
it tends to be a good proxy for the tech sector, the NASDAQ Composite and
the NASDAQ100. Cisco is not very profitable and is currently trading at
around 7-times revenue, so it can certainly fall a long way from its current
level before reaching anything resembling fundamental value.

Gold traded strongly on Thursday with the April contract closing marginally
above $300. It got a helping hand from the other markets as stocks, bonds
and the US$ all had down-days. As we are writing this Market Alert gold is
up another $4.20, although the Australian gold stocks are flat (some
slightly up, some slightly down).

Based on the way gold has traded over the past 2 days a spike to $325 would
not surprise us, but such a move is probably already factored into the gold
shares. Having sold around 40% of our trading positions (and none of our
investment positions) in gold stocks during the recent rally we plan to do
nothing else at this time. We don't think it is prudent to do any new
buying, especially in the higher-profile gold stocks that have already run
so far so fast, but we want to keep some trading positions in case the
long-awaited gold price explosion occurs earlier than our current forecast.

Alert #68, Feb-06 2002
We normally don't issue these Market Alert e-mails as frequently as we have
done over the past 2 weeks because we don't want to over-emphasise the daily
fluctuations in the various markets. This is particularly so when nothing is
happening that contradicts our big picture view (as is the case now).
However, we've recently been receiving a lot more e-mails than usual from
TSI readers (something we don't mind, by the way) asking for our thoughts on
the latest market action. So, here is another quick update.

The US stock market was recovering quite nicely on Tuesday until news hit
the wire that the short-term prospects for an economic stimulus package had
evaporated. This news prompted yet another rush for the exits and another
put-option buying spree (the equity put/call ratio was a very high 0.92 on
Tuesday). We suspect that the market will quickly get over the temporary
inability of the "Stupid Party" and the "Evil Party" to agree on a stimulus
package and will mount another recovery attempt over the next few days.
However, lower levels for the major stock indices are a high probability
over the coming month.

Putting aside the 'news of the day' and just looking at what the markets are
doing can provide some insight into what is really going on. For example,
Japanese Government Bonds recently broke their eleven-year up-trend (one of
the most powerful trends of the 1990s). This strongly suggests that the
problems facing Japan and the rest of the world are far greater than just
sluggish economic growth. An economic stimulus package in the US is
therefore of little use beyond whatever short-term boost it gives to
sentiment.

Gold was strong on Tuesday and is now butting its head up against the $300
level. A signal that this is the start of a major rally would be generated
with a daily close above Tuesday's intra-day high (299.80, basis the April
contract).

We once again emphasise the importance of separating trades from
investments. We have been, and will continue to, scale out of our gold-stock
trading positions during this period of incredible strength. Along these
lines and further to yesterday's e-mail we sold Bendigo Gold (BDG) in the
Australian market today at 31.5c, realising a profit of 70% in 5 weeks. We
are not contemplating the sale of any of our gold stock investments at this
time because we are confident that these stocks will eventually move MUCH
higher, even though they are likely to experience sharp intervening
pullbacks once the current enthusiasm dies down.

Alert #67, Feb-05 2002
The US stock market experienced yet another in a seemingly endless series of
mini panic-attacks on Monday, but the panic will no doubt subside if the
market reverses higher on Tuesday (something we expect it to do). The reason
for the regular dramatic mood swings is that the market is simply not
trending. Traders are constantly jumping from one side of the fence to the
other in an effort to be on the 'right' side, but the market has not yet
tipped its hand as to which side is the right side.

The S&P500 and the Dow made new closing lows on Monday, but held above their
30th January intra-day lows. The NASDAQ did, however, move below its 30th
January intra-day low, as did the Bank Index. The banks look very weak from
both technical and fundamental perspectives and we would continue to avoid
them (the stocks, that is, not necessarily the banks themselves).

We have advocated buying put options during periods of strength over the
past 2 weeks, but would absolutely not be buying them during periods of
panic. A downward spike and reversal higher on Tuesday morning would
probably lead to another reasonable put-buying opportunity late this week.

The Japanese Nikkei225 Index made a new post-bubble closing low today. In
fact, today's close was an 18-year low for the Japanese stock market. As
we've noted on several occasions, the Japanese market has been leading the
US market over the past 12 months. The Nikkei's latest plunge is therefore a
bearish omen for US stocks.

Selected gold stocks continue to surge and the gold price itself has now
moved up to the low-290s. The odds favour a reversal lower in the gold price
from around current levels, but we certainly wouldn't want to be short gold
at this time. In our view the downside risk is around $15, whereas the
upside risk is $100.

The sort of market action we are currently seeing in the gold sector is one
of the main reasons we separate our trading positions from our investment
positions. When stock prices rocket higher it is reasonable to take some
trading profits. However, we would never sell an investment on the sole
basis that its market value had increased. For example, we recently sold a
trading position in Harmony Gold but have not even considered selling our
investment position in this company. Yesterday's closing price of $8.60 for
Harmony Gold seems expensive relative to its $5 price tag of last November,
but it is not expensive relative to its current earnings/revenue and it is
downright cheap relative to where we expect it to be trading in 12 months
time.

One of our trading positions is Durban Deep (DROOY). DROOY leapt 37% on
Monday as people who had probably never heard of the company 2 months ago
when it was trading at $1/share fell over themselves to buy it at up to
$2.80/share. DROOY has risen by almost 140% since we added it to the
Portfolio 2 months ago and we will sell half of our position now. If the
opportunity presents itself we will also sell Bendigo Gold (ASX: BDG) in the
A$0.30-0.32 range. BDG has risen by around 60% in the 5 weeks since it was
added to the TSI Portfolio and now looks pricey relative to other
opportunities in the gold sector.

Alert #66, Jan-30 2002
Fears that improper accounting practices are widespread are beginning to
weigh heavily on the US stock market. Creative/deceptive accounting has been
rampant for years in the US for the purpose of meeting/exceeding Wall St
earnings estimates and thus boosting stock prices. The Enron blow-up brought
home the downside risk associated with the book-cooking, and complacency is
now rapidly being replaced with panic as any company with
potentially-suspect accounting is dumped. Industrial conglomerate Tyco has
been particularly hard hit with its stock down from $58.90 at the end of
last year to $33.60 at Tuesday's close. This represents a loss of around
$50B in market capitalisation and it has happened almost totally as a result
of a change in investor perceptions towards complex/creative accounting.

JP Morgan Chase dropped another 7% on Tuesday. JPM has come under scrutiny
due to the huge notional value of its derivative book (30 trillion dollars,
give or take a few trillion), but this banking behemoth appears to be having
its biggest problems with its basic banking business. For example, JPM was
the largest banking creditor to the three highest-profile corporate
bankruptcies of recent times - Enron, Kmart and Global Crossing. It also has
large exposure to Argentina.

In the latest Weekly Update we suggested buying QQQ March $35 put options at
$0.80 or better. These options traded at $0.80 on Monday and traded as low
as $0.70 on Tuesday morning, before closing at $1.05 on Tuesday. We wouldn't
chase them during this mini-panic, but there may be another opportunity to
buy these 'downside speculations' at reasonable prices late this week or
early next. The market is probably going to try to put together some sort of
rebound in the wake of Wednesday's FOMC Meeting, but resistance at around
1140 (for both the cash S&P500 and the March futures) now looks like a solid
brick wall.

As we write the Nikkei is trading at 9863, down about 1.6% on the day.
Consecutive daily closes below 10,000 for the Japanese market would be an
indication that the post-September rally in the world's major stock markets
has come to an end.

The accounting issues, and the lack of trust they inspire, could turn out to
be the proverbial straw that breaks the camel's back as far as the Dollar is
concerned. While the advent of the euro has boosted capital flows into the
US, anything that puts a dent in confidence (from the perspective of a
foreign investor/speculator) has the potential to slow, or even reverse,
those capital flows.

In the Weekly Update we noted that the first stage of the correction in gold
and silver prices was probably complete, so Tuesday's turnaround on the back
of US$ and stock market weakness fits quite nicely. Gold stocks were strong
on Tuesday as the general market fell, but the XAU was unable to close above
its Jan-16 high. NEM rallied enough to almost fill the downside gap that was
left after it announced its bid for NDY (yesterday's high was 21.97 versus a
low of 22.20 on the day before the bid was announced). A decisive close
above 61 for the XAU and 22.20 for NEM would make things interesting. More
on this in Thursday's Interim Update.

As per the Weekly Update we have bought some insurance (short-term downside
protection for our gold stocks) in the form of NEM March $17.50 put options
(purchased on Monday at $0.15).

Alert #65, Jan-25 2002
Firstly, our Year 2002 Forecast is now available at TSI (just click on "Yearly Forecast" in the Market Analysis menu).

Secondly, the evidence is starting to become quite persuasive that the stock market is NOT going to be able to maintain its upward bias into March, as we had previously thought. Sentiment indicators, which had been mixed until the market's bounce over the past 2 days, are now consistent in their message - an intermediate-term peak has been reached.

Yesterday's rally failed right at the 1140 level mentioned in recent commentaries. However, the market is likely to remain firm, or at least stable, for another week or so before the next serious downward move begins. The 1140 level on the S&P500 may well be exceeded over the coming week, but the probability of new post-September highs (above the early-January highs) is now slim. 

Experienced option traders should consider averaging into some March put options during periods of strength over the next week. We plan to buy the QQQ March $35 puts at 80c or better (they closed at $1 on Thursday).

Both JDS Uniphase and Qualcomm issued some disappointing guidance after yesterday's close, probably ensuring a down opening today (the market is oversold and will likely absorb this news after an initial flurry of selling). Something that almost certainly won't be discussed in the mainstream media when these companies' results are reviewed is the simple fact that they are both currently trading at more than 10-times revenue. JDSU closed at $7.89 on Thursday and will probably drop 5-10% in response to its downbeat earnings report, but if we apply a more normal price-to-sales ratio to this company then it should be selling at less than $2/share.

Alert #64, Dec-27 2001
Our last commentary before going AWOL was the Dec-17 Weekly Update. Here's a
very quick summary of how we left things at that time:
a) Stocks would bottom over the coming few days and then rally into
year-end. Another down-move was forecast for January.
b) The Dollar Index had just broken below important support, projecting a
steeper correction than originally anticipated. The Dollar was still
expected to be strong during the first quarter of next year.
c) The Yen was on its way to the 138-140 (yen per dollar) target we set in
November of 2000, although we were expecting a near-term rebound.
d) We had just turned short-term bullish on the CRB Index, thus bringing our
short-term view into line with our longer-term view.
e) We believed that the risk/reward balance for gold, silver, and our
selected gold/silver shares remained very attractive (minimal downside
potential with the major risk being on the upside).

Here's a synopsis of what happened while we were away (changes noted below
are from the Dec-14 close to the Dec-26 close):
- The S&P500 bounced from 1123 to 1149
- The gold price edged higher by $1
- The XAU dropped by 1 point
- The 30-year bond was essentially flat, although there was an impressive
reversal from down to up on Dec-17
- The Dollar Index rallied from 114.95 to 117.73
- The Yen plunged from 127 to-the-Dollar to 131
- The CRB Index moved marginally higher (from 191 to 193.5)
- Argentina defaulted on its government debt, replaced its president and
moved much closer to a devaluation of the Peso

BIG PICTURE UPDATE

Our big picture views were not changed by anything that happened while we
were away. In summary we expect a) that the stock market will make new lows
in 2002, b) that bonds commenced a major bear market last November and will
therefore make lower highs and lower lows over the coming years, c) that the
CRB Index will soon begin a bull market, d) that the US Dollar will
experience a large decline (following another rally during the first
quarter), and e) that gold and silver will accelerate higher over the coming
2 years. In our regular commentaries over the next few weeks, beginning with
the Weekly Market Update on Dec-30, we'll be outlining our 2002 forecasts
for the stock market, the precious metals, oil, the CRB Index, bonds and
currencies.

SHORT-TERM UPDATE

The stock market is doing its best to meet our expectation for a rally into
year-end. As things currently stand, several major indices are delicately
poised near important technical levels. The S&P500 is about 20 points below
its 200-day moving-average and 25 points below its post-September intra-day
peak. Wednesday's closing level for the Dow was just 10 points below its
200-DMA (it spent most of the day trading above this MA) and about 70 points
below its post-September intra-day peak. The Bank Stock Index closed just 2
points below its 200-DMA on Wednesday. The NASDAQ Composite dropped down to
its 200-DMA last week and bounced (Wednesday's close for the Comp. was 33
points above its 200-DMA). The NASDAQ100 moved up to its 200-DMA on
Wednesday, but closed 28 points below it.

With so many indices near widely-watched support/resistance levels, the
probability of a break-out (either up or down) is high. In fact, we wouldn't
be surprised to see both - an upside break-out that creates a lot of
excitement followed, within a few days, by a reversal lower.

If stock indices remain firm into early-January then we would expect a sharp
correction (or, if the early-December highs are not exceeded, a continuation
of the correction that began on Dec-06) to occur during January. Depending
on what happens over the next few days we might suggest the purchase of some
put options in an effort to profit from this anticipated decline.

The only real surprise while we were away was the sharp move higher by the
Dollar. A market that breaks-out to the downside will often rebound to test
the break-out, so some Dollar strength would not have surprised us. However,
the Dollar's recent surge indicates that the Dec-14 break below support was
a 'head fake'. Although we didn't forecast it, Dollar strength at this time
actually fits more neatly with our stock market view. The US$ and the US
stock market have been moving with each other for the past 5 months. If this
continues to be the case (we have no reason to think that it won't), then a
Dollar correction will occur in parallel with a January stock market
correction. In the Weekly Market Update that will be posted at TSI on Dec-30
we'll review the possible explanations for the Dollar's surprising (to us,
at least) recent strength and the reasons for the likely continuation of
Dollar strength during the first quarter of next year (following a January
pullback).

2002 should be another good year for investors in gold and silver stocks,
but the coming 3 months could be quite difficult. Over the past several
weeks we added 4 trading positions in gold/silver stocks (Harmony, Durban
Deep, Corner Bay Silver and Gabriel Resources) to the TSI Portfolio. These
additions have done as well as we could have reasonably hoped (Harmony is up
34%, Durban is up 13%, Corner Bay is up 60% and Gabriel is up 32%). These
stocks are a 'hold' at current prices, but we would not be doing any new
buying now. We will need to re-assess the situation at the time, but a gold
rally in January (something that would likely occur if the Dollar pulls back
as discussed above) would probably represent a good selling opportunity for
short-term traders in gold stocks.

Alert #63, Nov-30 2001
The stock market hasn't strung together 3 down-days in a row since the Sep-21 bottom and Thursday's rally kept this incredible record intact. Yesterday's stock market rally was apparently (according to the mainstream financial press) based on hopes that the economy is about to recover whereas yesterday's bond market rally was apparently based on fears that the economy is not about to recover. Go figure. Our take is that neither move was based on economic fundamentals. Bonds had become dramatically oversold and were due for a bounce and the traditional end-of-month buying from mutual funds gave stocks a boost.

Some of the sentiment surveys are now reflecting dangerous levels of bullishness. For example, the latest AAII survey shows a bullish percentage of 69%. The only occasion over the past 7 years when the AAII's bullish percentage reached a higher level was in January 2000, just 2 weeks prior to the Dow's all-time high. We are currently expecting further upside during the first quarter of next year, but only if there is a significant-enough correction over the next few weeks to rebuild the 'wall of worry' that up-trending markets climb. On the other hand, a surge to new recovery highs during the first half of December would probably create the ultimate peak for this post-September rally.

In yesterday's Interim Update we mentioned that derivatives never reduce risk on a system-wide basis, they only shift risk from one location to another. Bob Moriarty, the proprietor of www.321gold.com, pointed out in an e-mail to us that the proliferation of derivatives has dramatically increased risk within the system. We couldn't agree more and plan to discuss the derivatives issue again in the coming Weekly Update.

Alert #62, Nov-27 2001
The latest Commitments' of Traders (COT) Report was released on Monday
(delayed from last Friday) and it confirmed what we had expected it to
confirm - that commercial traders were aggressive buyers and that
speculators liquidated their long positions on the drop in the gold price to
the low-270s. During the week ended Nov-20 the commercial net-short position
decreased from 24,000 contracts to just 2,500 contracts. This means that the
commercial net-short position shrunk by more than 5,000 contracts for every
$1 reduction in the gold price, supporting our view that there is minimal
further downside in the gold price from current levels. Price weakness is
being met with aggressive commercial buying in the futures market and strong
demand from India in the physical market.

The commitments' of traders for the currencies are supportive of our view
that a pullback in the Dollar will occur over the next few weeks, but that
we have not yet seen the ultimate highs for this Dollar rebound.

There is another BOE gold auction today (Tuesday). We doubt that this
auction will have much of an effect on the gold price, although on those
occasions when the gold price has been weak going into one of these auctions
it has often rebounded in the days and weeks following the auction.

On Nov-16 we added a trading position in HGMCY (in addition to our core
investment in this stock) and in the latest WMU suggested two more ways to
participate in a near-term rebound in the gold price. One was to buy DROOY
and the other was to buy January call options in NEM. The NEM Jan $22.50
call options would be a reasonable speculation if they can be bought at
$0.40 or lower, but the market is too illiquid for us to make an official
recommendation. We will, however, add a trading position in DROOY to the
Portfolio at Monday's closing price of $1.16. Traders in Australia could
consider buying Lihir (LHG) for a trade (it is trading at $1.09 as we
write).

Here is a link to an article by Northern Trust's Paul Kasriel entitled
"Deflation? Not Bloody Likely!":
http://www.northerntrust.com/library/econ_research/weekly/us/011123.html

The ideas expressed in the article are quite close to our own.

Alert #61, Nov-16 2001
Thursday was a truly remarkable day in financial market history because bond
and oil prices collapsed together (a sharp decline in the oil price is very
bullish for bonds, so this would not happen under 'normal' circumstances).
The December bond contract is now more than 2 full points below where it
closed on the day prior to the US Treasury's initially-successful attempt to
manipulate long-term interest rates lower. As things currently stand, the
Treasury's blatant attempt to manipulate the supposedly-free market
succeeded in giving the US lower interest rates for a period of 10 days. Was
it worth it?

The oil price has collapsed to the point where oil is now fairly valued
relative to other commodities (December oil closed at $17.45 on Thursday
after hitting an intra-day low of $17.15). The market continues to react
(over-react?) to the game of chicken being played by the OPEC producers and
the non-OPEC producers. The result of all this is that whatever low is
reached during this climactic sell-off has a good chance of being THE low
for the oil price for a long time to come.

Incredibly enough, the XOI held its uptrend during Thursday's oil price
crash (it closed right at the trend line drawn on the chart included in this
week's Interim Update). When we recommended oil and gas producers OXY and
CHK over the past 2 weeks we suggested taking an initial position
immediately and then adding on weakness over the ensuing weeks. We think
this is a good time to be doing a bit more buying. CHK (Chesapeake Energy)
in the low $6 area looks particularly attractive since its earnings over the
next 12 months are protected by its hedge book.

The expected test of support at $275 in the December gold contract occurred
on Thursday, but at this stage there is no way of knowing whether or not the
test will be successful. However, we are going to add a trading position in
Harmony Gold (NASDAQ: HGMCY) to the Portfolio if we can buy it at $5.05
(Thursday's close was $5.25). We will also add a silver stock - Silver
Standard Resources (NASDAQ: SSRI) - if we can buy it at $1.75 (Thursday's
close was $1.90). These bids are deliberately stingy because we haven't yet
seen evidence that support will hold and that commercial traders have used
the recent dip to substantially reduce their net-short position.

As explained in yesterday's Interim Update this year's lows for the Dollar
are probably 'in', but a significant pullback over the next few weeks
appears likely. This is a reason to do some cautious buying of gold and
silver stocks over the next few days if good opportunities present
themselves.

Alert #60, Nov-09 2001
The stock market is still holding near its recovery highs, but we have had
up-to-down reversals on each of the past two days. The interesting thing to
us is that traders continue to be very quick to bet against the market. For
example, the QQQ (NASDAQ100 Trust) put/call ratio was an incredibly-high 2.8
on Thursday (the volume of put options traded was almost 3-times the volume
of call options traded). This is the type of number we would expect to see
during a crash, not during a day when the QQQ was down by only 1% after
surging by 40% over the preceding 6 weeks. Option traders as a group do not
trust the rally from the September low, but option traders as a group are
almost always wrong. We still expect a near-term pullback, but the rally
following this pullback could really be something.

In the Oct-03 Interim Update, at the point of maximum bearishness with
regard to oil stocks, we noted that the XOI (the AMEX Oil Index) was one of
the few indices to hold within its medium-term uptrend during this year's
general stock market panic and that this was a bullish omen. In the Oct-17
IU we said that we would become interested in oil stocks if the XOI pulled
back to around 480 over the following 2 weeks. The XOI didn't make it all
the way back to 480, but did recently dip below 500. This is close enough.
We are going to immediately add Occidental Petroleum (NYSE: OXY) to the
Portfolio (Thursday's closing price was $25.15). As was the case with Phelps
Dodge and Chesapeake Energy, we suggest that investors consider taking an
initial position now and then buying more during any general stock market
weakness over the next few weeks. We are also going to add BHP Billiton
(ASX: BHP) at A$8.95. BHP is a diversified natural resource company that has
substantial oil and gas interests in addition to being amongst the world's
largest producers of coal, copper, iron ore and aluminium. OXY and BHP are
highly profitable companies selling at low multiples of earnings.

The ECB followed in the Fed's footsteps and cut official European interest
rates by 0.5% yesterday, but someone forgot to tell Wim Duisenberg that
lower interest rates are only bullish for the currency that emanates from
the US. 

Gold is on its way back to $275 (basis December) and many gold stocks
experienced sharp reversals on Thursday. This action is all part and parcel
of the correction that began on Oct-09, a correction that is not yet
complete. Traders should remain on the sidelines until a low-risk buying
opportunity emerges.

In the coming Weekly Update we plan to discuss the potential derivatives
disaster, asset deflation (hint: there's no such thing), and the current
action in the gold market. What we actually discuss will, however, be
determined to some extent by what happens during Friday's trading.

This article, entitled "Operation Enduring Inflation", is worth reading:
http://www.mises.org/fullarticle.asp?control=820&month=38&title=Operation+En
during+Inflation&id=38

Best wishes,
Steve Saville 

Alert #59, Nov-02 2001
Bonds moved higher again on Thursday, but closed near their lows and sharply
off their high. Thursday's intra-day high in the December bond contract of
112-18/32 will probably turn out to be THE peak, at least for the remainder
of this year. 

The bond market's reaction to Friday's Employment Report will potentially
tell us a lot, particularly if the employment numbers are much worse than
expected (a distinct possibility). If bonds fail to sustain a rally on
Friday in the wake of a bad employment report, then the peak is most likely
in. 

The equity market has made several impressive reversals in both directions
over the past 2 weeks, so anyone attempting to trade the market with a time
frame of more than a few hours is probably getting whipsawed to death. For
our own account we usually do trades in stocks and/or options on most days,
but so far this week we haven't done a single trade. Sometimes it is better
just to sit on the sidelines and watch the play with detached amusement.

Short-term sentiment indicators suggest that Thursday's rally could continue
for a few more days. The results of the latest AAII sentiment survey showed
a sharp drop in the bullish percentage from 56% to 35% and the put/call
ratio for the QQQ (an indication of sentiment towards the tech sector) has
been greater than 1 on several days over the past 2 weeks despite the
relative strength being shown by the large-cap techs. As is the case with
the bond market the equity market's reaction to the Employment Report could
be telling, particularly if the data are worse than expected.

In summary, we seriously doubt that the stock market's correction is
complete and suspect that a continuation of Thursday's rebound will just
postpone the timing of a low.

There are a lot of strange things happening in the stock, bond, gold and
currency markets at the moment. While the action in each market can be
explained when that market is viewed in isolation, some markets are giving
signals that contradict what is happening in other markets. We'll continue
to try to fit the pieces together in a way that makes some sense.

Alert #58, Oct-30 2001
The reasons put forward in the press for Monday's sharp decline in the stock
market were:
a) The war in Afghanistan is going to be lengthy
b) Economic growth and corporate profits are not going to rebound anytime
soon
c) There is a high probability that Argentina will default on its foreign
debt
d) There may be more terrorist attacks

All of the above are legitimate concerns, but they didn't suddenly
materialise on Monday. The market has moved higher over the past few weeks
despite an on-going deluge of bad news, but there is now a greater chance
that bad news will have an effect on market action. This is because a lot of
short-covering fuel was used up in the recent rally and sentiment had become
overly bullish (last week's resilience convinced a lot of traders that
downside risk had been substantially reduced).

Yesterday's close in the NASDAQ100 was right at the 50-day moving-average
and the uptrend dating back to the September low. We expect that this
uptrend will soon be broken, although a short-lived bounce from around
current levels would not be surprising. When the uptrend is broken there
will probably be a mini-capitulation as the traders who were sucked-in to
the market by last week's obvious confirmation of strength rush for the
exits. We plan to close-out our QQQ put options if/when the QQQ falls below
$31 intra-day (about 10% below Monday's close).

The Dollar Index also fell sharply on Monday, but its short-term uptrend is
intact. The December Dollar Index could drop as low as 113.50 (versus
Monday's close of 114.71) without breaking the uptrend dating back to the
Sep-17 low.

Alert #57, Oct-23 2001
In the latest WMU we mentioned the prospect that some more attempts to rally
the stock market would be made during the early part of this week, but that
a downward break would likely occur by the end of the week. We also
speculated that any strength early in the week would result in a sharp fall
in the equity put/call ratio (which, we thought, had been pushed to
artificially-high levels last week by activity related to the expiration of
October options).

We certainly got some early-week strength (more than we bargained for) and
the equity put/call ratio plummeted on Monday as anticipated (Monday's ratio
was a 'fearless' 0.42 versus last week's 'moderately-nervous' 0.67). So,
where does that leave us?

In short, nothing has changed as a result of Monday's action. The QQQ
(NASDAQ100 Trust) closed at $34.45, right at its 50-day moving-average.
Unless the downtrend dating back to the May peak is decisively broken via a
daily close of $36 or higher, the forecast outlined in our recent commentary
(for a pullback followed by a 1-2 month surge) will stand.

Gold has dropped straight to $275, the level we had mentioned as being a
likely target for this correction, without any intervening rebound. Monday's
trading may have 'washed out' many of the remaining weak-handed speculative
longs, but we won't know for certain until the next COT Report is released
on Friday. If the gold price rebounds over the coming few days then a retest
of support around 275 would probably occur in early November before a rally
worth playing has a realistic chance of getting underway. As far as trading
positions in gold stocks are concerned, we'll remain on the sidelines until
the sentiment, technical and inter-market evidence suggests that the
correction lows are at hand. A core investment position in gold stocks will
be retained since the longer-term financial market trends are
unequivocally-bullish for gold.

We were immediately stopped out of PAAS for a 4% loss. Monday may have been
a short-term bottom for this stock, but the entire basis for the trade was
that the medium-term up-trend had remained intact during the stock's recent
pullback. As soon as the up-trend was broken the basis for the trade was
removed.

Alert #56, Oct-19 2001
Microsoft delivered quite an up-beat report after the close of trading on Thursday, but any market-wide positive effect from the MSFT news was mostly offset by gloomy news from Corning and Nortel.

Put/call ratios continue to be on the high side, although Friday's expiration of October options is probably distorting the picture (making it appear as though traders are more bearish than they really are). The latest AAII (American Association of Individual Investors) sentiment survey results, which show 61% bulls versus only 21% bears, suggest this may be the case and that the market will be vulnerable to a sharp decline once the expiration-related activity ends.

We hadn't originally intended to 'play' this stock market pullback, preferring instead to retreat to the sidelines for a while and wait for an opportunity to 'go long' in preparation for what could be a very strong market during the final 2 months of the year. However, yesterday's bounce in the NASDAQ100, that appears to us to be related more to Friday's options' expiration than anything else, has provided an interesting opportunity to profit from the expected pullback. As such, we are going to buy QQQ (NASDAQ100 Trust) November $30 put options (QAV WD-E) at around $1.00. This is a trade that is only suitable for short-term traders experienced in options trading (and who therefore understand the risks).

Alert #55, Oct-12 2001
The stock market's surge over the past 2 days is already creating a good
deal of exuberance, as evidenced by the high volume of equity call options
that traded on Thursday. Furthermore, tech bellwether Cisco is up by more
than 50% over just the past 7 trading days and many small-cap tech and
internet stocks jumped by 20%-40% during yesterday's session.

With short-term technical indicators signalling that the market is
overbought, with sentiment having reversed from depression to bullish
complacency over the past few days and with the major indices approaching
their 50-day moving-averages (levels that we do NOT expect to be exceeded
during this initial rebound), a downward reversal is likely over the coming
2-3 trading days. As such, during Friday's session we are going to take
profits on the QQQ shares purchased on Sep-25 (the profit will be around
20%). We hadn't originally planned to sell into this initial rebound off the
lows, but the war environment makes us more cautious and quicker to take
profits. We expect to have an opportunity to re-purchase at lower levels at
some point during the next 2 weeks.

The US$ Index has broken out of its downtrend, meaning that any pullback now
will likely be to a higher low. The Dollar's upside breakout also suggests
that the next stock market pullback will be to a higher low.

The initial stage of gold's correction is probably almost complete, although
lower levels are likely over the next several weeks. It's now just a matter
of being patient as we await the next short-term buying opportunity.

There is a good chance that the gold, stock and currency markets will
experience counter-trend moves next week (the current short-term trends are
down for gold, up for stocks and up for the Dollar, so next week's action is
likely to see the markets moving in the opposite direction to these
short-term trends).

Alert #54, Oct-10 2001
Over the past 2 weeks we've noted the likelihood that gold and gold stocks
were about to commence a correction, but in the absence of any signs of
weakness we were prepared to give the short-term bullish case the benefit of
the doubt. In particular, there was a distinct possibility that a final
upward thrust in the gold price would occur in parallel with the current
pullback in the stock market.

Yesterday (Tuesday) we saw the first real sign of weakness in the gold
market when the December gold contract closed below $290 (the stop-out point
mentioned in last week's Interim Update). Yesterday's action also broke the
short-term up-trend and the close was below last week's low. As such, we
plan to immediately sell most of our short-term trading positions in gold
stocks. The major trend for gold and gold stocks remains UP, so we will
retain our core gold stock holdings.

Although the odds now favour a pullback in the gold price over the coming
few weeks, the situation is not clear-cut (is it ever?) because the Dollar
Index has not yet broken out of its medium-term downtrend. As such, the
possibility of another sharp decline in the Dollar remains very much alive.
If the Dollar falls hard, the recent gold rally would almost certainly get
its second wind. If this occurs then our core gold stock position
(comprising HGMCY, GOLD, NDY and FN) will give us reasonable exposure to the
upside.

In summary, we are selling short-term trading positions and retaining
longer-term positions in gold stocks. In tomorrow's Interim Update we will
look at support levels for some of the popular gold stocks.

Alert #53, Sep-28 2001
We said that one of the major financial effects of the Sep-11 tragedy would be higher inflation as the central banks of the world aggressively injected liquidity in an attempt to restore stability to the markets. Well, the initial results are in and they are stunning. During the week ended Sep-17, M1 increased by$115B. That's a 10% increase in one week (520% annualised)! M2 and M3 both increased by around $165B.

This huge increase in money supply (which will probably turn out to be a one-off event), when added to the increase that had already occurred over the past year, is going to put irresistible upward pressure on prices over the next year. As we said in yesterday's Interim Update, the only question is which prices. You know what we think is the answer to that question. More on this topic in Sunday's Weekly Market Update.

Hold on to those gold investments and start accumulating the stocks of the large, financially-solid commodity producers.

Alert #52, Sep-25 2001
Just a short note to let you know that:

a) We are cancelling our short-term bearish view on  bonds (we remain
long-term bearish on bonds). We turned short-term bearish on bonds on
August-29 when the T-Bond yield was 5.36%. The bond price has since fallen,
taking the yield up to 5.56%. We had expected an even greater fall in the
bond price (rise in the bond yield), but yesterday's spectacular drop in the
oil price will be very supportive of bonds. With the world's major central
banks inflating their currencies like there was no tomorrow we think there
is little chance that T-Bonds will exceed their March-2001 peak, but the
short-term downside risk in the bond market has been markedly reduced by the
plunge in energy prices.

b) In the latest WMU we said that we would be buyers of QQQ shares if there
was another attempted sell-off during the first 2 hours of trading on
Monday. The market gapped higher at the open on Monday, so we didn't
purchase the shares. We will, however, be buyers during any weakness this
morning. 

For all other views/analysis, please refer to the latest Weekly Market
Update. In Thursday's Interim Update we'll discuss our outlook for commodity
prices.

Alert #51, Sep-21 2001
Gold has spent the past week consolidating its gains, probably more as a
result of government intervention than anything else. This is what we
expected, particularly if the Dollar stabilised as it has done. However,
what we didn't expect was that the stock markets of the world would dive to
the extent that they have done this week. In light of what is happening in
the financial markets, a gold price of $290 today makes even less sense than
it did one week ago.

The most likely scenario is that gold will continue to consolidate for
another week or so before proceeding higher. However, based on the enormous
pressure that some hedge funds and bullion banks must be under (those on the
wrong (short) side of the gold market are almost certainly on the wrong side
of other markets), the potential also exists for the gold price to explode
higher over the next week amidst an unseemly short-covering scramble. Either
way, the gold price is going much higher.

The North American gold stocks have recently been dramatically
out-performing the South African golds and, to a lesser extent, the
Australian golds. The SA and Oz golds usually only move in response to an
increase in the gold price, whereas the NA golds move in anticipation of an
increase. As the bullion price moves higher the SA and Oz golds tend to make
big catch-up moves and, during any gold rally worth writing home about,
overtake their NA counterparts.

In addition to some anticipatory buying, the NA gold stocks are getting a
boost from the same flight to safety (flight away from risk) that has caused
the demand for cash and short-term government debt to surge. As such, any
stabilisation in the markets could result in at least part of this "safety
premium" being removed from the NA golds.

As far as the stock market is concerned, records continue to be broken. The
equity put/call ratio was an incredible 1.20 on Thursday and has now
exceeded 1.00 on three of the past four days. Are option buyers, as a group,
going to be right for the first time in history? They might be right for a
few more hours judging by the after-hours trading in S&P500 futures (down 17
points as we write), but probably not for much longer than that.

By the way, as we prepare to fire this message into cyberspace the US$ is
firm against the other major currencies with the notable exception of the
Swiss Franc. This may be significant since Switzerland is the only country
in the world that still has substantial gold reserves in relation to its
total money supply.

Alert #50, Sep-18 2001
Here are our observations/thoughts regarding Monday's financial market
action. 

Firstly, nothing happened on Monday that was inconsistent with the analysis
presented in our latest Weekly Market Update. The US stock market sold off
(but not dramatically so), official interest rates were cut, bonds were
weak, the Dollar was initially weak but then stabilised, and gold
consolidated its gains from last week.

Despite having the benefit a 6-day cooling-off period, the stock market
reacted to the recent disaster in the same way as it had reacted to past
disasters - by spiking lower. Within the next day or so there will probably
be an upward reversal followed by a spirited short-covering rally. The next
Commitments' of Traders Report will be particularly interesting in that it
will tell us whether the commercial traders used the weakness early this
week to substantially reduce their short positions.

The Fed and the ECB cut rates by 0.5% on Monday morning and the BOJ is
likely to take steps of its own to add liquidity over the coming days. The
market is pricing-in another 0.25% cut by the Fed between now and the
October-02 FOMC Meeting.

Yesterday's rate cuts were widely anticipated and thus had no immediate
effect on the financial markets, but they will have a big effect over the
next few months. It is no longer possible to earn a positive real
(inflation-adjusted) return by investing in short-term US Government
securities, a situation that is unlikely to change for at least the
remainder of this year. This fact alone is going to put substantial downward
pressure on the Dollar and upward pressure on the gold price. In the
short-term (the next few days), the Dollar is likely to experience a
recovery while the gold price is expected to consolidate recent gains.

Gold and gold stocks are as attractive today, based on both fundamental and
technical factors, as any assets ever get. We are not the only ones who
recognise this, so the opportunity to buy gold-related investments near
20-year lows is not going to exist for much longer. Needless to say, any
near-term weakness should be considered as an invitation to add to
positions.

Alert #49, Sep-12 2001
I am not an American and I probably don't personally know any of the people
killed in Tuesday's tragedy, yet I feel an enormous sense of loss. The world
as we know it has changed. The horrible image of those two buildings
collapsing with thousands of people inside will be imprinted on my brain for
the rest of my life.

We had a fair idea what we were going to discuss in tomorrow's Interim
Update, but it seems irrelevant now. Since the US markets are going to be
closed again today we are going to skip this week's Interim Update.
Hopefully, when it comes time to do the next Weekly Market Update we will
have had the opportunity to observe the US markets' reaction and will
therefore be in a position to string some words together in a coherent
manner. In the mean time, here are a few brief thoughts on the potential
effects of Tuesday's horrific events.

In the past the typical reaction of the stock market to a man-made disaster
is to drop dramatically in the immediate aftermath of the news and then to
recover, with the recovery taking anywhere from hours to months. This news
has happened at a time when the stock market is already at one of its most
oversold levels in history and when the short interest is high, so there is
unlikely to be much follow-through to any downward spike that occurs once
the market re-opens. The market is therefore likely to follow the historical
pattern following such 'bolts from the blue'. Furthermore, the recovery back
to pre-news levels will probably be measured in hours or days rather than
weeks or months. 

The way we see it, one of the biggest implications for the financial markets
will be an acceleration of the existing inflationary trend. The Fed and its
partners in crime throughout the central banking world have pledged to add
whatever liquidity is needed to ensure that this massive human tragedy does
not lead immediately to a financial crisis. As discussed in the past,
central banks have limitless power as far as their ability to create money
if they are prepared to risk a plunge in the purchasing power of their
nations' currencies.

The accelerated trend towards inflation should lead to greater strength in
commodity prices than we had previously anticipated (we were already bullish
on commodities taking a 12-month view and were expecting an upturn in the
CRB Index to occur during the next several weeks). It will also put
substantial downward pressure on bond prices once the knee-jerk
flight-to-safety buying runs its course.

As well as directly shovelling money into the banking system, the Fed will
almost certainly cut official interest rates in the near future. With the
Fed pushing short-term rates lower and the market pushing long-term rates
higher, gold and gold stocks should excel.

Gold trading has been volatile and thin following Tuesday's depraved acts of
terrorism. Governments and their central banks will want to restore
confidence, so if ever the gold market was going to be the recipient of
concerted government meddling now would be the time (a rising gold price is
a sign of falling confidence). They may be successful in the very
short-term, but will be overwhelmed by market forces. Our recent advice
still stands - any near-term weakness in gold and gold stocks should be
considered as an opportunity to add to positions. We would only be
interested in taking some profits on a gold price spike up to the 315-325
range.

The latest BOE auction, held earlier today, resulted in the gold being
offloaded at $280. Bids were received for 4.3 times the amount of gold being
offered. This is a positive result, particularly considering that spot gold
was trading at only $271 early yesterday.

Alert #48, Sep-11 2001
Stocks: 

The stock market had a nice upward reversal on Monday as the S&P500 Index
spiked below this year's previous intra-day low at the start of trading
before finishing the day with a small gain. The reversal wasn't particularly
dramatic, but we like the fact that almost no one expects it to lead to
anything more than a fleeting bounce (this unanimity of disbelief is
bullish).

The CBOE equity put/call ratio was 0.89 on Monday, one of the highest
readings ever for a day on which the S&P500 was up. Extreme bearish
sentiment never turned a market higher by itself, but substantial rallies
usually occur when the sentiment-pendulum swings this far into the bearish
camp.

Monday's early morning downward spike may not have given us the ultimate low
(it probably didn't), but the increased volatility and extreme negativity in
the stock market is indicative of a market that is in the process of
bottoming. Further to our comment in the latest WMU, we appear to be in the
late stages of a slow-motion crash and crashes always complete the
medium-term downside (although not necessarily the long-term downside as
gold investors in 1980 and stock investors in 1929 discovered). Similarly,
the large daily moves in both directions in bond prices suggest that the
bond market is trying to carve out a top.

Gold:

In the latest WMU we showed a chart comparing the XAU with the yield spread
(the yield on the 30-year T-Bond minus the yield on the 13-week T-Bill) and
noted that a move in the yield spread above 2.25% would create a significant
tail wind behind gold stocks. On Monday the yield spread rose 0.05% to
2.26%, a new high since the XAU bull market began last November, which helps
explain why there was some strength in gold stocks despite the $1.40 drop in
the gold price.

Fundamental, technical and cyclical factors point towards the commencement
of a gold rally in the near future and Wednesday's BOE gold auction could
possibly be the catalyst that ignites the rally. Even if the auction results
do not turn out to be particularly bullish, gold is set to benefit from the
next downward leg in the Dollar's bear market. Those who are experienced in
trading options should consider purchasing call options on the leading gold
stocks during any weakness over the next few days. We suggest buying options
that have at least 2-3 months to expiry and are 10-20% out of the money. If
we can buy them for $1 or less we will add the NEM Jan-2002 $25 calls (NEM
AE-E) to the Portfolio. Those who are not option traders should take
advantage of any near-term weakness to buy Lihir Gold (for our Australian
readers) and Harmony Gold, using tight sell-stops for both (don't risk more
than 10% on Lihir and 5% on Harmony).

Alert #47, Aug-31 2001
Bonds were a little stronger during the early trading on Thursday, then gave
back their gains and ended the day with a marginal loss. Bonds are unlikely
to see much downside while the major stock indices are still declining, but
when stocks bottom we expect bonds to drop 5-6 points in quick time (a drop
of that size would drive the yield up to around 5.8% from its current level
at 5.37%).

Long-term interest rates were flat on the day, but short-term rates dropped
resulting in a widening of the yield spread. As discussed many times in the
past, a widening yield spread (long-term interest rates rising relative to
short-term interest rates) is positive for gold and gold stocks. We doubt
that there is much scope for short-term rates to drop much further, but
there is certainly a lot of scope for long-term rates to rise and thus bring
about a further widening of the yield spread.

Few people have been as bearish on the Dollar as we have over the past few
months, but as bearish as we've been the Dollar actually managed to surprise
us with its weakness on Thursday. The Dollar Index has support at around
112.50, a level that has held twice over the past 2 weeks. If that support
is broken (yesterday's close was 112.87) then a quick drop to 108 (the
January low) becomes likely.

Gold rose $1.70 on Thursday, closing near the high of the day and more than
$3 off its low. This was a muted reaction to the action in the other
markets, but small moves will continue until the 5-year downtrend is broken
via a decisive close above $280 (basis spot). As previously noted, once the
long-term downtrend is broken the 'shorts' will need to quickly start
preparing to defend 325.

We like gold here as an investment, as a trade, and as a low-priced hedge
against a "bolt from the blue". As noted in yesterday's Interim Update we do
not expect a significant gold rally over the next week, but if the Dollar
fails to hold support at 112.50 then the pressure under the gold price could
become irresistible.

As per the Interim Update we purchased a second position in the QQQ during
yesterday's stock market sell-off. The sell-stop for both positions is set
at $33.50 (just below the early-April low), so we are risking about 9% based
on our average purchase price.

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