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Yokohama "Lockdown"

An APEC (Asia-Pacific Economic Cooperation) meeting began a few days ago in Yokohama, Japan, and will continue for a few more days. To give you an idea of the massive wastage of resources and the disruption caused by such high-profile rendezvous of government representatives, here is a brief report from a friend of ours who happens to live in the area where the meeting is taking place:

"Apec has descended upon us here in Yokohama. Approximately 9 minutes walk from my apartment is where all the action has and still is taking place. Mr Obama and other world leaders will arrive on Friday and the Minato Mirai area is awash with thousands of police and security officials. Cars and vans -- in fact all kinds of vehicles -- are being stopped and searched, as are pedestrians and their belongings. Security has been high for several weeks, however last night on a shopping expedition within the one-mile radius I witnessed the full impact.

There are more than a hundred police vehicles including coaches, vans, cars, bikes, and even police boats in the harbour, all with flashing red lights. Occasional sirens are blaring away in several directions. Police with flashlights are searching bushes and every nook and cranny they come across. Dozens of well-built men wearing dark suits and the telltale wires dangling from their ears to inside their jackets, all appearing to be talking to themselves.

On Friday when Air Force One lands I am sure the skies will be buzzing with fighter jets and helicopters, and SWAT teams will take up positions on the rooftops of the surrounding buildings.

Taxi drivers and others I have spoken to in my very broken Japanese have suffered over the past few weeks with heavy traffic restrictions and a general invasion of their day to day lives."

Bond Market Update

The Stock Market

The stock market has a remarkable ability to ignore threats, which can lead to losses for anyone who identifies a threat early and then takes a position in anticipation of an appropriate stock-market reaction.

The following chart shows that the S&P500 Index has short-term support at 1160. A normal pullback would test this support, but right now the market seems very reluctant to pull back. We are reminded of the final few weeks of the 2007 up-trend.

Gold and the Dollar

Gold and Silver

A high-level central banker causes a stir by uttering a 4-letter word (gold)

Gold is no longer money, but it could resume its monetary role in the future. In fact, part of the long-term bullish case for gold involves its eventual return as money.

We are a very long way from the point where money is, again, gold or as good as gold. However, a tiny step in the right direction was taken early this week when Robert Zoellick, President of the World Bank, suggested the reintroduction of gold into the monetary system. In a Financial Times op-ed piece, Zoellick said that a new system should involve today's major currencies (the dollar, the euro, the yen, the pound, and a freely exchangeable renminbi) and should consider using gold as an "international reference point of market expectations about inflation, deflation and future currency values."

Zoellick's idea is extremely vague and seems to entail the use of gold as some sort of official yardstick within a modified version of the current monetary system, which actually wouldn't be a significant improvement over what we have today. This is definitely not something to get excited about and is not even a reason for much optimism, but as the saying goes: a journey of a thousand miles begins with a single step.

Current Market Situation

The most interesting price action of late has been in the silver market. Silver rose steadily during September, but volatility began to increase in October. Last week, the price trajectory turned parabolic. The result was that in US trading on Tuesday morning (9th November) the silver price reached $29.30, which meant that it had gained about 30% in only six weeks and was more extended relative to its 10-week moving average than it had been at any time over the past 10 years.

Spectacular price advances in the commodity futures markets invariably prompt the futures exchanges to increase margins, which the Chicago Mercantile Exchange (CME) did on Tuesday. This provided the catalyst for a sharp downward reversal in silver that spilled over into other markets, but it should be noted that the sort of price action seen in the silver market prior to the margin increase will always lead to a sharp downward reversal. The only question is when. If the margin increase hadn't occurred then silver's parabolic rise could perhaps have continued for a few more days, but not for much longer.

Although silver's downward reversal was impressive, there is no evidence yet that an intermediate-term peak is in place. In particular, the top section of the following chart shows that while there were big intra-day swings over the past two days, on a daily closing basis there has not been a price decline of sufficient magnitude to signal a lasting peak. Also, the bottom section of the following chart shows that on a daily closing basis the pullback in the silver/gold ratio has been fairly minor to date.

We suspect that gold, silver and the silver/gold ratio will reach intermediate-term peaks within the next 2.5 months, but probably not until December-January. We also suspect that there will be more margin increases before prices top out.

Gold Stocks

In the email sent to subscribers following Tuesday's market action, we wrote:

"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."

The HUI rebounded on Wednesday, which opens up the possibility that the 'correction' was a single-day event and that the short-term upward trend has already resumed. However, Tuesday's downward reversal was accompanied by such heavy trading volume that there will more likely be at least a few days of consolidation before the rally resumes in earnest.

In our email alert we said that support at 520 was a logical target for the pullback. As indicated on the following daily chart, there is also some support in the mid-530s that could limit the decline.

To state the obvious: a daily close by the HUI above Tuesday's intra-day high of 588 would confirm that the correction had ended.

Something that could easily have been lost amongst this week's topsy-turvy price action is that the HUI/gold ratio finally exceeded its May-2010 peak. This removes the only remaining bearish divergence of note and increases the probability that new highs will be seen within the coming month.

Currency Market Update

The Long-Term Trend

We've been showing versions of the following long-term chart in TSI commentaries for about 8 years. When we first showed the chart it was to help make the point that the US dollar's bear market had a long way to go, but the chart's message is now very different. Now, the chart indicates that the US dollar's bear market could be almost complete.

The chart shows the Swiss-Franc/US$ exchange rate with an inverted scale, which means that the line on the chart rises when the US$ is strengthening against the SF and falls when the US$ is weakening against the SF. Since 1970 there has been a very long-term trend towards US$ weakness against the SF (as befitting the SF's lower rate of inflation), but within the context of this very long-term trend there have been major cyclical advances and declines. Furthermore, the pattern from 1970 through to the present has entailed US$ declines lasting 8-10 years interspersed with US$ advances lasting about 6 years. If the pattern continues then an 8-10 year decline is nearing completion.

There is no guarantee that the pattern will continue. In fact, a reasonable argument could be made that with a committed inflationist at the helm of the Federal Reserve and a dangerous mixture of socialists and corporatists running the US Federal government, the US$ is destined to move well below the bottom of its long-term channel. However, we think it is more likely that the dollar (in SF terms) will remain channel-bound, for the same reason that the channel has defined the dollar's progress for the past 40 years. The reason is that no government wants a relentlessly strong currency. All governments operate under the mistaken belief that persistent currency strength creates economic drag, so if their currency appreciates beyond a certain point their efforts to weaken it tend to expand until eventually a major trend reversal occurs.

Right now the fundamental backdrop doesn't support the idea that the US$ is about to embark on a 6-year advance, but when a major trend is in its embryonic stage its fundamental drivers usually aren't obvious. Also worth mentioning is that even if the dollar is close to a major bottom, the bottoming process could last 1-2 years. For example, the dollar's first major post-1970 decline ended in October of 1978, but a consistent new upward trend didn't begin until about two years later. In the mean time, there was a huge rally in the gold market.

Current Market Situation

The following daily chart shows that there has been a 2-point rebound in the Dollar Index from its early-November low. A routine counter-trend rebound would take the market up to the vicinity of its 50-day moving average, which is now only about 1 point above the current price.

We are on alert for signs that the Dollar Index's rebound is more than just the routine counter-trend variety, but we haven't yet seen any. The currency market remains tied to the stock market, so evidence of an important US$ bottom is likely to emerge at around the same time as evidence of an important stock market peak.

Update on Stock Selections

(Notes: 1) To review the complete list of current TSI stock selections, logon at http://www.speculative-investor.com/new/market_logon.asp and then click on "Stock Selections" in the menu. When at the Stock Selections page, click on a stock's symbol to bring-up an archive of our comments on the stock in question. 2) The Small Stock Watch List is located at http://www.speculative-investor.com/new/smallstockwatch.html)

Chesapeake Gold (TSXV: CKG). Shares: 38M issued, 45M fully diluted. Recent price: C$12.10

CKG broke above resistance at C$10 on Monday and then moved quickly up to C$12.

We've mentioned in previous commentaries that we expect CKG's huge Metates gold project in Mexico to eventually be acquired by a major gold mining company at a price that equates to more than $20 per CKG share. This is as specific as we can be, because even though there has been sufficient engineering done to complete a PEA (Preliminary Economic Assessment), the project's value will ultimately be determined by whether or not a large-cap mining company will be prepared to plough a few billion dollars into mine construction. Moreover, it is not reasonable to assume that just because the Metates project can be shown to have very robust economics at current metal prices, the project will necessarily be developed into a mine.

The reality is that due to financial and physical resource limitations, there are more elephant-sized (10+ million-oz) gold deposits in the world than it will be possible to develop into producing mines over the next several years. One of the challenges for we speculators, then, is to figure out which junior-owned 'elephants' will attract the senior miners.

We remain bullish on CKG due to the huge leverage to the gold price that it offers. However, we are aware of the risk that this leverage is based on the potential for the project to be developed into a mine and that mine development may never occur. Furthermore, we think that this particular risk is greater for CKG's Metates project than for the elephant-sized Livengood project owned by International Tower Hill Mines (AMEX: THM). For new buying we would therefore favour THM over CKG.V, although both stocks are good speculations. Both stocks are also short-term 'overbought'.

Chart Sources

Charts appearing in today's commentary are courtesy of:

http://stockcharts.com/index.html
http://www.futuresource.com/