Copper

From the 12th November Interim Update: "When copper broke above resistance in the 79-80 range 3 months ago it generated an upside target of mid-90s, a level that also roughly corresponded to the peak reached in September of 2000. This target has been achieved and given the almost vertical rise in the price that has occurred over the past several weeks it would be normal for a pullback to begin from around the current level. A reasonable target for such a pullback, assuming it does occur, would be the breakaway gap at around 86. This would constitute a 40% retracement of the rally from the May low to the recent peak."

The below weekly chart of copper futures shows that copper hasn't yet reached the above-mentioned support level. Other support levels that could come into play if the correction continues are 82 and 80. In our opinion, 86 is the most likely level for a correction low while a drop to 82 represents the maximum short-term downside risk.

We continue to expect that copper will trade up to the mid-120s over the next 12 months in response to Asian demand, global inflation and a weakening US$.

Bonds

Below is a weekly chart of Japanese Government Bond (JGB) futures. The Japanese Government bond market has been the world's leading bond market over the past few years so it is worth paying attention to the performance of the JGBs.

We expect that resistance at around 139 will hold and that the JGBs will break below important support at around 135.5 within the next few months. However, a weekly close above 139 by the JGBs would cast doubt on our view that a major bond market peak occurred last June.

Gold and the Dollar

Gold Stocks

Gold stocks are often considered to be inversely correlated with the overall stock market and for this reason those investors who are bullish on gold stocks are often bearish on the broad stock market. However, it is clear that gold stocks have rallied strongly with the broad stock market over the past year. Actually, in this particular case gold-stock investors (including us) have benefited immensely from a rally in the broad stock market because general market strength has contributed to the dramatic out-performance of gold stocks relative to the gold price. 

Those who fully understand the positive effect that the general stock-market rally has had on the gold sector would also understand that it would be extremely improbable for gold stocks to continue trending higher once the broad market embarks on its next major decline. In fact, if history is any guide the gold sector will peak a few weeks after the Dow Industrials Index reaches its ultimate recovery high and experience a very sharp decline once the broad market enters the accelerated phase of its next intermediate-term downtrend. 

The likelihood that gold stocks won't peak until after the Dow peaks is something we've stressed over the past several months and is one reason we've been comfortable retaining substantial exposure to the gold sector. In summary, as long as the broad market was making new highs there really wasn't any need to be concerned about a major decline in the gold sector. Now, though, we are approaching a dangerous time for the gold sector because it's been 3-4 weeks since the Dow Industrials Index made its most recent high for the year.

Obviously, if the Dow moves to a new high for the year over the next few weeks -- something we think it has a good chance of doing -- then the immediate danger for the gold sector will subside.

The finely balanced situation in the broad stock market isn't the only reason to be cautious at this time as far as the gold sector is concerned. The below charts show that Newmont Mining (NYSE: NEM) -- the world's most important gold stock -- has just reached intermediate-term technically-based price targets relative to the US$ and relative to gold. Specifically, NEM's break above $30 which occurred during the second quarter of this year projected an intermediate-term upside target of $48. This target has just been reached. Also, the NEM/gold ratio has just moved up to its 1994 peak.

We expect that NEM will eventually move MUCH higher, but with important technical targets and resistance levels having just been reached and with the stock price way ahead of the gold price the short-term risk/reward does not look attractive. If we owned NEM we'd therefore be taking some money off the table at this time.

Now, NEM is just one stock and many other gold stocks are not over-valued relative to the current gold price and do not look extended from a technical perspective. Also, gold stocks continue to trend higher relative to the gold price and our HUI-Gold Oscillator indicates that significant upside potential remains. So perhaps its just a case that NEM has seen its best days (for a while, at least) and that some of the smaller gold stocks will continue to power ahead.

The below chart of the AMEX Gold BUGS Index (HUI) shows what we consider to be the most likely outcome over the next 2 months. 

The recent price action in both NEM and the HUI suggests that a pullback has a good chance of occurring over the coming 2-4 weeks. We'd then expect a final surge to a new high for the year, although given how expensive many of the HUI components are relative to the metal price the ultimate high might be only slightly (5%-10%) above the current level. We do, however, think that many of the junior gold (and silver) stocks -- the ones that aren't expensive relative to the current metal price -- have the potential to move considerably higher over the next 2 months.

Currency Update

The US$ is going to fall a lot further over the next few years because a) the current account deficit needs to be corrected, b) we are yet to see an exodus from the dollar (net capital in-flows have persisted despite everything that has happened over the past few years), and c) the 'real' returns on dollar-denominated investments are likely to remain low for the foreseeable future. 

In the short-term, though, bearish sentiment towards the dollar has become so widespread that we should be alert to the possibility that a counter-trend rally will soon get underway. In fact, we read an article the other day in which a currency trader was quoted as saying the dollar was a one-way bet (meaning there was no need to even consider the possibility that the dollar could rally). And although we don't spend much time reading financial market commentary in the mainstream press all the commentary we have seen over the past two weeks has been bearish on the dollar. However, when almost everyone is in agreement that a market is going to head in one direction it is not usual for the market to comply.

Interestingly, bearish sentiment towards the dollar is reaching an extreme just as the Dollar Index nears important trend-line support (see chart below). 

We suggest that currency traders with a time horizon of 3 months consider scaling out of US$ short positions from the current level in the Dollar Index down to 89 (the channel bottom on the above chart). Alternatively, it would be reasonable to use a daily close in the cash Dollar Index above its 50-day moving average as a 'stop' for any short positions in the US$.

We are currently neutral on the US$ but will turn short-term bullish following a daily close in the cash Dollar Index above its 50-day moving average.

Between the third quarter of 2000 and October of this year the Swiss Franc trended higher against the Yen. This, in our view, was indicative of the upward trend in safety-oriented investments relative to growth-oriented investments, a trend that has also been represented by an upward trend in the gold price relative to the prices of industrial metals and an upward trend in the yield-spread.

In October of this year SF/Yen broke its 3-year up-trend (see chart below), giving us a warning signal that growth-oriented investments were starting to get the upper hand. The situation was certainly not clear-cut, though, because other indicators did not confirm the breakdown in SF/Yen. Furthermore, the SF has rallied enough against the Yen over the past 3 weeks to enable SF/Yen to recapture its former upward trend. This doesn't mean that a trend change isn't going to occur in the near future, but it does mean that there isn't any evidence that a trend change has already occurred.

Gold

Below is a chart of the gold price in euros. Between May of 2002 and the present the euro gold price appears to have formed a large base. It wouldn't be surprising to see this base continue to form for another 3-6 months, but the pattern is bullish and once an upside breakout does occur we would expect the gold price to move up to 390 euros in quick time. 

Update on Stock Selections

Regardless of whether we are talking about gold stocks or non-gold commodity stocks or tech stocks or any other kind of stocks, general market risk is high right now. Therefore, investors that already have substantial exposure to the stock market -- regardless of whether that exposure is via the gold sector or some other sector of the market -- should not be increasing their exposure. They should, instead, be looking for opportunities to boost cash reserves. 

We recognise, though, that some of our subscribers -- particularly some of the newer ones -- might have minimal exposure to the market. As such, and because there exists the potential for further large gains in the junior gold and non-gold commodity stocks over the coming months assuming the overall market holds together, we will continue to highlight new buying opportunities in individual stocks. In this respect, three current members of the TSI Stocks List look particularly interesting right now.

The first is International Barytex Resources (TSXV: IBX). IBX is in the process of finalising an agreement with a local Chinese partner and the local government to take charge of a large tin-zinc deposit in Yunnan Province, China. The stock is very under-valued based on the size and quality of this metal deposit, but it will be very speculative until the aforementioned agreement is signed, sealed and delivered. Once the agreement is finalised, though, the stock price will be considerably higher, so if you can tolerate the risk we think it makes sense to do some buying now in anticipation of a positive outcome. As mentioned in a previous update, IBX has strong management.

The second is Admiral Bay Resources (TSXV: ADB). ADB has two irons in the fire: a silver-gold project in Mexico and a natural gas project in Canada. Either of these projects in isolation would make ADB a worthwhile speculation at the current stock price, but taking into account the potential of both projects ADB looks extremely attractive. The company recently completed an equity financing and therefore has the wherewithal to advance its projects over the next several months. 

From a technical perspective, ADB has been consolidating over the past few weeks and looks set to move higher.

The third is gold junior Canarc Resource (TSX: CCM). Drill results achieved to date indicate that CCM's Benzdorp project in Suriname has the potential to host a very large (several million ounce) gold deposit. And importantly, this potential is clearly not reflected in CCM's current market cap of only US$42M considering that the company also owns a 1.3M ounce high-grade gold resource at its New Polaris project in Canada. 

The stocks of exploration/development-stage gold mining companies such as CCM are often influenced more by company-specific news, such as the latest batch of drill results, than by the general trend in the gold sector. And one thing that makes CCM look particularly interesting right now is that the company is scheduled to complete 48 drill holes at Benzdorp over the next 4 months, after which a preliminary resource estimate will be produced. This means there should be a steady stream of news from CCM over the next several months and if that news is generally positive, that is, if the drill results continue to point towards a large deposit at Benzdorp, then investment demand for the stock should increase.

LightPath Technologies (NASDAQ: LPTH), a long-time member of the TSI Stocks List, has spent the past 6 months moving sideways in what appears to be a bullish consolidation. This stock could possibly suffer from some tax-loss selling over the next few weeks, but depending on what happens with the overall market it could be a good stock to buy for a trade during the second half of December in anticipation of a 'January effect' rally. Note - a 'January effect' rally would only be likely if the market were to pullback or move sideways over the next few weeks.

Last week Exeter Resources (TSXV: XRC) announced the results of a scoping study on its La Cabeza gold project in Argentina. The study showed that La Cabeza could be developed into a mine producing 45,000-60,000 ounces of gold per year at an operating cost per ounce of US$192 and an initial capital cost of US$22M. The conclusion was that the project has potentially robust economics at a gold price of $375/ounce. 

With a current market cap of only US$8M and several interesting projects in addition to La Cabeza, XRC's risk/reward looks excellent.

NovaGold's symbol on the TSX changed from NRI to NG over the past week and as of 2nd December the stock will trade on the AMEX (also under the symbol NG).

The QQQ and Dow December-2003 put options in the TSI Stocks List are going to expire worthless within the next few weeks. We expect to begin building another bearish position within the next two months, although rather than using put options we will probably choose an inverse index fund such as USPIX.

Chart Sources

Charts appearing in today's commentary are courtesy of:

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