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Grandich Letter Special Alert
Gold and Mining Shares Update

Peter Grandich
Grandich Publications
Sep 27, 2005

Gold $463- My opinion remains basically the same as it was in my alert of 9/21/05 http://www.grandich.com/docs/alertGL_09-21-05.pdf I noted both in written commentaries and in media interviews that gold was very overbought and the $450-$455 area could be tested to see if former key resistance is now strong support. From a technical standpoint, this would be considered a normal occurrence and healthy.

The chart above paints a good picture of what has been taking place since April. After bottoming early in the New Year around $408, gold rallied back above $450 by March, only to make a double bottom in the $410 area by June. Once again it rallied back to just above $440 later that month, only to decline once again-but this time just to around $420. I was commenting back then that gold was building a foundation that would allow it not only to challenge and surpass the old highs around $450 (we did, indeed, do so most recently), but eventually the $500 area. I was especially encouraged back then in my comments that the pullbacks were actually making for a better future. For some, it was hard to imagine how this was possible. This chart can show you some of what I was seeing at the time.

Please look up to the RSI (Relative Strength Index) at the top of the chart. You will see a line noted by the #30 and one by the #70. In technical analysis, the underlying market, stock or commodity is considered overbought and vulnerable to at least some profit-taking when it hits the 70 level. When it hits 30, it's considered oversold and likely to rebound. As you can see, gold was overbought as it approached July and indeed declined. But a "positive divergence" occurred in its low in the $420 area. Notice the RSI didn't fall as far as it did as we approached the June timeframe. This strongly suggested an internal building of strength that, at the time, I wrote about and mentioned in media interviews. I also spoke about a triple bottoming being formed that was building a tremendous foundation for the future rise of gold prices.

We touched $450 in August, only to reach the overbought area on the RSI. We pulled back only to around $430, and then proceeded to break out above overhead resistance and make new highs around $475. But we then recorded one of the most overbought readings in some time (noticed how much we went over the 70 level on the RSI this time). So, the profit-taking that took place towards the end of last week came as no surprise. As much as those who seek "immediate" gratification would like us to hit $500, it would actually be better for us long-term bulls to spend time building a base between $450 and the recent high of $475 for a period of time. This should allow the overbought status to work itself off and set us up for a move to $500.

While some players get caught up in thinking every waking moment in the gold market is a battle between manipulators and "plain folk," the fact is the "they" argument has been around during most of history when a person or group wants to give reason for why something happened or didn't. Yes, I do believe there are people who have used the short side of gold to prosper and even hope to accomplish some personal agenda. But, its not being objective to blame each down day squarely on their backs and each up day to more than one bullish factor. There's a segment of the gold market that isn't interested in social, political or economic agendas but merely price- it's called the jewelry market. Here, price sensitivity plays a key role- just ask anyone in that business. We happened to have just entered the best seasonal buying time for gold as more gold is bought for jewelry purposes between now and early December than at any other time. However, these buyers do step back for a period if prices rise sharply in the very short term. Sometimes they're forced in if no meaningful pullback occurs but more times than not they do wait, and they've grown accustomed to this. Personally, I don't think they're going to get much of a window here as forces around the world have come together to offer gold its best fundamentals in over 25 years (and the technicals aren't bad either).

Mining Shares - One would think with a gold price of $463 (remember how just a few years ago the only way this price seem possible was when it hit $230 they reverse split it 2 for 1?) and copper near $1.80, happy days would be here again among the major and mid-tier metals producers. While their share prices have risen from the depths of despair a few years back, the overall fundamentals haven't come close to matching the improvement. In fact, it's all but certainly tougher today than in any recent period of history. If much higher operational costs aren't killing you (energy, machinery and other items), then shortages of skilled labor, abilities to get permits thanks to environmental and/or political opposition are (not to mention hostile areas of the world against mining in general). And to top all this off, the ability to find substantial new deposits to keep up with demand continues to fall short.

Meanwhile on the junior resource front, high operating costs, lack of drills and qualified labor and many scenarios that impact the majors are hitting home. But, unlike the majors for the most part, the investment world has not beaten a path to their door. It's still very hard to raise capital for pure exploration. And non-broker financings leave many of those who do them "outside looking in" when it comes to developing a following for their stock among the investment community.

So, while the underlying metal prices have given great cause for optimism, those of us who try to profit from buying shares in companies who explore, develop and produce the underlying metals, still haven't seen it spill over in any great way. What will it take to see widespread investment interest and optimism? A gold price that stays above $500 for more than a day, week or month. This would bring widespread and constant media coverage (we just had a taste in the past week or so) on gold, which will force the "Don't Worry, Be Happy" crowd to play. Imagine someone like the General of "Be Happy" campers, Larry Kudlow, or their "nutty" lieutenant, Jim Cramer, not panning gold verbally, but suggesting you pan it in some river because gold prices are going higher-LOL!

When will you know gold is topping out? When Tout-TV (CNBC-TV) switches their NASDAQ babe to standing outside the Comex on a daily basis. Until then, all systems are a go.

Sep 26, 2005
Peter Grandich
Grandich Publications
P.O. Box 243
Perrineville, NJ 08535
phone: 732-642-3992

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