 PIVOTAL
EVENTS - JANUARY 12, 2006
A Dangerous Eruption
Bob Hoye
Institutional Advisors
January 14, 2006
Golds: Gold reached $551 - so much for the Keynesian tout
that "gold is a barbecued relic."
However, it has been all too
obvious that gold has been rallying with strong commodities and
a weaker dollar, which has hyper-excited the goldbugs. And, frankly,
this is always dangerous.
Just how dangerous is this
eruption?
Ross is preparing a ChartWorks
that points out that senior gold shares are at an overbought
condition seen only 7 times since 1900.
There was a typical pattern
that completed each speculative peak and this would require a
brief rebound.
Using the current proxy, the
XAU (which set a high of 141 on Friday), the decline measures
to 121 to 123.
Clearly, this would be a tradable
correction in a cyclical bull market for golds. When timely,
Ross will refine the optimum reentry point.
As measured by our gold/commodities
index, gold's real price rallied from 185 on June 1 to 240 on
December 9. This was well corrected on the way up, with the most
recent being a drop to 227 on December 21.
While gold's nominal price
made new highs, the real index only made it to 239 on Monday.
At the high of 240 in December, gold's dollar price reached 220.
The gain in real terms has been zip, which compares with a 14%
gain for gold's nominal price.
Goldbugs at play!
Silver Dreads Amongst The
Gold: There is much
more to silver than the widely known and almost as widely compelling
shortfall in silver supply relative to demand.
In our recollection, this analysis
is chronic and tends to obscure the fact that the gold/silver
ratio (GSR) can act as if it was a credit spread. Such spreads
narrow during a boom and widen during a contraction.
With a boom, the GSR decreases
and this declined from 82 in June, 2003 to 58 at the end of December,
2005. The increase since to 60.9 could be important, particularly
if it accomplishes a trend change.
Often a dramatic slump in silver
relative to gold presages a liquidity crisis. Of course, this
has occurred at the conclusion of a boom, not at the beginning.
Indeed, silver was part of
the frenzy in gold and crude through 1979 and the GSR plunged
from 45 in late 1975 to 14.8 in January, 1980. Of specific interest
is that the ratio reversed to rising a week before that wild
mania climaxed.
Thus our focus on the gold/silver
ratio now.
When this boom fails, and it
will, the ratio could eventually reach around 100. This would
mark a significant underperformance for silver and silver stocks.
Our advice would be to underweight
silver stocks and to lighten up on the bigger cap golds. Funds
derived could be applied to selected exploration stocks at somewhat
lower prices.
Of interest is that the exploration
index ( www.goldcolony.com
) has soared from 99 in May to 161 this week, which is virtually
at the high at the top of the bull market at the end of 2003.
Technically, this represents a considerable overhead resistance
and a moderate correction seems likely.
Impetuous Moves: Often impetuous moves mark the end
of a big speculation. Frequently, such impetuosity, either down
or up, can run for as long as 7 trading days without a setback.
This has occurred now in a
new important series, including the Dow, Nasdaq, S&P 500, and
Hong Kong is the champion with 8 days. Impetuosity is not just
the privilege of equity markets as it showed up in emerging debt
prices (MSD) and base metals prices as well.
This is another step in building
a cyclical peak in most, if not all, of the games.
Bob Hoye
Institutional Advisors
E-mail bobhoye@institutionaladvisors.com
Website: www.institutionaladvisors.com
PIVOTAL EVENTS - JAN 12, 2006
Hoye Archives
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