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Preparation for Next Buying Opportunity in PMs

Technical observations of

Bob Hoye
Institutional Advisors
May 10, 2006

Independent of the geo-political events that are creating underlying volatility and upward pressure in the metals there are also measurable technical events. Technically, we are into a phase of advance that is reminiscent of the precious metals of 1973-74 and 1978-79, the Nikkei of the late 80's and the NASDAQ of the 90's. It is a phase where buying breakouts can work well and overbought conditions can remain in place for extended periods; however the inevitable corrections do occur. The following analysis is meant to assist investors in finding the next lower risk entry opportunities on the long side of the markets.


The gold/silver ratio bottomed on April 19th and then moved in favour of gold for three days. The subsequent consolidation produced a divergence in the ratio. Now gold has rallied to new highs and silver to a tested high producing an uptick in the ratio. Typically (see following table) the gold price tops out 8 to 17 weekdays following the initial bottom in the ratio. May 5th was day 12.

GSR divergences in bull markets

Additionally, on May 2nd gold generated the first daily upside exhaustion alert since January 16th. Previous signals produced corrections to the 20-day average (unless noted). A correction in gold back to the 20-day exponential moving average (currently $636 and rising at $4.50 per day) is likely to produce the next significant buying opportunity.


Silver tested and found support at the 34-day exponential moving average on an interday basis on April 21st. This satisfied the normal pattern following upside exhaustion readings. The break also came immediately after the RSI(14) reading over 90, providing a classic 1 to 3 day sharp correction with an RSI(14) reading below 70 as a short term low in price.

Now that the GSR has established a well defined divergence we can narrow the ensuing silver analysis to the six instances related to those events. There is a consistent relationship between the peak in the Relative Strength Index and the time it takes silver to find an important low. The RSI(14) peaked at 90.78 on April 19th and on that basis it should take six to seven weeks to find a bottom from which a sustainable rally is possible. The week of June 5th looks like an optimum point from which to start the next major rally. (Seasonal pressure should also be out of the way by the end of June, with a positive influence through early October.)

From a pricing perspective, a 100-day simple moving average (currently $10.37 and rising at 5 cents per day) is the next support. The worst case scenario will be a test of the 89-week average (currently $8.37 and rising at 13 cents per week).

Technically, we'll ideally see the break become hard enough to generate a reading below -200 in the CCI(20). If so, then a reversal back above -100 in the oscillator will determine that the bottom is in place and provide a conservative means of entry. Risk can then be controlled 2% below the corresponding low.

Each of the six previous occurrences also generated a Sequential Buy Signal or Buy Setup as the correction was coming to a conclusion.

As another means of corroborating a bottom we should look for the mining stocks to show a bullish bias as the base forms.

With all these parameters established it is now a matter of having patience to see if they can fall into place over the coming weeks. Choppy market action followed by a downside cleanout would be the ideal means of putting the maximum number of investors back on the sidelines, thereby creating the buying force to push the price higher once again.

The Big Picture
( Update )

On a deflated basis the next target of significance for gold is $800+ (point 14).

The key targeted resistance levels for silver are $14, $18 and $27

-Bob Hoye
Institutional Advisors


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The opinions in this report are solely those of the author. The information herein was obtained from various sources; however we do not guarantee its accuracy or completeness. This research report is prepared for general circulation and is circulated for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized.

Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. Neither the information nor any opinion expressed constitutes an offer to buy or sell any securities or options or futures contracts. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report. In addition, investors in securities such as ADRs, whose values are influenced by the currency of the underlying security, effectively assume currency risk. Moreover, from time to time, members of the Institutional Advisors team may be long or short positions discussed in our publications.

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