CHARTWORKS - JUN 12, 2006
Precious Metals

Technical observations of RossClark@shaw.ca

Bob Hoye
Institutional Advisors
written Jun 12, 2006
posted Jun 14, 2006

Gold and silver are now into the time window that satisfies a nominal correction from the May highs. An assessment of the technicals suggests that support should be found at $570 in gold and 123 (more importantly 114) in the XAU. Silver could bottom as early as June 13th.

The Big Picture

As long as gold holds above $460 the major bull market is considered to be in motion. This allows for a 50% correction ($493) of the complete rally from $255, a test of the support line (on a deflated basis) and a test of the 50-month moving average. This permits a cleanout similar to the equity's market correction of 1987. Such a 'financial panic' would not alter the long term picture of an extended bull market into the next decade.

Gold vs Commodities

Gold became overbought relative to the CRB basket of commodities as of May and is now down 18% in the past four weeks. This matches a similar break in July 1980 following a top in the Gold/CRB at 2.35. A 23% correction occurred twice in 1983 from high Gold/CRB ratios. In today's environment such a percentage decline would produce a low of $562.

The 50% Rule

Gold has an uncanny tendency to make 50% corrective pullbacks while in bull markets. The key is from which starting point to measure the correction. The use of an RSI(14) on weekly charts can be used to establish the last time the price was into a neutral or oversold condition. Readings below 45 have been successful for this exercise. On that basis we can use the move from $410 of one year ago to this year's high and establish an optimum target of $571. In some instances the price will bounce marginally for a week, top out below the midpoint of the preceding bounce and then take out the low by 1% before making a sustainable rally. This type of 'spring' or 'isolated low' is quite common in gold. Therefore a bounce off the initial low (assumed to be around $571) should allow for a close into the mid $560's as part of the basing process.

On the upside, the initial rally into the summer should retrace 40% to 60% of the decline from $730. Assuming that prices reverse from around $571, the initial upside resistance should be in the range of $635 to $665.

Looking down the road. . . following a recovery from this selloff it is imperative that these lows hold over the coming months otherwise we could be in for a correction of the complete advance from 2001. This would provide support at $493.

1972 to 1975

1977 to 1980


1986 to 1990

Silver

Sequential Buy Setups are common at the end of corrective phases in the bull market of silver. If prices close below $11.84 through Tuesday then we will have had nine consecutive days with closes below the low of four days earlier and a 'setup' will be in place.

Seasonally, this market comes out of the weak period by the end of June and has a tendency to do well through September.

Following significant tops in the past three decades the silver market has managed to produce an oversold reading of -200 in the CCI(20) at the end of most corrections. A subsequent upside reversal through -100 confirms that the bottom is in place. Risk can then be controlled 2% below the corresponding low. (The index is currently at -155)

Since April 19th three key supports were anticipated to be the 34-day, 100-day and 89-week moving averages. Thursday and Friday's action is into support and if prices can reverse to close above $11.40 this week then the upside target becomes $13.60.

XAU

Most major corrective lows in the XAU occur around the Fibonacci retracement point of 61.8%. On this basis, the targeted support is 114. The current low has been at 123, a 50% correction of the past twelve month's rally.

-Bob Hoye
Institutional Advisors
email bobhoye@institutionaladvisors.com
website: www.institutionaladvisors.com

CHARTWORKS - JUN 12, 2006

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