CHARTWORKS - JUN 20, 2006
Gold, GSR & XAU

Technical observations of RossClark@shaw.ca

Bob Hoye
Institutional Advisors
Jun 22, 2006

Gold and the mining stocks 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 to $540 in gold and 123 (more importantly 114) in the XAU.

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% to 60% 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' should 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 26% in the past four weeks. This is of similar proportion to the 23% corrections that occurred twice in 1983 from high Gold/CRB ratios.

Gold/Silver Ratio

The gold/silver ratio (GSR) provides exceptional value in timing tops and corrections in the bull markets of gold and silver. It also serves as a proxy for credit spreads. The bull market moves in precious metals that are lead by silver (1972-74, 1978-80, 1987 & 2005-06) undergo similar topping and corrective patterns.

• Once the ratio bottoms (April 19th), the gold market finds a top in ten to seventeen trading days (May 12th).
• From there, the gold market generally corrects for nineteen to twenty-three days (24 days into June 24th) with the gold/silver ratio continuing to move in favor of gold.
• To confirm a bottom gold now needs to close at a six day high. This generally takes the form of an initial rally of three to five days (June 19th) followed by a test of the low and then the confirming breakout.

From the breakout, the mining stocks have done well over the ensuing three to five months (+50%, +50%, +56% & +25%)*.

* note that Homestake Mining Co is used for analysis purposes prior to 1983.

The 50% Rule

Gold has an uncanny tendency to make 50% to 60% 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 is 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 this basis, we can use the move from $410 of one year ago to this year's high and establish an optimum targeted support range of $571 to $538.

On the upside, the next multi-month rally should retrace 40% to 60% of the decline from $730. If the existing low holds then the initial upside resistance should be in the range of $615 to $654.

Looking down the road. . . following a recovery from this sell off it is imperative that $540 low 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 to $460.

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 rally.

Previous examples

* note that Homestake Mining Co is used for analysis purposes prior to 1983.

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

CHARTWORKS - JUN 20, 2006

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