Special SKI Report #74
The Short and Long-Term Gold Picture

Jeffrey M. Kern, Ph.D.
Email: jeff@skigoldstocks.com
USERX | historicals
Written Aug 8, 2010
Published Aug 9, 2010

Current USERX price = 16.40, Up 89 cents (6%) since the last report 3 weeks ago.

Introduction (repeated from prior Reports):

The SKI indices contain short-term (16-20 trading days), intermediate-term (35-39 trading days), and long-term (92-96 trading days) indices. A more comprehensive description of these mathematical indices and their history is found here. Basically, the indices compare today's price to prices from a specified prior time period. The name of the index specifies the time period (e.g., 92-96 index = compare today's price to prices from 96, 95, 94, 93, and 92 trading days earlier). Although I use the oldest gold mutual fund, USERX, for analyses, the predictions are applicable to the broad precious metals' market. I do not recommend or analyze specific stocks, but my subscribers from around the world regularly discuss individual issues on our Forum. In addition to the truly unique SKI indices, I also use "run patterns" to guesstimate turning points in the precious metals' market. A "run" refers to a pattern of daily up and down market closing prices. If the market has 3 consecutive days of higher closing prices, the run is "3 up". If prices then decline for 2 consecutive days, the run becomes "3 up and 2 down". If prices then close higher the next day, the run changes to "2 down and 1 up". Some people have referred to run patterns as "worms". A run pattern is only completed after the direction of closing prices has changed. I have compiled a listing of every run pattern that has ever occurred and generated probabilities that the end of the run marks a high or a low, moderated by the indices themselves.

New Material:

In the last gold stock SKI Report written on Sunday 7/18/10, I described how another critical point was reached as the 35-39 index had bought on 7/16/10, the 92-96 index was being touched by one penny and moving towards a sell signal, the precious metals complex had reached its chart support level, and that a further decline in the following week would be a problem (bearish) for the intermediate-term. In this Report, I’ll follow-up on that technical picture and also describe my view, based upon SKI, on the “Big Picture”.

On the Monday (7/19/10) after that prior Report was written, gold and the gold stocks fell about 1.5% for their fourth consecutive daily decline. That WAS sufficient to sell the intermediate-term 35-39 index a few days later and “cause a problem” for the intermediate-term. That day’s decline also caused the master 92-96 index to be within one day of a sell signal. USERX fell to 15.28 and the prices from 96, 95, 94, 93, and 92 trading days earlier were 15.30, 15.52, 15.29, 15.48, and 15.35. Therefore, the market had just barely fallen to one-penny below all of that indices back prices. THE 92-96 INDEX WAS WITHIN ONE DAY OF SELLING. But then, rather amazingly, the gold stocks rose the next day and closed one-penny above all of the index back prices: On 7/20/10 USERX rose to 15.53 and the index back prices were 15.52, 15.29, 15.48, 15.35, and 15.20 to “save the day”.

SKI has been on a 92-96 index buy signal since 6/08/10. The 92-96 index is the master index that is required for true bull markets. Despite the ups and downs since that time, SKI HAS NOT SOLD! It certainly came close to selling on 7/19/10, but it held. The declines on 7/21/10 and 7/27/10 also touched the 92-96 index support but the index did not sell and support held.

Last week the gold stocks and the precious metals finally rose in a meaningful manner. I say “finally” because I’ve been expecting such a rise for the past month. Nonetheless, the 35-39 index has not re-bought, meaning that despite the rise of the past week, the intermediate-term is still at risk. Prices rose into a 16-20 index short-term sell signal on this past Friday (8/06/10) at USERX 16.40. Prices also rose into an 881-885 index sell signal. Furthermore, the 660-664 index is about to generate its sell signal this coming week. And finally, prices rose just enough to hit/touch the 35-39 index without generating a buy signal.

Sound complicated? Basically, prices have finally risen as I had expected, but have now risen into multiple index resistance levels. The short-term has become overbought via a 16-20 index sell signal, the intermediate-term (2 months) remains bearish via a 35-39 index sell signal, and the longer-term (many months) remains bullish because SKI is still on a 92-96 index buy signal. The longer-term picture is described in the “Big Picture” section below.

Going forward, the next important juncture should occur in the next two weeks. If this is forming a short-term top (ala the 16-20 index sell signal), the 92-96 index will be in danger of selling as its back prices rise. The bulls need to avoid that sell signal. If the 92-96 index sells, it will be a Double Sell index pattern, mechanical SKI will sell, and short positions can be considered.

The Big Picture:

The very long-term picture is actually easier to predict than shorter-term time frames (but more difficult to believe in and invest upon because the loss/risk potential is larger for a long time frame). The precious metals complex completed its large (many year) first-wave rise in May 2006. That view differs from many analysts who see that a higher price occurred in March of 2008. But May 2006 was marked by a “death run” pattern that portended at least several years of lower prices and requires that I view it as “The Big Top”. The correction that followed the “death run” was an enormous ABC decline: “A” declined into the summer of 2007, “B” rose into March 2008, and “C” was the collapse into the Fall of 2008. I therefore missed much of the B-Wave rise from the Summer of 2007, but SKI caught the last $100 rise in gold from 2/13/08. As the 92-96 index was about to sell on 3/18/08 and gold bullion had risen for 6 consecutive days, I was able to sell the exact “B-wave” top at $1005 that morning. The “big picture” decline continued until 9/11/08 when there was a “life run” low that counteracted the May 2006 “death run” top. I bought gold at $740 that day, it rose $200 in a little over a week, and then collapsed to its $680 final low, but that pattern yielded a many-year bullish outlook that continues to this day.

The current situation for the “big picture” view is that the goldies completed their 1.8 year rise from the 2008 low. There was a rather clear 5-wave rise from the 2008 lows. Chart here. The first wave peaked on February 20th, 2009 and I said to sell with the SKI index signal the next day. I was bearish for months and missed much of the rise in the gold stocks, but gold did not exceed that February high. SKI then turned bullish again near the end of August 2009 via multiple index sell signals (the master 221 index bought one day after the end of the long triangle correction on 8/18/09 at USERX 12.37 and predicted at least one year of bullishness). Price rose into early December 2009, did an ABC correction into early February 2010, and then rose for its fifth wave. The rise from the 2008 low was just the first of three such waves higher that should occur over the next many years and then end with another “death run” top (and then another life run low and another multi-year rise to another death run top).

Conclusion:

The “Big Picture” continues to be extremely bullish. But the first of three large waves higher from the 2008 low appears to have completed this Spring of 2010. It’s possible that the correction of that 1.8-year, 5-wave rise completed on 7/19/10 in the gold stocks (when the 92-96 index just barely avoided selling) and on 7/27/10 in gold bullion. However, that would be an unusually brief correction for a 1.8-year rise. Moreover, the 35-39 index still has not re-bought and it obviously must re-buy for the next impulsive rising wave to be in force. The triangular chart break-downs that I described in the last Report (and portend a decline to $1100) have not been rectified and the goldies (ala USERX, HUI, GDX, GLD and $Gold)) have only risen back to the underside of their broken support lines connecting the February and March 2010 lows (for gold) or the February and May 2010 lows (for the stocks).

In the short and intermediate-term, the gold stocks have risen into 4 SKI index resistances and gold bullion has risen for a record-tying 8 consecutive days into this past Friday (8/06/10). There is no law that requires an instant decline, but SKI will sell in about 1.5-2 weeks from now IF the 92-96 index sells. Furthermore, if that declines begins, the 221 index (that bought one day after the low in August 2009 and portended at least a one-year rise) will also sell after a year.

September is the traditionally bullish period for the precious metals. It’s actually bullish about 67% of the years and bearish the other 33% of the years since 1974, but the highest historical likelihood is for a LARGE move (either up or down). I am trying to communicate that a rise is not a given and that the movement over the next few weeks should tell the intermediate-term story. SKI remains long, but IF these short-term resistance levels hold and SKI sells in the next 2 weeks, a further significant corrective decline should be in the works. I’ll make “the call” if the 92-96 index sells.

Best wishes, Jeff

If you are interested in following and learning more about the SKI indices, I'll write another Report in three weeks or you can shell out the big bucks for a SKI subscription. Weekly Updates are available by subscribing for a month (or longer if you're wise and cheap enough to want to save money) at my website www.skigoldstocks.com for the princely sum of $25 (for a one month subscription) or more ($200 for an annual subscription). I also provide more frequent intra-week messages/alerts at a slightly higher price along with access to our informative Forum and a managed gold futures program. The precious metals are in a very long-term (decade+) up-trend but are the most precarious, volatile, and psychologically difficult market in the world (in my opinion). That's the way it's always been.

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email: jeff@skigoldstocks.com

Jeffrey M. Kern,Ph.D., is an academic psychologist with a specialty in the measurement and prediction of human behavior. The communications provided are for informational purposes only and are not intended to be investment advice or recommendations for specific investment decisions. Dr. Kern is not a registered investment advisor, but is registered as a commodity trading advisor (CTA). The information provided is considered accurate, but cannot be guaranteed. Investments/trading in narrow market segments or gold futures is for individuals willing to accept a higher level of risk for the opportunity of greater returns. Past performance is no guarantee of future performance. His website is www.skigoldstocks.com.

Communications should be sent to: jeff@skigoldstocks.com.

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