Market Harmonics
 Metals Watch

Reader Note:  Our commentaries are generally biweekly; the COT sentiment data is weekly, as data is released. 

June 8, 2008

Gold

We're still inclined to think that the price consolidation in gold might have one more leg to the downside remaining, although we might be convinced otherwise if a sustainable move above $936 takes place.  Otherwise, we still don't rule out a retest of the $846 low of May 2, ($850 in the August NYMEX contract).  As noted previously, we continue to think that even an additional low would still be part of the same price consolidation, and not evidence of a top in the bull market, which we believe still has more to run.

Silver

Unless and until spot silver prices can offer a sustainable move above $18.80, we still don't rule out the possibility a further low beneath the $15.99 reached on May 1.  The latest COT data for silver shows Large Speculator sentiment to still be on the mixed side.

May 2008 Commentary:  Mining Shares Update 

On May 12 & 13, I attended the "Hard Assets" Conference in New York, a pleasant event that offered keynote addresses from CNBC personality Larry Kudlow, as well as economist and Council on Foreign Relations member Benn Steil, who, as we noted in our previous column, has been calling for the introduction of a digital gold-based currency to replace our struggling fiat money system.  The keynote addresses were just part of the lure for the conference organizers' main objective, which was to bring mining companies and investors together.  As such, there was no shortage of junior mining companies from around the United States and Canada looking for the opportunity to tell investors their story, and ultimately hoping some day to no longer be "junior." 

For some perhaps, that dream may become reality.  As revealed in the above ratio chart of the AMEX Gold Bugs Index (HUI) versus the Dow-Wilshire 5000 Index, investor interest in gold shares has soared over the past few years.  Quite a far cry from the low point in 2000, when investor interest in gold mining companies was virtually non-existent, and the organizers of the Hard Assets Conference would probably have had to pay the attendees to show up.  Even in 2001, when we began making our first gold stock recommendations, there was still very little interest.  Stalwart stocks today like Newmont Mining and Freeport McMoRan, which have posted triple digit returns in the past seven years, were then trading at bargain basement prices.  It wasn't until the bull market for metals was well underway, and mining shares started rising in value, that the bulk of investors began chasing them.  But then again, that's just the simple nature of the market.

Even with the recent consolidations in gold and silver prices, we're not satisfied, based on the Elliott Wave patterns playing out, that a top in the bull market for precious metals has been made.  As both the chart above, and the chart we present below suggest, investor interest is far from over.

This chart reflects the relative performance of gold as commodity versus the HUI basket of mining companies.  Since 2000, and especially from 2005 forward, the performance trend has not really favored one over the other to any significant degree.  The commodity's performance has been slightly better, as shares of mining companies are also impacted by general conditions in the stock market itself.  Even so, what it suggests is that the performance between the commodity and mining shares has been highly correlated, as equity investors have been content with getting their exposure to the metals market via ownership in mining companies.  

For those investors who look at gold and silver for protective purposes, such as portfolio hedging or as a cash equivalent, it's important to remember that ownership of shares in a mining company doesn't provide it.  Nor, for that matter, does speculating in futures contracts.  Ownership of physical gold and silver are the only mechanism to acquire such protection.