Excerpted from NFTRH22, dated 2/28/09. The message of patience and an intermediate view ultimately paid off as the HUI corrected a bit further and then doubled in the coming months.
Precious Metals
Here at NFTRH, you are not going to get glad-handed. You may not always get swami- like forecasts, but you are going to get the best attempt at accuracy, whether in support of what we may want to hear, or what we do not want to hear. I am assuming you have a level of sophistication with regard to the idea that all healthy markets experience corrections – sometimes significant ones – within a bullish big picture.
The precious metals sector is rife with fundamental believers and always-bullish (and emotional) analysis. After all, it is generally easier to simply ‘set it and forget it’ when the fundamentals are good, which they are and have been for months now. On the other side of the coin are the pure traders, micro-managing every twist, squiggle and broken line on a chart. I believe the best stance is one in the middle of these two because I believe the best performance ultimately comes from a solid fundamental foundation combined with the ability to see the risk of corrections coming and manage that risk accordingly, while remaining ‘in the game’ big picture wise.
Preamble out of the way, let’s get right into the nuts and bolts of what is going on in the precious metals. The following HUI chart includes a look at daily gold and silver in the lower panels. Silver has potential to decline significantly relative to gold, as well as in nominal terms. This will be illustrated later in the report with an up to the minute check on the gold-silver ratio (GSR).
[HUI chart w/ Gold & Silver omitted]
HUI resides at the first of our support levels, as noted on the blog last week, and the question now becomes is this the extent of the correction? It sounds logical that it could be given the rising SMA 50 that proved to be good support in January. You will recall that I had a high confidence level on that plunge to the 50, and bought it. I do not have that level of confidence this time around, although, as you will see later, I have bought back a couple positions and added to another. Also, despite the bearish look of silver, the ZSL short play was covered. That is because I am not a gun slinging trader and I was under-exposed (for me) to the sector. I would rather get the intermediate and big pictures right, and that often dictates taking positions contrary to what I think the short term is going to do. And I think the gold miners are going to decline, short term, possibly to the strong support around 250. This would constitute a major buying opportunity, for which cash should be on hand.
The HUI-Gold ratio (HGR) remains unconstructive as it continues to wallow below the indicator that was our warning trigger, the SMA 50. In fact, that could be a little bear flag implying new lows in the short term.
[Original HGR chart omitted - actually no longer available, but here is a new one reviewing what ultimately happened]
Once again, good cash management is recommended, while keeping an eye on favored gold miners (later in the report a few charts of NFTRH holdings will be shown along with optimal buy/add levels) for low risk opportunities.
This is not a sprint. Amid world wide financial system chaos, gold sits there calmly, perhaps planning to drop to our worst case level of 650, or perhaps planning to hold our best case support of 925.
Gold pays no income. That is because it does not need to compensate you for holding any associated risk. Whatever is likely to unfold – and again, later in the report our scenarios #1 and #2 are looked at for the US dollar, the folks who explore for gold and dig it out of the ground are likely to be well set up to capitalize on the metal’s relative strength to everything else.
If the broad market bottoms and commodities catch a bid near term, gold is likely to under-perform gold mining cost inputs, but as Bob Hoye said in his weekly Howe Street radio interview, the margins are already structurally built in. I could not agree more. Any misperception-driven selling of the miners is an opportunity.
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