 Technical Update of the AMEX Gold BUGS Index
David Petch
July 7, 2004
This update is primarily going
to deal with the AMEX Gold BUGS Index. All commodities were essentially
in a BEAR MARKET for 20 years. The forecast in the behavior of
the HUI is easier compared to the S&P or US dollar for that
reason. The S&P 500 Index is mirroring the DOW which has
been in an up trend since 1760 (back data extrapolation involved);
the longer the wave pattern the more difficult it is to assess
the thought wave structure that will follow.
The precious metals such as
silver are having there above ground sources continuously raided
to suppress the metal price. According to silver Guru David Morgan
(writer of the Silver-Investor Newsletter), above ground silver
supplies will be very tight in the coming year or so. Silver
primarily is an industrial metal (most is not recovered from
industrial processes) with most being supplied as a result of
secondary mining (copper, zinc, lead). The amount of silver globally
consumed is growing on a yearly basis, with production trickling.
Once the above ground supply has been exhausted, the open market
price will dictate how high the price gets. Silver historically
has played an important role in established currencies by making
up a certain percentage of issued coinage. England removed silver
from its coinage in the early 40's and is strictly composed of
base metals today, as are most global currencies.
A re-introduction of gold and silver into global currencies is
likely to occur to some degree, but it is unlikely that the world
is going to revert to such a system in this century. The growth
profile and development of humankind is exponential, rather than
linear. Even with AIDS and other diseases expected to wipe out
significant portions of the human population in the coming 30-40
years, the global population is not expected to top until 2040-2050.
Between now and then, there are a lot of undeveloped countries
to come online and will require exponential growth. Earlier economies
and populations of 5000 years ago grew at a slower pace, and
the amount of gold and silver mined could usually keep up with
the coinage. A country going off the gold standard is not a phenomenon
that only occurred with the US in 1971.
When the Roman Empire peaked, they were forced to reduce the
gold and silver content from their circulating currency. This
website
illustrates the main coinage that was initially issued. As the
Roman Empire expanded, trade and payment to their military infrastructure
required gold and silver that did not exist. They were forced
to lower the grade of their coinage with more brass, copper and
zinc. Their currency eventually became worthless. Given the expansion
of global fiat currency, the price of gold and silver would have
to rise several orders of magnitude to function as in earlier
times. It is more likely that countries will have a lower percentage
of their currency linked to a certain amount of gold at the start
of the next market phase. It will likely decrease to lower levels
again as time passes before another unsuspecting generation swells
the ranks. The current expansion and maturing of the global economy
simply can not function without an expansion of currency. A true
gold-backed currency allows an individual at any given time to
exchange a denominated dollar for an equivalent amount of gold.
Gold was fixed in price at $35/ounce for nearly 30 years before
it was allowed to trade freely. The behaviors of gold prices
are part of the evolution of our global economy becoming linked.
Further extrapolation suggests that countries are likely to have
larger pools of gold in the future to back the currency, but
in a "non-tradable" sense. It would likely serve why
countries keep nuclear bombs..not intended for use, but for a
display of power.
Most of the gold ever mined is still in existence, and is used
to preserve wealth. The coming decade is likely going to see
erosion of wealth from most individuals, and a flight to preserve
wealth will occur. Gold is money, and now that it is available
to the global populace to accumulate supplies will tighten. Poor
mans gold, or silver is likely to soar more than gold on a percentage
basis, given the affordability to most persons in third world
countries over gold. The governing factors for any bull market
is supply and demand. When demand picks up on limited supply,
a bull market in a given item begins.
We have discussed gold, but what about gold stocks. Gold stocks
are only worth ~$100 billion dollars, and all the gold ever mined
is around $1.4 trillion dollars. The total global debt and money
supply is around two logs higher than this. When people try to
enter stocks and purchase gold, the door of entry is small, so
prices are likely to rise to ridiculous levels near the end of
the bull market around 2013-2014. The shares of current large
cap companies are likely to expand 10 fold in the coming 10 years
to keep up with investment demand. It should be noted that the
metal will dominate the latter part of the cycle. Gold and silver
stocks are likely to have their peak around 2010-2011 (two years
prior to the top in the metal price). If gold reaches above $2000/ounce,
then there will be a saturation point for company prices (higher
gold prices will not do anything to the share value). The analysis
in this article will examine where we currently stand in relation
to the AMEX Gold BUGS Index technically, with a final chart showing
"You are here" in relation to the expected pattern
to develop in the coming 2 years.
The Bollinger bands are converging at an accelerated rate. When
the lower 55 MA Bollinger band begins to curl down, an established
up trend will be signaled. A further consolidation for another
week is likely. Refer to the Elliott wave charts presented later in this editorial. The full stochastics
are bouncing off the 30% line with the %K above the %D. This
is a bullish development, and basing is unlikely given the overall
technical picture.
Figure 1
The 50 day MA is currently
offering support to the index, while the 155 and 200 day MA's
are nearing convergence. The shorter term stochastics shown below
are bearish, suggesting further weakness or consolidation in
the HUI. It should be noted that the %K could rise above the
%D quickly, based upon the wave pattern present. We will present
this chart daily this week to track the changes in the stochastics.
Figure 2
Below is the weekly HUI chart.
The Bollinger bands are still converging. The up trend on the
weekly chart will be confirmed when the lower 55 MA Bollinger
band curls down. This indicator lags the trend by 6-8 weeks.
The lower 21 MA BB curling down is suggestive we are nearing
the start of the next up leg of the corrective pattern. The stochastics
below have been bullish for one month and are likely to continue
rising to the top of the 70% channel line. This is around 2-3
months from now.
Figure 3
Below is the short term Elliott
wave count of the AMEX Gold BUGS Index (HUI). The triangle has
been forming as hypothesized back near the end of May (the severity
of the decline and internal wave structure of waves [a] and [b]
suggested this). There are many Fibonacci relationships observed
between the internal waves of the triangle. Noted in the chart,
wave [e] retraced ~61.8% of wave [d] and ~38.2% of wave [a].
There are many other Fib relationships not noted. A contracting
triangle SHOULD have many Fib relationships present to consider
it a valid pattern. The triangle based upon the wave structure
should have a non-limiting triangle classification. This is confirmed
by the wave structure currently running to near the apex of the
triangle. There are two preferred counts that have the same outcome,
just in a different time frame. The light green line has the
HUI breaking out from the triangle, testing it, and then advancing
minimally to 233 before any correction of significance. The darker
green line has the same target with a possible higher target,
with a sub-triangle forming in wave [e]. This could extend for
another 1-2 weeks. The internal wave structure of each wave in
the triangle are corrective..there is no visible or accurate
way to label them as impulsive segements in their entireity.
Figure
4
Below is the Elliott wave chart
of the HUI showing the entire corrective sequence since December
2002. The end of the triangle will complete wave [W]. which will
represent 1/3 of the expected correction. Refer to Figure
7 for the "YOU ARE HERE" diagram to see the expected
move. The entire pattern. The pattern for wave [W] is a complex
correction with a flat-X-triangle structure. As mentioned, the
minimal move will be to 233, prior to a slight pullback, and
a continuation of the move up to 280-320.
Figure 5
The longer term Elliott wave
chart of the HUI is presented below. Each successive wave of
[I] was longer, with the log scale corrections diminishing as
the pattern advances. The green line shows the suspected pattern
that will develop as wave [W].II completes. An alternate count
not presented would have the HUI rising to 230, and declining
to 150-160 to form wave [W}. Non-limiting triangles such as the
current one we are in often mark the end point of a certain degree
pattern. This is our Sherlock Holmes point to confirm with a
high degree of confidence the pattern is labeled correctly.
Figure 6
Below shows the "YOU ARE
HERE CHART". I am regurgitating the typed information in
the chart below. Since wave I lasted approximately 3 years, wave
II should last between 1 _ to 3 years. Wave [X]/OO should last
4-6 months. The top of wave [X] is likely to be in near 280-320.
Wave [Y] should be a non-limiting triangle to complete wave II,
lasting for one year minimally (probably two years). The minimum
length of wave III will be 1.618 x [log(260)-log(35)] x Start
point of wave III. If wave III starts at 320, the minimal height
for completion of wave III will be 448 on top of 320, or 768.
I expect wave III will be around 2 to 2.618x wave I, so the maximum
height for wave III is going to reside around 1047 (320+727).
There is a lot of variation based upon the final top for where
wave III will be, but it is well above the curent levels. I am
using a log extrapolation based upon this wave structure, since
the move is more likely to be logarithmic rather than linar.
The time frame for completion of wave III is going to be 4-6
years years minimally. IT WILL BE MOST PROFITABL TO BUY AND HOLD.
Trading in and out of the wave [Y].II that is likely to develop
will be futile. The purple line shows the alternate wave pattern
that could develop if the HUI turns south by a large degree at
230. If this occurred, wave III would likely reach a higher top,
given a longer corrective sequence that would develop.
Figure
7
That is all for today. Updates
for the week will include:
1) Wednesday - Update the US
dollar and S&P 500 Indices
2) Thursday - Update of the
TNX, XOI, and commodities
3) Friday - Natural Gas Index
The main focus of today was
an examination of where the HUI is going. This article should
serve as a reference for the larger degree pattern of where we
are going in the next 1-2 years.
July 6, 2004
David Petch
Treasure Chests
Copyright ©2004 www.treasurechests.info.
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Disclaimer:
The above is a matter of opinion and is not intended as investment
advice. Information and analysis above are derived from sources
and utilizing methods believed reliable, but we cannot accept
responsibility for any trading losses you may incur as a result
of this analysis. Comments within the text should not be construed
as specific recommendations to buy or sell securities. Individuals
should consult with their broker and personal financial advisors
before engaging in any trading activities. Do your own due diligence
regarding personal investment decisions.
Reprinted
at 321gold Inc
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