Clive Maund
gold, silver, & oil shares


MARKETWATCH - IMPORTANT UPDATE at critical juncture, all subscribers should read all of this...

originally published February 11th, 2009

The Precious Metals sector remains at the critical juncture described in the last Marketwatch update posted on 4th February . However, the situation has become even more critical with the passage of time, and the now fast growing risk of a breakdown by the broad stockmarket inflicting major collateral damage on the sector means that downside risk is passing the point of being unacceptable - to us at least. Yesterday was a microcosm at what could happen in the event of the broad stockmarket dropping heavily, with gold and silver up significantly and PM stocks being dragged lower anyway by the broad market. At this point in time we have good gains on many of our positions, and we have no intention of giving those gains back to Mr Market if we can possibly avoid it.

If the principal risk factor is the broad stockmarket it behoves us to take a look at it. On the 1-year chart for the S&P500 index we can see that, notwithstanding the bullish euphoria of the major financial media, who now appear to take it for granted that "the bottom is in" (which is a very dangerous signal just by itself, for their job is to line up the little guys as cannon fodder for Smart Money), the market appears to be weakening, with a bearish Descending Triangle forming that is increasing the likelihood of a breakdown to new lows. Given the widespread consensus that "the bottom is in" a break to new lows is likely to trigger another avalanche of selling, and given that investors love nothing more than to "throw out the baby with the bath water", this is likely to result for heavy collateral damage to both the Oil and Precious Metals sectors. Bearing this in mind we will now take a look at the HUI index charts to assess the danger.

The 4-year chart for the HUI index reveals at a glance the reason why the sector has stalled out at the current level - it has arrived at a major wall of overhanging supply whose origins lie with the vast quantity of stock that changed hands around the current levels in 2006 and 2007. Those who bought during that period and have stayed long ever since have lived to endure huge paper losses around the time the market bottomed late last year, and many of them are minded to "get out even" and it is their selling that has stopped the rally dead. There can be no doubt that this is a MAJOR obstacle for the sector to overcome, and given that the index has risen a long way to arrive at this resistance and that the 200-day moving average is still falling, indicating that the long-term trend is still technically down, and now not far overhead, it now seems unlikely that the index will break above this resistance at this attempt, especially given the now rapidly deteriorating broad stockmarket. The best that we can hope for in these circumstances therefore is that a trading range forms beneath the resistance before it is later surmounted. However, over a shorter-term timeframe, it is vulnerable to a severe reaction in the event of the broad stockmarket breaking down, which could mark the start of a broad trading range beneath the resistance. A possible scenario for the near future is drawn on the chart.

On the 6-month HUI index chart we can see that the situation is now balanced on a knife-edge, meaning that a decisive move one way or the other is likely soon. While it is true that the index broke out upside from the "Distribution Dome" that we drew on the chart earlier, which is in itself bullish, this breakout is, so far at least, only marginal, and yesterday's drop breached the uptrend from November for the first time on this log chart, which was a bearish development, although it has not yet broken down on the arithmetic chart. We can see that the rising 50-day and falling 200-day moving averages are converging steadily, which means that a resolution of the current stalemate cannot be too far away. The fact that the 200-day is falling and that the index has not made great progress into the core resistance, which extends up to 340, now suggests that failure and breakdown is the more likely otcome, especially given the outlook for the broad market.

All of this being the case, it is considered wise to close out the vast majority of our positions immediately, as should the sector reverse to the downside, our hard won profits, which in a good many stocks are substantial, will rapidly evaporate. Those who disagree with this analysis or are perhaps reluctant to close out positions possibly for tax reasons, should at least consider protecting their holdings by the use of Put options in stocks such as Newmont Mining. How does this analysis square with the bullish Cup & Handle on the Silver Wheaton chart, which we looked at just the other day? - the answer is that it doesn't, a conflict which we will attempt to address later.

We have had a heavy weighting in silver stocks, which has largely worked out very well, as many of them have made large gains, and we have ridden the uptrend for all it was worth, as many of our juniors stocks have continued higher even as the sector indices got bogged down in recent weeks. The longer-term outlook for these silver stocks remains excellent and if things work out as looks probable, then we will be able to swoop and scoop the same stocks up cheap again after a substantial reaction. The following liquidation list is intended to give an overview of the recent performance of our holdings. The open positions not on the list are either considered to be very cheap and unlikely to react much, such as MacDonald Mines (BMK.V) or sufficiently positive that they could make progress even in adverse market conditions, such as Canadian Gold Hunter (CGH.V) and Fronteer Development (FRG), recommended on the site 2 days ago. In considering the profits and losses in the list it should be borne in mind that positions recently closed out are not on the list, of course. This includes stocks in which we booked substantial profits before later repurchasing them after a reaction such as Minco Silver, Orko Silver and Silver Wheaton, and several losing trades such as Apex Silver which went bust, and ECU Silver and Hecla Mining where we bailed out at a loss. Note that for the sake of convenience the gold and silver ETFs (GLD and SLV) are included in these share lists. It is appreciated that you only just opened some of these trades. With gold and silver up a bit this morning and the European markets flat, it may be possible to close out pòsitions at slightly better prices. All prices are for the close of trading on 10th February.


Gold Stocks

Cabo Drilling CBE.V C$0.95 now C$0.13 (+36%)

Evolving Gold EVG.V C$0.24 now C$0.375 (+56%)

Freeport McMoran FCX $20.01 now $27.29 (+36%)

Full Metal Minerals FMM.V C$0.25 now C$0.30 (+20%)

Gold Resource Corp GORO $2.38 now $4.90 (+105%)

Rio Tinto RTP $101.55 now $107.37 (+6%)

SPDR Gold Trust GLD $71.10 now $90.21 (+28%)

TXCO Res TXCO $2.34 now $1.56 (-33%)

Vale RIO $15.14 now $15.79 (+4%)


Oil Stocks

Abraxas Petroleum $0.81 now $1.13 (+39%)


Silver Stocks

Apogee Minerals APE.V C$0.045 now C$0.07 (+55%)

Endeavor Silver EDR.V C$1.61 now C$1.81 (+12%)

Fortuna Silver Mines FVI.V C$.0465 now C$0.95 (+104%)

Impact Silver IPT.V C$0.34 now C$0.56 (+64%)

Ishares Silver Trust SLV $9.67 now $12.98 (+34%)

Klondike Silver KS.V C$0.095 now C$0.095 (0%)

Mexican Silver Mines MSM.TO C$0.10 now C$0.12 (+20%)

Minco Silver MSV.TO C$1.10 now C$1.03 (-6%)

Orko Silver OK.V $0.50 now C$0.64 (+28%)

Revett Minerals RVM.TO C$0.17 now C$0.115 (-32%)

Silvercrest Mines SVL.V C$0.41 now C$0.62 (+51%)

Silvermex Mines SMR.V C$0.18 now C$0.30 (+66%)

Silver Bear SBR.V C$0.27 now C$0.46 (+70%)

Silver Wheaton SLW $6.72 now $6.31 (-6%)

Tumi Resources TM.V C$0.165 now C$0.185 (+12%)

US Silver Corp USA.V C$0.045 now C$0.145 (+222%)


Although gold and silver are rapidly gaining ascendancy as safe haven investments that should quite rightly eclipse worthless US government paper, there may be another flight into Treasuries if the broad stockmarket breaks lower again. This implies that gold and silver will temporarily get taken down again should the dollar surge as investors switch into it to buy Treasuries. So it is worth looking briefly at a chart for the 30-year T-bond.

We called the exact top in Treasuries towards the end of December, which went on to break down from completed Head-and-Shoulders tops. However, after breaking down from these top areas they have not followed through with a steep decline, and the converging nature of their downtrend channels coupled with the fact that they are not far above important support levels is increasing the chances of a reversal to the upside. It is considered unlikely that they will make new highs, but they could get back back to the vicinity of their highs before they roll over again.

Posted at 9.30 am EST on 11th February 09.