MIDAS: The following was an email sent by Adrian to a fellow Cafe member. It had me enthralled and I figured it would you too....

This is fascinating and like solving a great mystery. And just like great mysteries, you have to look at ALL the clues. If you look at the gold chart alone, it seems to be saying that a correction back to $480 is likely. Gold is in a strong upleg and transitioning into Phase 2, so the upleg will be supported by the 50 DMA and not the 200 DMA.

For most of the move in Crude over the last 3 yrs, it has corrected back to the 50 DMA and occasionally lets off a big head of steam back to its 200 DMA.

But we haven’t looked at the shares. The HUI has been consolidating for 2 years.

The HUI has only just broken out of its box formation of 2-yr duration, or if you prefer, broken above the neckline of an inverse head & shoulders of 1-year duration. If gold is going to correct significantly from here, then it would mean that the shares will have missed out on reacting to a $95 move in the gold price. I just don’t find that plausible. It is possible that the gold price does correct and the shares take off and show a delayed upleg, but that would be a most unusual event because the gold price typically drives sentiment in the shares. In a few years time, when we get the final blow-offf when gold is $ xxxx, punters might drive stocks up even with a big fall in the gold price, but we don’t have ANY froth in the gold shares right now that could that type of event happen. The CEF fund has only 1.2% premium to the underlying assets. In major uplegs, that goes to 25%-30%.

Adam Hamilton has just put out a piece, which says that this move up in the gold shares will be massive. I agree with him. The ONLY way I can see that happening is if gold either keeps on going or stabilizes above $520 for a while letting the 50 DMA catch up and then accelerating up toward $600. I can not envisage a scenario where a $95 up move didn’t excite investors, a move into uncharted 24-year high territory didn’t excite investors, a break above a historic psychological number didn’t excite investors, but a gold correction back to $480 will make them pile in to mining shares. It just doesn’t jive.

This move up in gold has been amazing. I keep remarking about an Artic Ice-Breaker. Despite the move up of $95, there have been no wild moves. It has been orderly and unexcited. Resistance has just been sliced through with little fanfare or volatility. I believe the excitement is yet to come.

The next clue is the COT. The OI has been GOING DOWN on big gold up moves. The significance of this can not be under-estimated. The Shorts are feeling too much pain. They are getting margin calls they are starting to cover. Notice, however, that the increase in the margin requirements on Nov 28 did not affect the longs. They didn’t flinch. They have plenty of money and want delivery. Another clue to that was the LARGE deliveries that occurred in November, which is NOT a delivery month and this trend is continuing into Dec but the bulls are leaving the bullion on the exchange to continue their accumulation. We have NEVER seen before the shorts cover on an up move in this 4 year bull market.

Then there is sentiment. Many people are like you. They are concerned about a correction. That is hardly a bearish sign.

The subtle change that has occurred is that the gold bull market has become global. If physical markets become more dominant than the COMEX, which is already the case for India and now Japan, then who cares about the technicals of Comex? Gold passed the multi-year resistance of 350 euros and is now 445 euros. Conventional market wisdom said it should have corrected. It then should have corrected when it passed 400 euros, but it didn’t. This is what happens when the fundamentals of supply and demand kick in.

Take a look at Natural Gas. Earlier this year it passed a multi-decade high of $10 and was stretched 25% above its 50 DMA. It HAD to correct just like gold HAS to correct right now……………

SORRY NO CIGAR! Look below.

For three months, it wasn’t even close enough to its 50 DMA to smell it -- let alone touch it. There has just been a quick correction to the 50 DMA and it is off on a mission to the moon again. Correction to the 200 DMA? Sure, but I wouldn’t put any money on that until at least the spring. This is a market driven by the fundamentals. There is a shortage of natural gas…but it hasn’t been in deficit for 10 years like gold or silver

The correction didn’t come for another 2 months after hitting the $10 mark and reached $15 …50% higher. If gold were to do the same, it wouldn’t correct before $750. That is not to say that is what will happen, but just to show you with a real example from today that IT CAN.

I have said that this move will KNOCK THE DUST OFF YOUR MONITOR. I believe it will suddenly behave like oil or nat gas because supply and demand are suddenly all that matter. The Asian women are not content to hang a pendant around their necks with a JPMorganChase derivative contract stapled to it. It just doesn’t look quite as pretty!

This is what I see when I look at all the clues that are available to us. Am I right? That’s for you to decide, but it's where my money is.

© 2005 "Adrian" from LeMetropoleCafe.com
Bill Murphy
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