Sunday, March 23, 2008

Gold Stocks vs. Gold ratio part 3: The breakdown?

Part 1 and 2 of my recent charts highlightin the Canadian gold shares/Gold ratio can be found here.

Todays chart shows the breakdown from the symetrical triangle, but the ratio closed just above the December 2007 low. If this holds a falling wedge patten would begin to unfold. I noticed some of the JR exploration shares on my watchlist held up fairly well during this blowoff. If gold holds in the high $800's to low $900's I believe the gold shares will begin basing before making their run upwards against the yellow metal.

Bob Moriarty, President of wrote this story today that is the most bullish Ive ever seen him, especially in light of recent warnings he made about a gold correction.

Buy with both hands

Bob Moriarty - Mar 24, 2008

When you are searching for information about investing, you are going to run
into two totally contrary forms of information.

There are those I call the "Cheerleaders" who specialize in telling you want
you want to hear. We all know who they are. They are quite popular because they
indulge all your fantasies. Whatever you want to hear, they tell you: Gold and
silver are going to go up every single day. There is no such thing as a
correction. If the price of gold or silver goes down, even for a day, it's
because of some mysterious group they never really identify or prove exist.
There's a cabal and it controls everything in your life. You can't make a bad
investment decision, if your stocks go down, it's because "THEY" made them go

I call them "Cheerleaders" for a simple reason; they stand on the sidelines
and howl at the moon. They aren't players, just cheerleaders. They specialize in
figuring out what you want to hear because that's what they are going to feed
back to you.

Then there are those who tell you not what you want to hear but what you need
to know. There are far fewer of these guys. They aren't nearly as popular as
those who tell you what you want to hear but they are the ones who will help you
make money. I think of it as the difference between signal and noise on a radio
transmitter. You need to hear the signal, that's the important part. You need to
learn to ignore the noise.

One of the ways I figure out which is which is to ask myself, when silver and
gold finally hit a major top, is this guy going to tell me to sell or is he
going to be braying "Buy" at the top of his voice? I was a commodities broker
for a very short time in 1984 and I saw the files of literally hundreds of
people who had made fortunes in late 1979 and in early 1980 only to lose every
penny because they wouldn't take profits. They were listening to the
cheerleaders and ignoring the players.

I spent ten days trying to warn people of an upcoming violent correction. It wasn't popular because it was so contrary to what people think. That's how and why I made it. When you can't buy a silver bar because the demand is so high, you are at a top. When do you expect to run out of silver bars? At a bottom?

We have had our violent correction. The number of gold contracts and silver contracts were at record highs. Before this correction ends, I expect to see those numbers cut, perhaps in half. Most of the damage has been done to gold and silver but another month or so of correction would be about right.

This is going to be a really weird prediction. Last week I nailed the biggest
and fastest gold and silver correction in history. It was the best call anyone
has made for 28 years on gold. This week I'm going to predict gold shares are
going to explode upwards starting immediately. ESPECIALLY the juniors.

Now that's a switch. But here's the logic behind it. If you look at the XAU
over gold, it shows a low in the ratio in May of 2005 and another last August.
From May of 2005 until the next high in Feb of 2006, the XAU climbed from about
78 to 155. From the low in August of last year to November, the XAU rocketed
from 125 to 190.

The juniors didn't participate in the rally since August. Many are the same
price they were in August. Some are lower. Jim Sinclair and John Embry believe
that hedge funds have shorted the juniors. I don't totally buy that. If there
was some giant short position, it should show up. And while short positions in
many juniors have gone up, they aren't much above 1%, which is nothing for a
NYSE stock. So I'll just say that I'm not totally convinced. But if they are
right, those same shorts now are going to have to cover. Gold could easily
correct for another couple of months and the gold shares and especially juniors
could rocket.

The lowest the XAU over gold ratio has been in three years is .183. I think
that's the lowest for five years but I can't prove it with my software. On
Thursday of last week, the ratio dropped to .183 and closed at .187. Thursday of
last week should have marked the single best day to be buying gold shares in the
last five years. There is nothing saying the ratio can't go lower but if it
does, it just means it's building up more pressure when it does explode.

After a short and brutal correction, gold will resume its climb. Gold and
silver have not peaked. They are money and when all currencies fail, they will
be the last man standing. We will go back to a gold standard not because anyone
wants to but because there will be no other alternatives. Whatever country goes
to a gold standard first will have the new world's reserve currency.

Buying gold stocks in the middle of a gold correction may seem a bit contrary
but contrarians make money. Gold moved from $650 to $1030 without moving the
juniors. If it can do that, it can move from $1030 lower and still have a gold
share boom. I'm a buyer and you should be buying with both hands. You are
always playing the odds and the odds favor a 50% move higher in the next six
months. That is what has happened every other time the ratio got so off

Mar 24, 2008

Bob Moriarty

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