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GDXJ ETF, A Golden Star is about to be Born

Commodities / Gold & Silver Stocks Oct 21, 2009 - 01:14 PM GMT

By: Peter_Degraaf


Best Financial Markets Analysis ArticleA new ETF is being introduced to the investing community by van Eck Global, the same corporation that is behind a number of ETFs, including GDX, the Gold Miners ETF.  This ETF (symbol GDXJ) will represent 38 junior mining and exploration companies that have mining potential.  The complete listing is available at the bottom of this article. 

The launch is expected to take place sometime before the end of this year, and this event will help to make the junior exploration sector even more popular than it is today.  It is our contention that this sector will surpass the excitement that was created by the upstart dot-com companies of the late 1990s, since this time the companies involved represent real value.

First a few charts to show that the timing of this launch is excellent, as it fits right in with a major seasonal rise in gold bullion, silver bullion and mining stocks.

Featured is the weekly gold chart. The question ‘is gold overpriced’ is answered here with an emphatic “NO”.  At $1,070 gold is just 38% above its 200 week moving average, compared to 80% in March 2008 and 57% in July 2008.

     The RSI is still below the level reached in March 2008 (blue oval), and the MACD is a long way below the level reached in March 2008 (black oval). 

Historically gold produces a short-term bottom towards the end of October, and when this occurs as part of the 7 – 8 week gold cycle, it will likely be the last buying opportunity for a number of months.  Due to some incredibly bullish factors, this October bottom is expected to be shallow. 

The most important drivers for gold are the unprecedented US budget deficits and the inexperience of the people in charge to deal with the problem.  To paraphrase Sir Winston Churchill:  “Never in the history of mankind have so few thrown this much money at so many problems.”

Hardly a day goes by that I don’t receive a letter from someone who is spooked by the negative picture painted for gold by some analyst who subscribes to Elliott Wave Analysis.

Pay no attention to the Elliott Wave crowd that warns you of collapsing gold prices! 

Their most popular guru is Robert Prechter who has been down on gold for the past 6 or 7 years, and has been wrong all this time! 

Here is the problem with applying Elliott Wave analysis to the gold price:

You begin by drawing 5 connected lines that follow a predictable course.  Lines number 1, 3 and 5 are slanted upwards, and #2 and #4 are of the downward slanting type.  Next you fit these lines onto a stock or commodity, in this case the gold price.  You make the pattern fit your expectations, and if you’re stubborn enough and are currently out of the market, you make the pattern look like we’re at the end of #1 or #3 or #5 and due for the start of #2 or #4.

Meanwhile you totally disregard the fundamentals which are always different!

If the fundamentals were always the same, then Elliott Wave analysis would work like a charm.  As it is, these people are like those who drive a car down the freeway while looking only in the rear view mirror without taking into consideration that there are other cars on the road.  The premise used by Elliott Wave mal-practitioners is FLAWED.

  Elliott Wave analysis works best when viewed in retrospect!

No phenomenon based on human action is a straight line up, down, or horizontal.

Substituting numerology for the harder work of thoughtful analysis is fool's play!

Featured is the weekly chart that compares the price of gold to the long bond price.  In an article I wrote in September (archived here), I wrote about the likelihood of an upside breakout occurring from the 8.50 level.  The implications of this breakout are that bond holders will begin to realize the futility of holding bonds (as inflation is eating up all of the increase in price), and the need to switch into gold. 

This breakout at 8.50 is from beneath an area of resistance that has lasted for almost two years and completes the formation of an ‘inverted head and shoulders’ pattern that has a target at 1150.  As I mentioned in my previous article, this target coincides with a target for gold at $1,500.00, with a time frame of November-December 2010.
The reason this target makes sense is because fundamentals for a rising gold price have never been stronger. 
I listed those fundamentals in previous articles.    

Those of you who are spooked by the ‘gold bears’ need to review the track record of those writers.  That is what archives are for.  Keep a written record yourself, of predictions that are made.  This way you can stop reading those ‘stopped clocks’, and end up with 3 or 4 writers who have experience and who understand the markets.

Featured is the monthly chart that compares the HUI index to the gold price.  The most bullish part of a ‘gold rush’ is when the HUI index of gold and silver stocks is rising faster than gold itself (as now).  The blue arrows are the expected targets for the current trend.  “A trend in motion remains in motion until it is stopped.”  A student of Elliott Wave analysis could easily draw his favorite pattern on this chart formation and declare that the current leg is #3 or even #5 in a sequence, but the overriding reason why this trend is bullish is not a set of lines, but bullish fundamentals. 

Featured is the chart of a gold recycler.  The downtrend in the stock price indicates that the supply of scrap gold is dwindling. This is bullish for the rising gold price.

My sources in the jewelry business confirm that scrap gold is slowing down drastically.  Of concern is the fact that 10K gold scrap is almost finished, and much of the gold coming across the counter now is 18K or higher.  This indicates that people with low incomes have exhausted their meager ‘treasure chest’, and middle class people are now beginning to hurt to the point of having to cash in their jewelry.  While Wall Street led by Goldman-Sachs is knee-deep in bonuses, Main Street is suffering ‘big-time.’

The implication for gold is that the recession is deepening, and government will do what it has always done in the past, print money to try to solve the problem.  This will be ‘gold-bullish.’

Featured is the CPI trend chart courtesy Federal Reserve Bank of St. Louis.  Despite the rhetoric that price inflation is non-existent; this chart shows a steady rise that was interrupted only by the credit crisis plunge during late 2008.  Across the board price inflation is always caused by monetary inflation.  The two go ‘hand-in-hand’, albeit with a delay, as it takes money time to work through the system.

Price inflation is a major driver for a rising gold price.  Price inflation is causing ‘real interest’ rates to turn negative.  When you put money into a savings account you MUST DEDUCT the rate of inflation from your rate of interest.  According to economist John Williams who keeps track of price inflation on his website, the rate of price inflation at the moment is +2%.  By the time a saver pays taxes on the interest he or she received from the bank, the ‘net return’ is break-even at best or a negative return at worst.

This causes investors to look for something better.  Gold fills that need.

The battle between gold bulls and gold bears is in high gear.  The main argument offered by the bears is the very large number of ‘net short’ positions on the COMEX.

 It must be remembered that these short positions are matched by long positions.
 Actually the matching long positions are potentially more dangerous to the gold price than the short positions, since the short positions will have to be covered at some point, while the long positions can be rolled forward as they become more profitable. 

As long as the holders of the long positions (primarily hedge funds), are satisfied that gold is not overpriced (having just broken out above the magic $1,000 level), the gold price can continue to rise.

Quoting from the most recent Hulbert letter:  “The Hulbert Gold Newsletter Sentiment Indicator (HGNSI) has been stuck at 53.8% since Oct. 7. It has been as high as 89.58%. This lack of movement from the lower level is not consistent with a blow-off”.

At my website two of the most popular free features are:  “My expectations for the future”, as well as the “Stock pick of the Week”.  A new pick is listed every Friday, and a running record of previous picks is archived.

Here is that list of junior explorers I promised you at the top of this article.  May I suggest you print this section out, or ‘cut and paste’ it onto a blank document so you can file it for future reference.  For your convenience I have added the percentage that each stock makes up as a part of the total index.  As well I have added the company website to all of the stocks.

Happy trading!

By Peter Degraaf

Peter Degraaf is an on-line stock trader with over 50 years of investing experience. He issues a weekend report on the markets for his many subscribers. For a sample issue send him an E-mail at , or visit his website at where you will find many long-term charts, as well as an interesting collection of Worthwhile Quotes that make for fascinating reading.

DISCLAIMER: Please do your own due diligence. I am NOT responsible for your trading decisions.

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