My View on HUI and Gold

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Even with what has happened during last several weeks, I am still expecting this consolidation phase to end soon, and that second half of 2007 will be a good up market for gold, silver and HUI. In 2008 too. Buying during a dip and holding has been a good strategy during last seven years in this gold and mining market, so donít panic. A great opportunity and turning point might be right in front of us.

With the market turmoil during the last several weeks (and especially today, August 16, 2007) with both gold and especially HUI, I want to provide my latest thoughts on this particular market and sector.

Let me first comment on the gold consolidation as of today, which has disappointed many precious metals investors. As we know, gold peaked back on May 8, 2006, and it has gone through a long consolidation phase for 15 months since. This process is long, but there are several things we should also keep in mind here.

First, if you look at the gold (or HUI) chart since last May, there have been two bottoms. The second one happened last October. So even with the lack of a spectacular up move, gold has been on an uptrend since last October (at least for now, if gold doesnít drop below $560 and HUI below $270). This uptrend is hardly noticeable since it is almost flat with a slight upward skew, but the same thing happened during 2004-2005 period too, when gold tried to overcome the key resistance of $450. If we use last October's bottom for gold & HUI, the correction period is actually very short, only five months (from last June to last October).

Second, if you look at the past seven years of a gold bull market, there have been three major resistances: $325, $450 and $700. Each barrier has taken a long time for gold to break, e.g. it took 20 months for gold to break the $450 key barrier.

Third, the previous run from $450 to $730 was too spectacular, too fast, and the up slope was too steep. This was accomplished in only seven months' time ó too short. With such a good run, it is normal for the market to have a long breath, and take its time to build a good foundation for the next move up. It is the balance and symmetry between price momentum and time.

Lastly and most importantly, if you plot the monthly close chart from 1970s to now, gold has never gone higher than $700. Gold reached $887 on an intraday basis in 1980, which has never been reflected in the monthly close chart (by the way, the weekly close chart shows gold below $800 in 1980). The same thing also happened to the $730 price when it peaked last May. Both are reflected as $690 resistance in the monthly close chart. If using a monthly chart for long-term perspective, gold has never exceeded and stayed above $700 mark for over a month.

This explains why gold faces such a difficulty recently to surge decisively over $700, because gold has never done this in its entire history. Above $700 is an uncharted territory for gold from a long-term perspective. I can imagine that $700 actually provides the largest obstacle for gold to overcome. It shouldnít be a surprise that gold spends about the same time now trying to overcome $700 as it did trying to overcome $450. We also shouldnít forget that once gold broke $450, we saw an explosive move to $730, a 60% gain (versus a 40% gain from $325 to $450 with the previous run). If using the same analogy, we shouldnít be surprised to see that once gold breaks $700 decisively on a monthly chart, gold will have a field day with a similar explosive up move to four digits.

I saw this kind of shakeout and bottom testing in May 2005 (when gold was above its previous bottom but HUI was testing its old bottom again). This is the typical capitulation to shake out all the weak apples and hammer out any remaining confidence in investors. With trading in any market, we need both patience and a strong heart, especially with gold, and especially during market the turmoil like now. Also, donít forget, if this gives you more confidence, that we are holding gold, the last currency standing in the world, and HUI as long-term option to gold never expired. We are not losing time value on these gold options and quite the opposite, we gain time value, since each day the miners are getting one step closer to production. This is much better than holding some asset- ďbackedĒ securities (ABS) marked to black box computer models (not to the market), with assumptions such as delinquency rate can jump four times, from 5% to 20% in one month. We have no clue what the future cash flow looks like on those ABS products, if there is any. But at least we have gold.

Even with what has happened during last several weeks, I am still expecting this consolidation phase to end soon, and that second half of 2007 will be a good up market for gold, silver and HUI. In 2008 too. Buying during a dip and holding has been a good strategy during last seven years in this gold and mining market, so donít panic. A great opportunity and turning point might be right in front of us.

Thomas Z. Tan, CFA, MBA [email protected]

August 16, 2007

Disclaimer: The contents of this article represent the opinion and analysis of Thomas Tan, who cannot accept responsibility for any trading losses you may incur as a result of your reliance on this opinion and analysis and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. 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.

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