Precious Metals: Will the Momentum Continue in 2008?

So far, the holiday season has been a kind to Precious Metals investors. Gold finally emerged from a consolidation triangle and seems well on its way to $1000/oz. As disclosed earlier, I had turned rabidly bullish in September. During the six-week correction that started in November, I bought call options on every significant dip. While some partial profits were taken on bounces, there are still a number of Market Vectors Gold Miners ETF (GDX) and Pan American Silver Corp. (PAAS) calls in my trading account at Zecco.

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Readers know that I frequently use charts to determine entry and exit points. It’s something I’ve been doing without proper justification. Although there are plenty of academic research saying that technical analysis does not work, I’ve always thought that since there are plenty people out there believing in it, it has at least become a self-fulfilling prophecy. That’s a pretty good argument in break-out situations, however, in corrective pullbacks, a large number of technical traders can invalidate seemingly clear support levels. A case in point is the consolidation from May 2006 (wave 2) that ran longer than expected, and didn’t end until a long sideway channel was violated in mid-August. The sharp drop and snap back was in fact the start of wave 3. [I’m labeling the waves here the same way as Martin Goldberg, which I think is the most “obvious” designation.]

Regarding this most recent pullback, first a triple bottom around 396 was violated, then there was a quick penetration below the range of wave 4, as well as the 50% retracement level. Plenty of “weak hands” were taken out at these levels which paved the way for a new advance. The above shouldn’t be taken as an indictment against technical analysis, but rather the point is that its message should be interpreted with care. Indeed this recent behavior has been great for dip-buyers since it was clear where the major stop loss orders were located.

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Now I’m going to look at where this Amex Gold BUGS Index (HUI) rally may take us. It’s an about face because I’ll resort to trend lines/Fibonacci levels which, just a second ago, I said may be giving misguiding signals. Did I already mention that this is guess work anyway? The fact is, there is no other way to forecast time and price on this scale. So here it is: HUI to be at 580 by May, and 760 by year end. The timing of the May peak is interesting in that significant peaks or troughs of the HUI tend to be made in that month (Peaks in May ‘01, May ‘02, May ‘06, troughs in March ‘03, May ‘04, May ‘05, and nothing special in ‘07), although I believe that ultimately we will be much higher by year end.

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There is usually a great dispersion in upward price forecasts, so I’m not worried about traders front-running these targets. Nonetheless, I’ll be very surprised (and proud) if the actual trajectory is anywhere close to what’s outlined here. I’ll settle for just getting the direction right.

Best of luck in the New Year.