What I Suspect About Gold

September 12, 2003
Mark Boucher

Investors need to remember that the market is overbought,
sentiment is fairly high, and insider buy-sell ratios are negative, so any
jitters can send the market for a temporary loop. We got a partial excuse for
nervousness this week when Osama bin Laden released a tape promising that more
attacks would be forthcoming, just before the anniversary date of the twin towers
terrorist disaster. While the market could easily undergo a minor correction
taking many weeks at any time, we would expect a recovery to develop as economic
news continues to confirm our base scenario and it is looking increasingly like
a much stronger growth period than markets are anticipating, is ahead. Asia
should continue to lead on the upside, although a consolidation or correction is
long overdue. Our favorite markets are Asia in general, small cap EMs in
general, Thailand, India, China, South Africa, metals, and resources.

Investors should continue to
monitor the potential party killers:

Over 4.75% on 10-year government bonds
(this week global bond rates eased a bit, so weâ€™ve got a temporary reprieve
here);

Oil over $38-$40 (here too we have had lower
oil prices);

A
fast-plummeting dollar (dollar is still correcting and we need to watch whether
new leg down has started or stronger economic numbers will lead to further
consolidation); and

A CLEAR and strong successful terrorist attack in the US
or on a major US installation (look at the market response to a THREAT of more
terrorist action to see how real this party killer is).

The euro fell to 1.07 and has
rallied up to downtrendlines here. The critical tests will be whether it can
continue to rally when US economic figures are stronger than expected as well as
how the Euro reacts to the Swedish vote this Sunday. The AUD recovered and the
CD has broken some resistance â€” so letâ€™s watch and see if we get new high
breakouts by the CAD, AUD, and NZD which would likely lead the initiation of a
new leg up in all foreign currencies. The yen is likely to hold the critical
115 level until the September 20 Japanese election. But the big question is
whether the Japanese will continue to defend the Yen 115 level after the
election, especially in view of the MUCH stronger economic numbers coming out of
Japan. If the 115 level gives way a swift move to the 100 level would be
forthcoming. Gold and silver and related stocks continue to creep ever higher
in what we suspect is the early stages of a new secular advance. But remember
these metal plays are always VOLATILE.

The CRB broke out above 244
this week and we suggest speculators buy with a cash CRB 229 ops as a five-month
base breakout here confirms our commodity models and global indicators which
point to much higher commodity prices down the road in this global recovery.

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Internal breadth tools took a
big hit over the last couple days although they are still improving generally.
We had another week WITHOUT 20 new highs each day in our Top RS/EPS New Highs
list, and breakouts plummeted to just 5 with three close calls.

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Investors should continue to cautiously add stock exposure as trade signals are
generated that meet our strict criteria, as well as allocate to our favorite
segments. Our model portfolio followed in TradingMarkets.com with specific
entry/exit/ops levels from 1999 through May of 2003 was up 41% in 1999, 82% in
2000, 16.5% in 2001, 7.58% in 2002, and we stopped specific recommendations up
around 5% in May 2003 (strict following of our US only methodologies should have
portfolios up over 13.2% ytd by our calculations) â€” all on worst drawdown of
under 7%.

Bottom
RS/EPS New Lows are still quite weak with readings of 0, 0, 0, 1, and 2,
accompanied by 1 breakdown of a 4+ week range, no valid trades and no close
calls. The short-side remains bleak, though health care and consumer staple
indexes are clearly underperforming and should make up a sizeable percentage of
any short exposure for those desiring some. Selling pressure is very low â€” the
problem is that buying power is just mediocre.

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For those not familiar with our long/short strategies, we suggest you review my
book

The Hedge Fund Edge, my course “The
Science of Trading,”

my video seminar, where I discuss many
new techniques, and my latest educational product, the

interactive training module. Basically,
we have rigorous criteria for potential long stocks that we call “up-fuel,” as
well as rigorous criteria for potential short stocks that we call “down-fuel.”
Each day we review the list of new highs on our “Top RS and EPS New High List”
published on TradingMarkets.com for breakouts of four-week or longer flags, or
of valid cup-and-handles of more than four weeks. Buy trades are taken only on
valid breakouts of stocks that also meet our up-fuel criteria.

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The new leg up is tentative and will be nervous upon excuses to correct and
consolidate. But it should march higher, two steps forward and one step back as
long as liquidity is plentiful, global economic acceleration continues, and
breadth holds up.

Mark Boucher

What I Suspect About Gold

BUY THE FEAR, SELL THE GREED

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