Resource Stock Update - V14 #8.9 - Gold Markets and bullion - Aug., 20, 2008

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                                 Gold Markets

At this point it looks like we hit the bottom on Friday as I speculated that day. I have been
looking at various charts for a more solid sign that the bottom is in and the following charts are
certainly pointing out a bottom and strong reversal patterns

This first chart is that of the Gold ETF

It shows a strong candlestick reversal pattern called the 'morning doji star', a pattern I have
pointed out many times in the past in other markets and has been a very reliable sign of a bottom
and reversal. Also note the sell off on Friday to make the low was on much higher than normal
volume, a good sign of a panic or washout. There is also a second reversal pattern. It is called
'engulfing'. This is when a long white candle stick engulfs the previous day's range of trading. On
Tuesday, the ETF opened below Monday's price and went much higher by the close, totally engulfing
the previous day's trading range.

This next chart is daily chart of Gold on CBOT (Chicago Board of trade).

This chart shows similar patterns, it does not have a doji candle stick on Friday but does show a
regular morning star reversal pattern and the engulfing pattern on Monday/Tuesday

A chart of the London PM gold price fix also shows a morning doji star formation. This gold price is
fixed twice a day so we cannot make a candle stick chart, but it still shows the gap down in gold on
Friday and the gap back up on Monday

                  Very strange precious metal markets

Are the Central Banks conducting a going out of business sale?

See the answer to this later, first off

I have been trading gold and gold stocks since the 1970s, and I have never seen such weird or
different market as we had this year. The normal basic rules have not applied in the past year. The
gold and gold stock market has been acting strange after gold broke out and ran to $1,000.

Right now we have seen a big sell off in gold while at the same time their is a physical shortage.
This flys in the face of 101 economics of supply and demand.

The U.S. Mint has suspended sales of American Eagle gold coins and is refusing orders from dealers, two coin and bullion dealers confirmed Thursday.

I commented that I would send you a write-up on silver. I completed most of it a few months back and
it has sat in my unfinished pile. And I am glad I did not complete it and send to you because it was
confirmation of a severe shortage in silver. The logical conclusion of a shortage is a price rise
and I would have suggested buying various silver vehicles. But I am glad I did not, because instead
the silver price, like gold has been manipulated down in the face of a shortage.

The mint's suspension of gold coin sales follows its tight rationing of sales of silver eagle coins,
begun in May, when sales to the public were terminated and sales to the mint's 13 authorized dealers
were tightly limited.

Word of the mint's suspension of gold coin sales came from the American Precious Metals Exchange in
Edmond, Oklahoma, (http://apmexdealer.blogspot.com/2008/08/news-alert-us-mint-suspends-s ale...) and
from Centennial Precious Metals in Denver, Colorado.

The suspension is overwhelming evidence that the futures contract price of gold (and silver) on the commodities exchanges is substantially below the physical market price and that, indeed, the
commodities exchanges are being used as the vehicles for price manipulation of precious metals,
currency, and bond markets.

That is nothing new, the CBs have always intervened in currency and precious metal markets, but
never this extreme and I believe their manipulation or how the Fed likes to call it 'management' of
the financial markets has gone far beyond anything in the past.

Beyond a doubt there was intervention in the currency markets by central banks as there was a large
jump of US dollars held in custody for central banks. You can read more details on this by an
article by James Turk
http://goldmoney.com/en/commentary/2008-08-07.html

Gold is currency and that is why all the central banks hold gold and it has also been the strongest
currency so there is no doubt the CBs sold gold down and wanted to do the most damage as possible. In an ultimately failing effort to keep confidence in the US$ and financial markets That is why they pick this time of year or other holidays when markets are thin and they can have the most effect.
This time around they were very successful in creating as selling panic.

However, interventions cannot reverse trends, they can only influence short term trading. However,
there has been a lot of technical damage done to the precious metal prices and charts. So this is
probably going to set my target of gold over $1,000 to $1,200 by a few months, which will put us
into the spring of 2009. But do not rule out a much faster and steeper rally.

Lets look at three charts here of gold and gold stocks

Weekly Gold chart

We can see here that gold started to rally off a bottom ($650) last August and went almost straight
up to $1,000. It has now given back over half (61%) of that $350 move to go down to $785. 50% and
66% retracements are typical of more severe corrections, so we are in that range. We are also
trading around the major support area of $800

Now look at this two year chart of the Gold Bugs Index, this is made up of unhedged senior gold
stocks

HUI chart

Here we can see that the senior gold stocks went up with gold from last August to the $1,000 high,
but there rise was not that strong considering the increase in gold prices. Gold went up about 54%
but the index (330 to 510) went up about 54% too, so no real leverage with the senior gold stocks.
But they have now come all the way back down. They have given back all their gains and are trading at prices when gold was $650. They are way over sold but you can see they have been consolidating a bottom at this level for about 2 weeks.

Now here is the sickest chart that makes no sense at all, the TSX Venture chart that is a good
indication of the junior market. I can only get a 3 year chart, not a 2 year.

TSXV chart

You can see here that the junior stocks rallied well off from last August's lows, but they could not
even come very close to their 2007 or 2006 highs. In other words they are in no way reflecting
higher metal prices. This correction has brought the junior market all the way back down to the
levels of 2005 when gold was trading at $425.

This is ridiculous and I have no logical explanation. The last 30 years I have been buying junior
gold stocks, the principal has always been the same. You look for juniors that make gold discoveries
and when they do, the junior proves up metal in the ground that has a $ value. The higher the $
metal price and the more metal proven up, the higher the $ value and the higher the $ value of the
stock price. It is basic economics, when any public company creates something of value the stock
price will reflect the new value. With junior gold stocks this has held true in all markets, bear or
bull markets and dull sideways markets. However, this past year and for the first time, this basic
principal is no longer working.

Sure, at times and with certain stocks this principal can go out of whack for short periods,
unnoticed, under or over valued, but never before has the market undervalued practically all the
juniors with proven metal in the ground so severely and for so long.

I do not want to sound like I belong to a conspiracy group, but the only logical explanation for
this behavior with juniors is manipulation. There has been many gold market pundits talking about a
group of hedge funds working with the Fed to depress junior gold stocks. The market activity I have
outlined and the daily trading patterns I see in some junior gold stocks certainly backs this up.

It cannot stay this way for very long, something will give, but I am afraid it will be catastrophic,
not to gold or the junior gold stocks but to the markets and financial system. This bizarre market
activity is a sign of a severe break down in our markets and severe market manipulation by the Fed
and their agents to save the system.

Like all these high risk financial schemes (you know, the BSBS) that have been unwinding in the past
year and will continue to do so for a number of more years, this intervention in the gold market
will blow up in their faces as well.

The CBs are loosing control of the gold market. They can no longer effectively mange the physical
gold market and that is because they are running out of gold. The official numbers show that last
year the CBs share of the physical gold market has fallen below 50%, previously they have always
owned 2/3rds or more of the physical gold.

I suspect they actually have far less than 50% as some of that would have also been leased out and
never to return. A CB simply can no longer buy any good sized amount of physical gold without
jamming the price much higher.

It is a good thing the CBs are loosing control, because that will mean much higher prices in the
future. There is no doubt this will happen.

This last intervention to drive gold that low and below the price in the physical market shows how
desperate and afraid they are.

If it is true that they are also behind the manipulation of junior gold stocks, more sign of
desperation. It all smells to me like a last ditch effort to save the financial system from a lot
further damage. They must be scared to death of what they see coming down the pipe.

What this is doing is very counter productive to what they are actually trying to achieve.

There has been very few gold discoveries and there will be a lot less now that money has dried up
for the junior gold market.

Gold production is falling and will continue to fall and at a faster pace. China has now become the
worlds number one gold producer, surpassing South Africa. That is because it is one of the few
places in the world that is promoting companies to find and mine resources, not just gold, but all
metals and commodities.

The senior gold companies no longer have much in the way of exploration expertise, they lost that in
the last bear market and now there is a shortage of geologist needed for the industry and mining
equipment too. I recently met an old friend that works at a plant that builds the large open pit
mining trucks. They have back orders going into 2013.

We also see severe energy problems, especially South Africa, but now in South American countries
too. One of the first to be effected and cut back or shut down are mines, as they use a lot of
power.

Gold production is going to continue to fall in the face of rising prices and rising demand.

I have always suggested that 10% of your portfolio been in physical precious metals. Now more than
ever, you have to protect yourself and assets and you are running out of time to act if you have not
done so. I would even suggest increasing that now to 15% or 20%, with the fire sale in precious
metals.

It is already becoming difficult to buy gold and silver unless you can buy the 100 ounce gold bars
and 1,000 ounce silver bars.

1 ounce coins and bars are very difficult to buy. My local coin dealer that I have bought from in
the past has been all out of bullion for several months and it is the same story at all coin and
precious metal dealers.

The best luck I have heard from some readers is Kitco and I think this is where I am going to start
buying from as well.

https://online.kitco.com/bullion/index.html

Premiums are high, about 5% for the one ounce gold coins, but the 10 ounce bars are less than a 2%
premium over spot.

It use to be easy to buy bullion at the Canadian banks, but they have put on all kinds of surcharges
and high premiums. It looks like they are trying to discourage it or at least gouge their customers.

Even Kitco has posted on their web site to now expect delays in delivery because of high demand.

I believe the CBs intervened in the gold market to drive down the price to scare people from buying.
This is why they also may be behind manipulating junior gold stocks, to keep the mass public out of
the precious metals market.

However, it has back fired, what they essentially did is put on a fire sale. They drove the price so
low that it has actually increased demand in a big way.

I believe in time this event will become known as a going out of business sale. The last time the
CBs will effectively influence the gold price to any significant degree. They are running out or at
least their holdings of gold are no longer sufficient to influence the physical market. Another sign
of this is the increase in the leasing rates to loan gold. They have gone higher because the CBs
have a lot less gold they can loan.

This last intervention has revealed their weak hand for all to see and believe me there is plenty of
big money that is smart enough to see this.

You have to buy physical gold. Do not buy any of the ETFs as your bullion holdings

The probability is high that these ETFs will fail or the banks or financial entities that back them will fail.

There will come a point when they too will not be able to buy enough physical metal. They cannot be
trusted.

One of the major bullion banks, I think it was Goldman Sachs or Morgan Stanley settled claims for
millions of dollars with their clients because they were going to be taken to court because it was
believed they did not hold the bullion in their vaults that clients had bought. No doubt they were
guilty, why else would they settle this out of court.

I will forward the article when I come up with and verify the bank

Other alternatives are the Central Fund  TSX:CEF.A,  Amex:CEF http://www.centralfund.com

They actually hold the  bullion (about 50% each silver and gold) in safe custody, but it is trading
at about a 10% premium to their bullion holdings. I don't see this as a big issue because this
premium will likely remain throughout the bull market.

And I have also recommend the Bullion Management group fund. They hold the metals in safe custody,
about 1/3rd gold, silver and platinum

http://www.bmsinc.ca/

I will no longer be recommending any new junior exploration stocks (no proven discovery), at least
until the market returns to normal. There is no sense if they are not going to get any value for a
discovery. We have already witnessed this with most of our juniors that made new discoveries in the
past year. But we should continue to hold and buy the juniors that have these discoveries. Their
risks are far lower and potential is much higher because they are so over sold and they already have
the discovery.

For now, most new picks will be gold producers and under valued juniors with proven discoveries,
metal in the ground.

(c) Copyright 2008, Struther's Resource Stock Report

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