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Macro-Metal Monitor



Who's afraid of the Big-Bad-Wolf ???

Well, that depends on which of the global Central Banks represents the Big-Bad-Wolves, and, which represent the Lambs. The biggest, baddest wolf on the block is the Reserve Bank of New Zealand. The Reserve Board's 'crew' includes the Bank of England, the U.S. Federal Reserve Bank, and, surprisingly, the Bank of Mexico.

On the other side, representing the monetary lambs, we have the leader of the gang, the National Bank of Slovakia, the National Bank of Hungary, the Turkish Central Bank, and the Norges Bank (Norwegian CB).

How do we 'define' our monetary animal kingdom ???

Simple ... we look at the magnitude of rate hikes, OR cuts, enacted since the end of 2003. Note the results, as per the central banks that stretch the spectrum from the tightest, to loosest, in terms of 2004 policy:

• Reserve Bank of New Zealand ... hiked 125 bp (6.25%)
• Bank of England ... hiked 100 bp (4.75%)
• Federal Reserve Bank ... hiked 75 bp (1.75%)
• Bank of Mexico ... hiked 110 bp (7.20%)

• National Bank of Slovakia ... cut 225 bp (5.00%)
• National Bank of Hungary ... cut 100 bp (11.50%)
• Norges Bank ... cut 50 bp (1.75%)
• Turkish National Bank ... cut 600 bp (20.00%)

MOST interesting is the fact that of the four countries represented in each category, in both cases, three of the four ALSO represent CURRENCY wolves, or lambs ... in REVERSE.

In other words, aside from the New Zealand Dollar and the Turkish Lira, the wolfish-central-banks come attached to the weaker currencies, and vice-versa, with the lamb-baked countries carrying the stronger currencies.

Point: PRO-GROWTH policies are still the MOST supportive dynamic, in terms of the foreign exchange market. This is WHY ... rising rates have NOT been supportive to the USD, especially since U.S. yields are still LOW, and thus, have risen by the LARGEST 'degree', on a 'percentage-increase' basis.

Indeed, on this basis ... the Fed is THE Big-Bad-Wolf !!!

On this basis, the Norges Bank and National Bank of Slovakia are THE main lambs.

Indeed, this basis does NOT bode well for the USD as a whole. Evidence the correlation-overlays on display below, implying that the USD rally might be living on borrowed time.

Observe a different FX perspective, as revealed below ... plotting the wolfish British Pound, against the lamb-linked Hungarian Forint, with the recent renewed bear move in the GBP clearly evident.

Ironically ... the FX markets are reacting to Central Bank activity much in the same way the long-end of the fixed-income ... that overly aggressive monetary hawkishness WILL successfully inhibit inflation ...

... by inhibiting GROWTH ...

... leading to ... a REVERSAL in monetary policy among the wolves, and, eventually, an even MORE aggressive campaign to stimulate growth, while acquiescing to whatever reflationary 'corollary-moves' that might develop.

Indeed, note the text of the statement released following today's Norges Bank meeting, at which the CB decided to leave rates unchanged, at the RECORD LOW 1.75% ...

... "In our baseline scenario, inflation remains below target up to summer 2007. Norges Bank indicated that monetary policy should be oriented towards pushing up inflation at a somewhat faster pace than projected."

Indeed, a Central Bank that WANTS to PUSH inflation HIGHER.

Hence, we REWIND and REVIEW the USD -correlation chart utilizing the Norwegian Krone ... suggesting that a further breakout in the NOK above (USD below) the 2Q high (USD low) at 6.61 ...

... and ... a BULLISH resolution in the precious metals, predicated upon further depreciation in the USD against pro-growth currencies, AND, a continued push towards lower long-end yields globally.

For this to occur, the Gold market MUST continue the recent MICRO-TREND towards becoming disassociated from ALL currencies.

As usual, for guidance, we turn to the gold-linked equity indexes, and thus focus on the chart exhibited below, in which we plot the daily path of the unhedged AMEX Gold Bugs Index, or HUI.

It is increasingly probable that a downside CORRECTION may be OVER, as per the near-text-book A-B-C retreat that was 'rejected' at the 38% Fibonacci retracement level relative to the ENTIRE bull market.

Shortening the time frame, note that the recent correction also equates to a 50% Fibonacci correction as relates to the bull move since the correction seen in the summer of last year. Further, the med-term Oscillator has flipped back into positive territory after suffering a deep decline ... and ... the 200-day exponential moving average has turned back to the upside, directionally.

We focus on the technical dynamics offered by the AMEX Gold Bug Index because it represents the "un-hedged" gold mining shares, or companies that have NOT sold forward their future output. These companies would thus, theoretically, have more upside price potential, basis appreciation in the underlying metal.

This is specifically true ... IF ... the current 'annual' supply-demand deficit continues to widen ...

... especially ... if global central banks continue to retreat from fully 'filling' that gap.

According to recent statistics from the World Gold Council, 2004 mined supply is estimated in the region of 2,600 tonnes, to be outstripped by demand, estimated at 3,000 tonnes.

Yes, there will be continued 'official' sales from European countries; amid the renewal of the 1999 Washington Accord, but it will be restricted to 500 tonnes per year.

Perhaps FAR MORE importantly, we consider two other influences. First, the Swiss National Bank dis-investment campaign is nearly OVER ... and secondly ... other global central banks may become more aggressive BUYERS of the metal, as an alternative to the U.S. Dollar.

As for the first point, we observe that the SNB announced the sale of 1200 tonnes of metal, to dispose of their reserves in favor of interest bearing paper. At a rate of 25 tonnes per month, or 300 tonnes per year, since 2000, surprisingly we find that they are nearly FINISHED SELLING.

As for the second point, we note that the Argentine Central Bank recently purchased 42 tonnes of gold.

Indeed, we find Friday's action in Emerging Bond Markets to be of interest in this vein, as the EMBI+ widened by 6 basis points over U.S. Treasuries, with widening noted in Brazil, Russia and Turkey ... while Argentina's spread tightened.

Moreover, we have LONG warned that Asian Central Banks, particularly those that have accumulated HUGE amounts of USD via expanding trade surpluses ... have SCANT gold reserves, relative to those vast holdings of U.S. paper currency.

Of course, China heads a list that includes the world's largest gold consumer, India ... along with Japan, Korea, Singapore, Hong Kong and Taiwan.

The Central Banks of all of these countries hold very little gold, against excess USD, and any could turn buyer.

Contemplate the following thought-process, offered within an EXCELLENT article on the situation penned by highly-respected gold-market pundit Dr. Richard Appel, available on his web site at

U.S. Reserve holdings of gold are believed to be in the area of 262 million ounces, or, about 1 ounce per citizen.

For China to achieve that same ratio, it would absorb ALL of the world's gold output ... for the next fourteen years.

Of course Dr. Appel provides this thought as an illustration only, amid the realization that China's gold reserves may NEVER reach such lofty levels. But, with official USD reserves in the half-BILLION region, it would NOT be surprising one day to hear that China is accumulating metal as an alternative to paper dollars.

Finally, we note those mining companies that ARE hedged going forward, a decade long bearish influence, and one that exacerbated the bear market that ended in 1999.

In line with this, we have also long warned that "institutional" short-covering, and producer hedge covering could provide the impetus for the next macro-bull leg. As such, we would EXPECT to see the un-hedged stocks LEAD the way to the upside.

VOILA ... this is exactly what appears to be developing, as the broader U.S. equity market has begun to wobble, with money rotating back into precious metals stocks last week.

Thus we find it VERY interesting to note the consistent upside outperformance and leadership exhibited during the ENTIRE bull market off the 1999 secular low ...

... and ... the MOST recent surge to the upside ... as defined by the ratio-spread constructed by dividing the AMEX Gold Bug Index of unhedged stocks, by the Philadelphia Gold and Silver Mining Index, or XAU, a broader index of both hedged, and unhedged companies ...

... as evident in the longer-term correlation overlay chart on display below. In this study we plot our HUI/XAU ratio spread (dark blue line) against the underlying price of COMEX Gold (light blue bars). The chart speaks for itself, and we watch to see if the ratio can make a new high. Such an occurrence would be MOST bullish for gold, and, would strongly suggest a new bull leg is beginning.

More specifically, we note two individual names that stand out as potential 'barometers' of possible renewed bullish enthusiasm from investors.

First, as always, we focus on our 'favorite' silver-linked play ... Pan American Silver, which closed Friday at a new mini-move HIGH, flying higher in the face of shallow declines in both gold and silver on the day.

Indeed, observing the chart visible at the top of the next page, we note the path of PanAm ... relative to the underlying Silver market ... and ... the STRONG tendency for this stock to LEAD the metal to the UPSIDE.

If Silver were to 'follow' suit, it would eclipse its own recent high, set in August, at $7.01.

Also, we note the recently high-powered action in low-priced gold miner Bema Gold, who rode the wave of a new discovery in Russia, to post a monstrous 12% gain last Thursday, as noted in the second chart visible at the bottom of the next page.

According to analysts, the discovery of a new mother lode-like vein at the Kupol mine, could result in a TRIPLING of 2003 output, to 800,000 tonnes per year. Given that Bema, of course, is NOT hedged on this potential output, puts them in a decent position to benefit if gold indeed does begin another bull leg on a secular basis.

As for the potential PanAm influence, we are monitoring the action in Silver's 100-day exponential moving average, anticipating a bullish directional change in conjunction with the one already executed by the same MA applied to PanAm.

As for Bema, the updated chart on display below reveals the upside breakout resulting from the 12% rally on Thursday ... and ... Friday's directional turn to the upside in that same, key, med-term trend identifying, 100-day exponential moving average.

Bottom Line: we are willing to flip back to the bullish side of the equation ... despite the barking of the monetary wolves, and the potential for a renewed disinflation dominance, factors that have provided our primary bearish concern of late.

One way in which the wolfish influence HAS manifested itself ... can be seen in the overlay chart on display below. Simply, we compare the action in the December COMEX Gold contract (light blue bars) against the value of the 12-month forward 'swap' as defined by the Dec04-Dec05 calendar spread (dark blue line).

While this dynamic remains a concern from a would-be-bullish perspective ... we also note the action in the deferred Euribor contracts, amid an upside price breakout, or, IMPLIED YIELD BREAKDOWN, defined by the surge in the Dec-06 contract through the 96.50 level.

We view the price breakout in the deferred Euribor as an offsetting feature relative to the bark of Central Bank wolves ... and ... as a potential offsetting factor in terms of the lack of upside push in gold's own forward spreads.

In other words, the action in Euribor is bullish for the metals.

So too ... bullish for metals in an obtuse way ... is today's upside push in the USD versus the JPY, as noted in the candlestick chart perspective offered below. Indeed, it looks like what we have called the MUTHA of all pennant patterns has been resolved to the upside for the USD, with violation of the downtrend line ... and ... this morning's tick higher in the long-term 200-day exponential moving average.

OR ... from the perspective of a country that imports ALL of its petroleum, priced in USD ... a MAJOR reason why last week's release of August Japanese trade data revealed a HUGE decline in the monthly surplus ...

... we note the chart above, for the BREAKDOWN in the Yen, a country with a Central Bank that has NOT been out howling with the wolves ...

... a country pushing HARD for reflation ...

... and, a country that does NOT hold a sizable portion of burgeoning reserves, in gold.

In other words ... we view a possible breakout in USD-JPY as a function of Yen DEPRECIATION ... rather than USD appreciation.

VOILA ... in what could be the chart-of-the-year, we note the combined macro-secular picture, as pertains to the price of gold in YEN, seen at the top of the next page.

In FACT ... the price of gold in yen 'terms' offers a LONG-TERM SECULAR UPTREND, in place since 2000, mapping out a near-perfect example of our own famed "Launching Pad Pattern".

Indeed, whereas each other attempt to penetrate the Y45,000 level has FAILED to produce consecutive closes above the top of the pattern, the most recent attempt has SUCCEEDED ...

... with gold in yen terms on the verge of breaking out above 46,000 yen.

We can, as we have adopted a specifically bullish stance in gold, priced in yen terms.

Can anyone say ... "Lift-Off" ???

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