The Technical Argument for Much Higher Gold Prices

PROFIT CONFIDENTIAL

November 18, 2009

In Today's Issue: The Technical Argument for Much Higher Gold
Prices... What the Best Benchmark in China Is Telling Us... Limiting
Risk, But Still Making Some Profits... Why the Tumbling Dollar
May Put America on the Chopping Block

We have been receiving many e-mails from our readers asking if it is
too late to join the gold bull market. While I am a bigger bull on gold
than our technical specialist Anthony Jasansky, below Tony presents
an argument for a pullback on gold prices before they eventually
move higher. While the article may get a bit too technical, it is an
important read for current gold bugs and for those of our readers
thinking about entering the gold bull market.

Michael Lombardi, CFP, MBA

** The Technical Argument for Much Higher Gold Prices
-- by guest columnist Anthony Jasanksy, P. Eng.

Over the last two years, it took five attempts for gold's price to
finally break above the psychological resistance at $1,000 per ounce.
Though gold has been in a secular bull market in all currencies,
much of the "credit" for the decisive breakout to the all-time high
above $1,000 per ounce goes to the sliding U.S. dollar. In contrast,
gold has yet to make any comparable breakouts to new all-time highs
in the other two big currencies, the Euro and the Yen.

As high as the price appears to be, gold only trades at approximately
the 15-year average price in terms of crude oil, copper and silver.
The chart of Gold/Crude Oil shows that currently one ounce of gold
buys about 16 barrels of crude, close to the average price for the last
15 years. This suggests that the market is pricing gold in a rational
way rather than pricing in fear of rising inflation, or of another
financial meltdown in the making.

However, when it comes to short-term market pricing, rationality
gives way to trading emotions of multitudes of traders of various
means, objectives and sophistication. The gold market, including
gold equities, has a total capitalization that is only a fraction of the
capitalization of equity and bond markets.

As such, it is periodically subject to what, at times, amounts to
manipulation by central banks and large financial firms that trade
gold for their own accounts and to facilitate market liquidity for gold
producers and users. Therefore, unless one is a hardcore gold bug,
making new investments in gold, following the latest run-up, comes
with considerable risk of short-term pain.

Among the few gold sentiment indicators publicly available are the
weekly CFTC reports on open interest (OI) in futures and futures
options reported for several groups of traders. The CFTC recently re-
classified the categories of reporting traders for 22 commodities,
including gold and silver, with the revamped data available back to
June 2006 (www.cftc.gov).

The three groups with the largest OI are Commercials, which now
excludes Swap Dealers, Swap Dealers as a new separate class and
Money Managers. Having different trading objectives and functions,
their net positions have dominant bias, with money managers being
net long and swap dealers being primarily net short. However, their
net positions fluctuate with changes in gold price, and periodically
can reach extreme levels.

Presently, Money Managers have held the largest net long position
since gold first penetrated the $1,000 mark in March 2008, only to
drop by 30% in the subsequent seven months. Swap Dealers that
were heavily net short gold in March 2008 have now even larger net
short OI. In contrast, at the October 2008 lows, Money Managers
were only marginally net long, while Swap Dealers were "even."

My interpretation of the Net OI of these two groups leads me to
believe that gold is due for a pullback towards the previous
resistance level, now a major support, around $1,000. An argument
for such a pullback can also be made from the technical pattern
formed on the gold chart over the last two years.

Edwards and Magee, in their technical classic, regard this pattern as
a sort of inverted Head & Shoulders (H&S) bottom. A majority of
H&S bottoms mark major trend reversals. In contrast, inverted H&S
bottoms appear as consolidation patterns within a dominant uptrend.
The measuring formula (distance between the head and the neckline)
projects an eventual upside target of approximately $1,300.

** What the Best Benchmark in China Is Telling Us
-- Ahead of the Street Column, by Mitchell Clark, B. Comm.

Third-quarter earnings are still pouring in and the numbers from a lot
of smaller companies are just now hitting the wires.

I always like to follow a number of companies to use as benchmarks.
I use these benchmark companies to help develop a view on the
economy and the stock market and to see if there are any new trends
developing. Smaller companies can be just as valuable, if not more
so, than large-cap enterprises in terms of developing a view on
things.

One smaller company in China that is a great benchmark business to
follow is E-House (China) Holdings Ltd. (NYSE/EJ). I wrote about
this company back in May. It doesn't really matter what the stock is
doing; what's important is how the company is performing
operationally. This company operates in the real estate business in
China and if it's doing well, China is doing well.

E-House is one of the largest real estate services firms in that
country and the business was founded in 2000. The company sells
primary and secondary real estate agency services and operates in
more than 50 of China's biggest cities. Currently, E-House is selling
residential and commercial real estate properties in all major regions
of China. You couldn't find a better benchmark company to follow if
you tried.

The company's latest numbers recently beat consensus estimates as
third-quarter revenues grew a substantial 119% to 86.2 million
dollars. For the first nine months of 2009, the company's revenues
grew 58% to 182.4 million dollars. E-House's total gross floor area
(GFA) of new properties sold grew to 3.3 million square meters in
the third quarter, representing a huge increase of 235%. Most
tellingly, the total value of new properties sold was $4.3 billion in
the most recent quarter, up a whopping 314% from about $1.0 billion
in the same quarter last year.

The latest quarter brought earnings of about 34.9 million dollars,
which was an increase of 220% over the comparable quarter. Fourth-
quarter revenues are currently estimated to be between 103 million
and 106 million dollars, representing a substantial gain of about
165% over last year.

E-House is a great company to follow even if you aren't interested in
the stock. What this company reports is incredibly valuable to an
analyst or investor. Right now, E-House is saying that business is
booming -- and so are property values. In my view, it's one of the
best signals yet that China is actually growing at a faster rate than we
think it is.

I wrote before that the real estate market is like the stock market's
opposite. The business cycle in real estate takes a lot longer to
unfold. In the U.S., the stock market is climbing, while real estate is
struggling to recover. Eventually, however, the health of the real
estate market is required to maintain the health of the equity market.
E-House is saying that the real estate market is booming once again
in China. All the more reason to have some dollars allocated to that
part of the world.

** Limiting Risk, But Still Making Some Profits
-- Calling the Trend Column, by George Leong, B. Comm.

The rally continues to proceed after another strong up day for stocks
on Monday. The DOW closed above 10,400, while the S&P 500 is
above 1,100. The major market indices have closed higher in eight of
the last nine sessions and look technically bullish, albeit also
overbought given the buying. Trading volume is somewhat light,
which is not what we want to see during a rally, as it could point to a
divergence between price and volume. The CBOE Volatility Index
(VIX) is relatively low, an indication that traders believe more gains
are coming.

My sense is to continue to ride the rally, but also take some profits
along the way, as we have had numerous triple-digit gainers.

If you decide to absorb some profits, but still want to partake in
future potential upside, you may want to trade some options.

For those of you familiar with options, you know that option trading
is not all about rolling the dice and praying that you are on the right
side of the trade. The reality is that your risk from an options trade is
generally manageable and generally predetermined, as your total risk
is represented by the cost of the option trade or premium that you
paid. For example, if you buy a call option on a stock, your risk is
limited to the cost of the call option; however, your upside potential
is unlimited and only restricted by the expiry of the call.

For illustration purposes, let's demonstrate the limited risk profile of
options. Assume you like networking giant Cisco Systems, Inc.
(NASDAQ/CSCO) and decide to buy 1,000 shares at $23.84 per
share for a total outlay of $23,840. Now say you made a mistake and
the price of Cisco plummets to $10.00. You would then be on the
hook for a loss of $13,840. Take a look at the alternative.

You can partake in the same 1,000 shares position of Cisco through
purchasing 10 call options of Cisco (each contract represents 100
shares). For example, you can buy 10 contracts of the April 2010
$23 Call Option for a premium of $230.00 per contract, or $2,300
total for the 10 contracts. This would enable you to benefit fully
from the gains of 1,000 shares of Cisco, but without the major
downside risk, assuming the same scenario in that Cisco declines to
$10.00 and your options expire. As the holder of 10 call options, you
would simply let the expiry lapse and take the loss.

But, as I said, the loss is predetermined and limited to the premium
that you put forth, which was $2,300 in this case. Let's compare.
Your loss of $2,300 under the option strategy is far better than the
$13,840 loss via the direct purchase of the stock. The only thing is
that, if you hold the actual stock, it's only an unrealized loss, and you
could in fact keep the 1,000 shares of Cisco and wait for it to
rebound higher. This is a major disadvantage of options in that time
is always against you, since options are a wasting asset that
depreciates as you move towards the expiry date.

Timing is everything in option trading. I will discuss in detail the
concept of time in subsequent columns.

But, overall, if you think about it, options are excellent risk-reward
trades for speculators willing to assume of risk of losing the
premium.

** Why Tumbling Dollar May Put America on the Chopping Block
-- The Financial World According to Inya Column, by Inya Ivkovic,
MA

Very few have predicted the kind of funk that the U.S. economy
would slip into 18 months ago. Even the Oracle of Omaha, Warren
Buffett, missed the warning signs of the panic and chaos that ensued
when financial derivatives unraveled onto credit and financial
systems. However, what Buffett did predict was the downward
pressure on the U.S. dollar. He knew that importing, more than
exporting, would eventually force the dollar to weaken. Two winters
ago, he said, "Force-feeding a couple of billion a day to the rest of
the world is inconsistent with a stable dollar."

Many Americans think a weak dollar is good for a number of
reasons. Particularly vocal are the exporters, who get to sell more
stuff that is now cheaper on international markets, potentially
resulting in a lower U.S. trade deficit. Of course, to make it really
work, it would have to be selling less of Wal-Mart and more of
Boeing. Better yet, even China has hinted that it might play into this
"strategy," if it could be called such, by allowing the yuan to
increase against the greenback.

Undoubtedly, a higher yuan is bound to please the hard-hit
manufacturing sector that has had a beef with China and its policy of
controlling the yuan at great cost to workers in developed countries
for quite some time. However, there are two sides to every
calculation and those cheering the dollar's fall are forgetting the flip
side of its relationship with the trade deficit.

It is a simple, yet scary equation. The more Americans trading their
wealth for goods and services manufactured and offered outside the
country's borders, the greater the risks of putting the country on the
chopping block. During the first three quarters of 2009, the U.S.
spent approximately $275 billion more on imports than it received in
income from exports. Keeping such an imbalance between imports
and exports year after year, decade after decade, cannot help but
result with a huge pile of claims and IOUs against the U.S., the
majority of which are held by China. According to some estimates,
China is holding a Mount Everest of dollar bills and other foreign
currencies, likely totaling a whopping $2.0 trillion.

Over the years, China has presented itself as the "kind foreigner,"
lending quite a few of that $2.0 trillion back to the U.S., just so that
the latter could keep its lights on when things got really dark during
the Great Recession. However, even China is bound to tire of getting
the low-yielding T-Bills in return for its kindness from a country
suffering under high deficits and donning a weak currency. That is
not a description of a good investment, even if its guarantor is a
country such as the United States. Sooner or later -- more likely
sooner -- China and other kind foreigners are very likely to start
asking for something more in the way of returns.

These higher returns may come in the form of higher interest rates,
which also mean decreasing economic growth rates. Alternatively,
foreign lenders may seek to trade some of their U.S. dollar holdings
for ownership in prime U.S. companies. This is not something we
should put by China, because it has tried it before. For example, in
2005, one of China's state-controlled oil companies has tried to take
over Union Oil Company of California (a.k.a. Unocal), but had to
give it up after being met with a towering wall of political outrage.

In 2009, however, the U.S. has much less moral and political credit
to block such takeovers from happening, especially if China appears
to be playing along by increasing the yuan and keeping certain
Congressmen from manufacturing states happy. Besides, there are
plenty of battered investors out there, too, who would want nothing
better than to collect the takeover premiums, tender their shares and
never think about them again. There is a long list of U.S. large-caps
that have given virtually nothing to their investors over the past
decade, so selling them off to the Chinese would mean to many
nothing more than good riddance.

Eighteen months ago, Warren Buffett said that, "The truth is we're
selling America to the rest of the world. It's just a question of in what
form we sell it to them." Everything else being equal, it seems to me
that selloff is likely to come in the form of foreign acquisition and,
considering how fast the dollar is sinking, the time for foreign
ownership might come sooner, rather than later.