Resource World Magazine

M I NI NG S P E C U L AT I O N S Le ona rd M e lm a n Technical Analysis for metals: a useful tool U nquestionably, it is of considerable importance within the world of mining share investments, to accurately identify important price trends, both in the underlying metals themselves and in the shares of the companies involved in their exploration, development and production. In general, there are two methods of analysis which can be useful in identifying and evaluating those trends: fundamental and technical. Fundamental analysis relates to factors which help evaluate metal supply and demand. This type of information might include new mining production, industrial usage, diminished production from aging mines, the level of economic activity, important political trends, etc. For producing companies, fundamental analysis examines sales, earnings and prospects. Technical analysis can be defined as examining charts of actual price movements and making decisions based on such chart behavior. Many books have been written relating to technical analysis and there are a multitude of variations on the general theme. Perhaps the most important one is Technical Analysis of Stock Trends by Robert D. Edwards and John Magee, a widely-read volume which has gone through many new editions through the decades. For general trend purposes, I prefer long-term charts and, for this column, I am using 40-year charts of gold and silver to identify potentially useful technical concepts. For gold (Au), investors may recall the vibrant bull market of 1976-80 when the yellow metal soared from barely US $100/oz to over $800 and it was a period when mining activity virtually exploded upward. This was followed by varying degrees of bearish activity for more than 20 years. However, beginning in 2001, upon a chart breakout from that period of bearishness, gold embarked on a period of rising vitality until the historic high at US $1,930/oz in mid-2011. A period of decline to present levels which stand close to US $1,245 in late November, 2013 then ensued. Silver's (Ag) path has copied that of gold in terms of bull or bear market timing, although the magnitude of some of its moves has varied from gold, from time to time. Both charts clearly demonstrate one of the principle adages of technical analysis which is that a breakout from a long-standing trading zone can be of great significance. An important charting adage is to "never fight the trend" and I turn to gold as an example, noting the 10-year rally from 2001-11. Fighting that powerful trend could have been financially disastrous. Another technical concept is that major trends can encounter 28 www.resourceworld.com RW December 2013.indd 28 substantial contra-moves and still remain intact, but history has shown that if such corrections return more than 50% of the prior advance, the major trend might be at a true end. We are currently faced with this concept in the price of gold where the bull move ran from US $260/oz in 2001 to $1,930 in 2011. One-half that advance would be $835 and subtracting that number from the peak at $1,930 leaves us with a 50% retracement level of $1,095 – perilously close to today's price. It must be noted that silver has now fallen well below the 50% retracement level of US $27.50/oz, based on the long rally from $5.00 to $50.00. As a former broker, I found chart analysis to be a valuable tool in metals analysis and I would recommend further studies. n DECEMBER/JANUARY 2014 12/11/2013 6:12 PM

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