Shhhhhh!Don’t look now but the Amex Gold Bugs Index just moved to fresh highs. The index closed at 405.26 on… … Wednesday 10/10, surpassing its May 2006 high of 401.

Based on the lack of excitement and publicity our guess is more to come.

Chart 1 – HUI breaking out

Now mind you, a move to new highs is never a fait a compli that a breakout is at
hand. Heaven knows we have endured many false breakouts over the years.

There are a few technical analysis tools one can use to determine if a breakout is
for real. The most popular is a daily close 3% above the breakout level (about 414
in our case). The other is 3 consecutive daily closes above the breakout level. In
effect, both indicators are a means of gaining confidence either through price or
time.

Incidentally, we find it difficult to buy breakouts for this very reason. We never
know if they are for real. We prefer to bottom pick oversold stocks – but that’s
just our style.

So IF we are seeing the long awaited breakout (and it is a big IF) lets indulge
ourselves and calcualte a few potential targets.

How high will the HUI go?

Based on our Fibonacci extensions we expect 750 within 6 months to a year. How do we
arrive at that?

We take the magnitude of the previous wave up (165 to 401 which is a 143% move). We
multiply that by the Fibonacci ratio of 0.618 to arrive at a potential wave
magnitude of 88%. We then extend the top of the last wave (401) by 88% to get 750.

We say 6 months to a year because all preceding up waves have been around that
duration.

Now let’s get really speculative!

How about a long term target Greg?

Chart 2 – HUI bull market

A technical difficulty in projecting a long-term target (based on the existing wave
structure) is that it is not clear when Major Wave 1 ended and Wave 2 began.

For example, did the 2-year correction between 2004 and 2005 represent the end of
wave 1 or did the top in May 2006 represent the end?

Our feeling (and it is just that) is that the entire period from 2004 to now
represents a rolling correction and the end of major wave 1. We base this on the
fact that these correction periods were longer than the intermediate corrections in
2001 – 2004. That is, the money presses were churning at a consistently high rate
between 2004 and now and the yield curve was flattening over the period. As opposed
to now when the yield curve is widening again.

That said, we calculate our target by taking the magnitude of Wave 1 as 401 – 35 or
1000%. Multiply by the Fibonacci ratio 0.618 and we arrive at a projection for this
wave of 646%

Great Greg! So how about the target?

Wait for it!

We think 3,000 is achievable by the end of 2009 (401 x (1+6.46)). That will mean
several stocks rising 5x or greater.

Now we all know why we’re here!

More commentary and stock picks follow for subscribers…

—

Greg Silberman CA(SA), CFA
target=”_blank”>greg@goldandoilstocks.com

I am an investor and newsletter writer specializing in Junior Mining and Energy
Stocks.

Please visit my website for a free trial to my newsletter.

Click here: target=”_blank”>http://blog.goldandoilstocks.com

This article is intended solely for information purposes. The opinions are those
of the author only. Please conduct further research and consult your financial
advisor before making any investment/trading decision. No responsibility can be
accepted for losses that may result as a consequence of trading on the basis of this
analysis.