http://www.financialsense.com/fsu/editorials/petch/2008/0414.html

"...Does the above capture the essence of why PMJ’s have been held back thus far in the precious metals bull market, along with why prospects should improve moving forward? Largely, if I may say so myself, but there is more to talk about as well. Above I opine that hedge funds (on mass) will never play the juniors. Certainly Eric Sprott may have something to say about such a sentiment, and in thinking about how these hedge fund types like to control the markets they play, perhaps I am wrong in making such an assumption. Here, as liquidity dries up, characterized by a bursting hedge fund bubble, drastic measures by the survivors will have then searching for smaller and controllable markets with a good story, where PMJ’s fit this bill to a ‘T’. This could cause current valuations to treble against aggregate measures once momentum gets rolling. (i.e. precious metals stocks should be 12 to 15 percent of aggregate stock market measures at the pinnacle of their manic blow-off.)

This possibility is certainly borne out by key indicator diamonds (denoting pressure cooker conditions internally) in precious metal stock to commodity ratios, with this snapshot of the weekly Amex Gold Bugs Index (HUI) / Gold Ratio attached here a shining example in this regard. And while the diamonds might break to the downside first, which would likely occur with a lasting break in gold below the larger round number at $900, we know that because the real price of gold (see Figure 2) is far in excess of $2,000 using even official inflation measures, that at some point such a break would be proven false, and reverse to the upside through the four-digit barrier at $1,000 on a lasting basis. 

Then, once this occurs, which will act as an inflation signal to a sleepy investment community (focusing on hedge funds for now), not only will tightening liquidity conditions force investors to take another look at PMJ’s; but more, the pack-like predators that have their attention(s) focused in other sectors should show up here as well. John Lee describes the process in relation to silver in his latest attached here for your convenience. This should get momentum rolling, which in turn will bring in the small investors (in addition to hedge funds) who are also not afraid to pay up once prices start to run. So, the key then, or trigger if you prefer, is to watch for gold surpassing the $1000 mark, which could be sooner than most people think with lease rates now negative. (This means central banks will now pay you to lease gold.) A reversal in this regard would assure gold reading through the $1,000 as rising lease rates are always accompanied by rising commodity prices. 

In total then, and in reaffirming the primary reason we are here today, which is to determine if we are at or near a bottom in the dangerous but potentially lucrative PMJ market, it should be understood that sentiment is key in this regard, with factors like rising costs and liquidity conditions acting as triggers to first draw in the smart money (sophisticated speculators like us that watch the indicators), and then the momentum players (hedge funds and small investors) who will turn the larger move into a mania in due process. This is of course the process by which all manias are essentially derived, where a mania in precious metals will simply prey on people’s fears of system failure and inflation as opposed to greed. 

Just as an aside in this regard, and pictured just below for your benefit, watch the Gold / Crude Oil Ratio as the primary trigger for PMJ’s to begin making a move, where although perhaps rooted in fiction due to the fact crude prices could still rise, it will be perceived gold (and silver) are making gains on the aggregate cost structure, which will help bottom line(s), particularly of emerging producers like Novagold (NG:AMEX & TSX), Etruscan (EET:TSX), etc. (I will have more to say on specific company prospects later in the week.) It should be noted such a breakout is expected in associated with a break in gold above $1,000, not necessarily with crude breaking lower. Remember, a mania in precious metals will not be borne out of greed during ‘good times’ characterized by rapidly growing credit, but rather in the opposite, when money is attempting to secure enduring value and safety. (See Figure 2)"