I have stated that I liken the coming consolidation phase in the gold and silver market to that of the networking sector in the 1990s and I coined the term for the future consolidation as the "PAC-MAN" phase. Higher share prices for major mining companies such as Newmont Mining coupled with declining production is signaling that the consolidation phase which I have previously written about is at hand. As the share prices of networking companies vaulted higher they began to use their stock as "currency" in order to make acquisitions and offset the fact that their acquisition targets had also gained significantly in market value. The culmination of this paper "currency" acquisition frenzy, or as I like to call it "PAC-MAN" phase, ended with Cisco purchasing Cerent Corp. for 6.9 BILLION dollars in an all stock transaction late August of 1999. At the time, Cerent incredibly only had $9.9 million of sales and had lost $29.3 million in the first half of its fiscal year!!! Nortel had already purchased Bay Networks for $9 billion and Lucent had purchased Ascend Communications for $20 billion in all stock transactions. The main thing to consider here is that the companies which were making significant acquisitions during that time period watched their share prices climb to extraordinary levels while competitors were left in the dust. It was during this time that the "PAC-MEN" ruled.

Cisco Daily from 1990 to 2000

Cisco, led by John Chambers was the master of acquisitions making 12 to 18 each year at its peak and consequently their shareholders and management made fortunes during this remarkable time period. $1,000 invested in CSCO in 1990 was worth $1,640,000 at the top, an amazing 1,640 fold increase! As the chart shows, acquisitions increased as the paper value of Cisco's share price appreciated.

Cisco Weekly Chart from 1990 - 2000

Note the MACD on both the daily and weekly charts of CSCO as it shows the periods of consolidation and how long-term investors held on despite "sell" signals.  Of course the "wise" investors sold into the mania.  During this "PAC-MAN" consolidation phase companies such as Cisco were looking to make sure the acquisitions kept them in a "strong product cycle" which in turn kept their share prices climbing.

Lucent Technologies was also a large "Pac-Man" during this time eventually purchasing Ascend Communications for 20 billion dollars in an all stock deal using it's paper as "currency" two days after buying Keenan for 1.5 billion dollars.  During a four year period, Lucent gobbled up 38 companies while it's share price was on it's way into the stratosphere.

LU Daily Chart from 1996 to 1999

Now let's take a look at the Networking Index:

Even though companies in the NWX (Networking Index) already had extraordinary gains by the time the NWX was created in 1996, networking companies which understood the "PAC-MAN" concept began to aggressively make acquisitions using their stock as "currency."  These companies which ruled as "PAC-MEN" watched their share prices skyrocket!!!

Networking Index Daily Chart from 1996 to 2000

Just as the networking executives saw the need to keep the "strong product cycles" alive by continually purchasing junior networking companies, the big winners in the mining sector will be those companies whose CEO's understand the "PAC-MAN" concept and use it to acquire high quality juniors that add significant ounces to the balance sheet as the price of gold and silver skyrocket!

Now let's take a look at gold during the last secular bull market and how it ended in a mania:

GOLD Daily Chart from 1977 to 1980

The daily chart of gold from 1977 to 1980 shows the culmination of the last great secular bull market in gold.  You can see the daily MACD stretching to the sky near the 100 level.

Gold Weekly Chart from 1977 to 1980

A look at the weekly chart from 1977 to 1980 shows the weekly MACD exploding to the upside. We should look for the fireworks in this secular bull market in gold to be no less exciting.

Gold Weekly Chart from 1971 to 2004

As you can see from the above weekly chart of gold which covers 1971 through today, the weekly MACD went parabolic in the latter stages of the last secular bull market. Note that the MACD today is still hovering near the "zero" line. There is still unimaginable room to the upside in this secular gold bull market after gold finishes its consolidation around the $400 level

Now let's turn to the HUI (Gold Index) and its implications in the coming "PAC-MAN" phase:

HUI Weekly Chart from 1996 to 2004

As you can see, the HUI created in 1996 has moved from around the 35 level close to 260 at the recent peak and is currently trading above 230. This process of the secular bull market pricing up the major mining shares will allow them to use their stock as "currency" during the coming "PAC-MAN" phase. Although the price of junior mining shares have also appreciated, the major mining companies which use their shares as "currency" and "get the ounces" will position themselves for the greatest appreciation to the upside as the price of gold and silver soar, just as the major networkers who gobbled up junior networkers saw the price of their stocks soar.

In this secular bull market in gold and silver there will be major mining companies whose share prices will leave their competitors in the dust because they grasp the "PAC-MAN" concept first and begin to aggressively purchase high quality juniors adding ounces to the balance sheet in what will in all likelihood be a very, very long secular bull market in gold and silver.

By Eric King

March, 2004

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