Gold Market Opportunities

November 15, 2001

We read much that is bearish on gold and gold stocks in the financial press, but little that is bullish in scope. When was the last time you heard an advisor or newsletter writer heartily recommend getting long of gold stocks? How sad that most advisories are content to avoid the yellow metal like the plague even as the greatest bull market is developing in over a century and rock-bottom buying opportunities have never been more plentiful.

In the paragraphs that follow we'll take a look at some of the more attractive issues in the gold mining industry.

Although few people see it, gold has clearly bottomed above $250, has thoroughly established its base of support with absolutely no chance of breaking below it, and has been slowly drifting upward (though in sideways fashion) in an early bull market cycle channel. From the vantage point of our cycle charts this new-born is clearly visible. Right now there is a floor under gold prices around $278. Gold has better than a 50/50 chance of breaking above $300 by year's end, and next year should be the one we've all waited for as gold futures meets an interim cycle channel with a 45 degree slope. That means a gold price of well over $400 by the second quarter and then a continuation to higher levels as the year wears on.

Old favorite Durban Deep (DROOY) is online for an extremely bullish 2002. Currently coiling between $1 and $1.4, Durban has upside potential to end the year above $1.50 based on the cycle channels. Interestingly, the measuring implication of the triangle pattern in its chart also points to $1.50. Its dominant interim cycle channel has an upward slope well into 2002. A firm bottom has been established between $0.80-$1 and Durban has seen its lows for the year. Any attempt at trading Durban Deep for the short term must be done with the frame of reference of the triangle pattern for setting stop losses.

Another low-priced gold stock that has a continuously ascending cycle channel is Placer Dome (PDG). Although the slope of Placer's cycle channel isn't as high as that of DROOY, it is impressive nonetheless if only for its steady rise. Placer has seen its short-term bottom near $11 and should begin rising from here.

Anglogold (AU) has gold its bottom just below $16 and is consolidating for a run to test its Year 2001 high of $22. Pronounced insider buying is visible at just under the $16 supporting area on the tape. Anglogold will be the gold that keeps on giving over the next few months.

Too good to be left out of our recommended list of mining stocks is copper mine Phelps Dodge (PD). This stock must surely qualify as one of the best opportunities for racking up big percentage gains from a major bottom. Phelps Dodge has bottomed above $25, where insider buying was apparent on the tape. The cycles are starting to turn up for PD, which looks to have an extremely bullish 2002. As one analyst recently noted, "Copper is the most important metal needed for all economic activity and all those military armaments use copper also. There's never been a bull market that didn't start or end with copper. PD is so beat up it went back to the 1987 level! A minimum bounce will take the stock up 50% so it is a buy in all accounts."

Many today believe that gold is a completely controlled market with no hope of ever again realizing a bull market. They argue that central banks and other financial power brokers have capped the gold market and control it to such an extent that any attempt at driving up the price of gold by free market forces will instantly be quashed. But is this true? In his classic book, "Bear Markets: How to Survive and Make Money in Them," Harry Schultz writes, "It's only reasonable to ask why we have to have bear markets. Many think we should have progressed far enough in social structure, in government guarantees, floors, and protection, that we should have no more depressions, recessions, or bear markets. But to so think is to say we have repealed the law of supply and demand, and stopped the pendulum that swings from surplus to insufficiency, or that we have been able to arrest all natural cycles." As Schultz correctly points out, the laws of supply and demand, of equilibrium and disequilibrium, of rhythms and cycles; indeed, of human nature itself, would all have to be eliminated before such an unmitigated level of control could be attained over the gold market by any one single interest. Put another way, the gold conspiracy theorists postulate that the natural and centuries-old cycle governing gold price fluctuations have been nullified and that greed and fear itself-the essence of all market dealings-has been eliminated. The fallacy in this line of thinking should be sufficiently clear.

Expect the XAU index to fluctuate in a more or less sideways trading range over the next few weeks. The parameters of this range are between $53 and $58. Closer to the end of the money the XAU should touch the extreme lower boundary of this range where it meets with an important cycle channel slope. This should mean that the XAU finally gets going again to the upside in December and will be in a great position to enjoy a bullish 2002 as the cycle channel projects up to above $70 early in the first quarter of the year. A lot of traders were fooled by the false breakdown below the XAU's recent triangle pattern and assumed a new leg of decline had begun. This was little more than a "head fake" that was engineered to shake out the weak hands and small money traders while the big interests accumulate more gold shares under cover of weakness. We concur with the recent analysis of cycle expert Michael Jenkins who wrote, "Now that we're at the one year point from the lows last October it could be a time to watch for a six week to three month consolidation pattern and you would still buy dips but use stops on all positions. I think this is a major 5 to 7 year bull market for gold so any new high breakout would be a time to increase positions if you didn't buy on weakness."

Veteran invest counselor Samuel M. Robbins (300 Prince St., West Newton, MA 02166), providing confirmation for our ongoing forecast, wrote in a recent investment policy letter that the "greatest crash in history" should occur beginning by no later than the first quarter of next year, adding that "gold should anticipate the flight from the dollar with the final bottom soon." His comments merit repeating:

"America is 'over-everythinged.' America is over-borrowed, over-spent, over-consumed, over-stored, over-capacity, over-built, over-invested, over-indebted, over-margined, over-leveraged, over-indulged, over-optimistic, over-confident, over-blow, over-inflated, over-regulated, over-governed, over-grown and over-sexed. That is just for starters.

"Don't even consider the rest of the world. Just remember that if America sneezes, the rest of the world catches pneumonia, especially in this day and age of antibiotic-resistant bacteria".

"A distant early warning may be seen in the price of Treasury bonds: they have been declining ever since the Federal Reserve Board has been lowering interest rates in anticipation of the great depression that will follow the great crash." This may well be the beginning of the flight from the dollar under the cover of the strong dollar which is killing our exports and stimulating imports. We are shipping 30 billion paper dollars a month overseas. Foreigners may find our dollar safer than other paper currencies, but not safer than the one international currency that has survived down through all of human history-gold. Little wonder that the recent silly Bank of England sale of 20 tons of gold fetched bids 4 times the amount offered, and that in the face of future sales coming this year and next. How typical of government to be selling after 21 years of decline. One must conclude that gold is too important to be entrusted to government. Private investors know what to do with it, especially Orientals." If it were not for bank sales, the gold price would be skyrocketing. The first rule of investments is that 'ALL SALES ARE FINAL.' The banks can't sell the same asset twice."

Robbins also points out that the point and figure chart target for gold is $470/oz. short-term, $950/oz., long-term, and $1275 even longer-term. His forecast again closely parallels ours, although we use different methods to arrive at the same conclusion.

We are adding a special gold stock portfolio to our Bear Market Portfolio in the Bear Market Report. Subscribers will be updated as to trading positions three times weekly. The precious metals sector is finally coming into its own even as the bear market in stocks continues to develop.

Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy.  The forecasts are made using a unique proprietary blend of analytical methods involving cycles, internal momentum and moving average systems, as well as investor sentiment.  He is also the author of numerous books, including most recently “2014: America’s Date With Destiny.” For more information visit www.clifdroke.com.

The California Gold Rush began on January 24, 1848 when gold was found by James W. Marshall at Sutter's Mill in Coloma.