Gold to Test Lows Near $270 Before Taking off in 2002

December 4, 2001

The gold market, in true-to-form counter-cyclical fashion, is trading opposite the equities market and the U.S. dollar, and will likely test the lows near $270 over the next several days. Silver, meanwhile, could see a bounce and feeble rally to $4.20-$4.25 before turning down to test the lows of the year near $4.00 - and perhaps slightly below. Both silver and gold are in the process of absorbing the last remaining lines of supply, and should be clear to launch their respective bull markets sometime in the first quarter of 2002.

Comex December gold futures are oscillating in sine wave fashion within a $25 trading range. The upper boundary of the cycle channels is at $295 with the lower boundary at $270 or slightly below. From the looks of the current cycle channel configuration, gold should continue meandering sideways over the next few weeks into early 2002 before finally turning around in the first quarter and heading upward to test psychological resistance at $300. Once the overhead supply that exists between $300-$320 is taken out gold will have the all-clear to trend upward and anon in a bullish Year 2002 for the yellow metal.

Platinum futures should be avoided right now. Although platinum is being accumulated by insiders, there is still at least one more line of supply to be taken out before it can begin moving higher in sustained fashion. This is also likely to begin early next year but not until 2002. The month of December, and probably January, will be somewhat bearish for the "white metal." Platinum's cycle channels are mostly drifting sideways but with a slight downward bias. Platinum futures on the New York exchange should meet with resistance at $460 then turn down to test the supporting floor between $410-$420.

A word about the U.S. Dollar is in order as everyone seems focused on it right now. The Dollar Index is technically short-term bullish going into December, and will likely move higher to test the November highs at $118 and possibly even make a move for $119. However, it is at this point that the cycle channels begin pressing against the dollar's attempts at moving higher.

By early next year the dollar should begin its topping process and by the second quarter will probably begin falling. Next year will be quite bearish for the dollar, and this translates into a bullish gold market. However, never underestimate the short-term strength of the dollar, particularly at the end of the year when bankers, governments, and investment managers across the country will be actively propping up the markets-including the dollar-in order to give the (false) appearance of strength as we head into a new year.

The XAU has so far held above critical underlying resistance at $44-$45 although a test of this area is possible in upcoming days. Since gold's cycles are mainly opposite to those of the broad stock market the gold and silver mining stocks can be expected to be under selling pressure for the better part of the next four weeks as the Dow and NASDAQ rallies continue. The mining sector will come into its own when the 120-week cycle for the broad market tops in February. Not coincidentally, at that same time a number of important gold cycles are due to bottom, which will pave the way for a bullish 2002 in gold. A convincing proof of this bullish 2002 forecast is found in the chart for Newmont Mining (NEM). Extreme buying volume came onto the tape last week, just as NEM touched the extreme lower boundary of a one-year cycle channel. NEM is still under considerable short-term weakness and will need some time to consolidate before launching a substantial rally. But the current position of its cycle channels suggest to us that the rally will be ready to begin in the January-February timeframe. Another mining stock that will be worth buying at that time is Glamis Gold (GLG) which is currently under accumulation and ready to move higher at any time.

Among leading silver stocks, Silver Standard Resources (SSRI) is a buy at current levels (near $2.00). Silver Standard has upside potential to $2.25-$2.45 between now and February.

One astute observer recently remarked, "With over $2 trillion now sitting in mutual fund money markets one can only speculate what the destination for some of that money will be. Keep in mind that the total market capitalization of all gold mining stocks is $38 billion. Yes, all the gold mines in the world can be had for under $50 billion. Look at it another way, AOL's market cap is $163 billion. GE's is $400 billion. JP Morgan's is $79 billion. Microsoft's is $344 billion."

Here are some pertinent comments by numismatic coin expert Patrick Heller:

  • The terrorist attacks provided stark reason why prudent investors should own hard assets like precious metals and rare coins for 'insurance.'
  • You don't buy fire insurance on your home hoping to collect on the policy after your house burns down. Instead, you hope the premium is the full amount you suffer out of pocket. But you realize that some homes burn down and that the insurance will rescue you if the worst comes to pass.
  • In a similar way, precious metals and rare coins are hard assets that can protect you from the sudden devastation in the value of your paper assets, including the U.S. dollar.
  • The prospect of any significant decline [in precious metals prices] is minor in my judgment-especially when you consider how much the U.S. government has inflated the money supply in the past three weeks. There is also a good likelihood that the stock markets have not reached bottom, if past history is any indication.
  • For the time being, you may wish to increase your holdings of gold, silver and rare coins from our normal recommendation of 5-10% of your net worth to 10-20%. I would not recommend platinum or palladium to the conservative buyer right now.
  • Silver is especially appealing right now. Although it is mostly used for industrial purposes nowadays, the shortage of new supplies over the past 11 years has cut deeply into remaining inventories. The burial of a mere 30 million ounces, valued about $125 million at the time, pushed up the world price of silver by 10%. It wouldn't take that much more demand to bring on a major price move-which governments would be powerless to stop because they simply do not hold enough silver that they could sell.
  • You may feel that you have missed the boat because you didn't buy gold and silver when they were closer to their lowest prices since the 1970s earlier this year. But, compared to what prices might be a few months from now, gold and silver are still great bargains.

We anticipate major adjustments to our Bear Market Report gold stock portfolio in first quarter 2002. The months ahead will be both challenging and rewarding.

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.