Short-Term Gold Update

COMEX Gold Futures saw a two-day double top last week near the $308 level. A pullback and consolidation is underway with perhaps more short-term price weakness to come. The good news is that gold has made it above $300 with ease and has broken above a critical resistance area near $296. This establishes a new upward trend that should last for several months. Once $308 immediate overhead resistance is cleared we can expect a test of the next benchmark area around $335-$345.

Since the September high at $296 gold has broken through no less than five layers of supply between November and January. This is the mark of a healthy baby bull. In the past, gold rallies that failed and reversed took ages to regain the lost ground and supply hung like a dead weight around the market's neck for months at a time. Yet gold's last correction only lasted about 10 weeks and prices exceeded the September high. In the process several new layers of demand have been created in this market as delineated by the multiple parallel channels in the gold chart. A sign of even greater short-term strength would be if gold manages to keep above $290-$292 throughout its latest correction. This would add even greater impetus to its next upward leg.

We mentioned recently that gold's dominant interim cycle (the 40-week cycle) is up into spring and we should have a ways to go before gold's next serious correction.The cycle channels have aligned across all timeframes and are pointing to the target chart resistance area near $345.

Looking at a two-year continuous contract gold chart provides a magnificent perspective of where we are along the gold cycle. Three distinctive parabolic bowls are visible in the gold chart from January 2001 to the present. We are presently completing the third (and presumably final) bowl before the blast-off in gold prices, which nearly always takes place after a triple parabolic bowl-shaped bottom. This is more than just an inverse head and shoulders pattern, it is extremely parabolic in nature which means that not only are the commercials heavily accumulating but that long-, intermediate-, and short-term cycles have aligned beautifully to produce an extraordinary rise in gold prices.

Many ask how gold can mount a sustained rally in the face of runaway deflation for most other assets. This is possible only due to gold's inherent worth as a form of money and store of value. Gold appreciates in value during times of extreme deflation due to the extreme buildup of debt and interest on debt during the preceding boom phase of the economic K-wave. Deflation is caused by debt buildup and the consequent shrinkage in the supply of money as compound interest saps more and more money from the system until finally none exists and prices collapse. Gold is not a liability, therefore it does not collapse but actually appreciates in value relative to everything else.

P.Q. Wall, of P.Q. Wall Forecast, wrote something worth quoting in his latest newsletter. Concerning gold he wrote, "We have often mentioned a coming implosion of third world currencies. Argentina is trying to prevent a further run on its banks by freezing all accounts of any size. And the more the news of world wide debt collapse begins to hit home in the third world, the more the populist backlash from demagogues, and the more demand for gold will rise." We echo these sentiments.

Someone writes, "Recent developments, precipitated by the Enron, Global Crossing stories etc. have raised a concern of mine. How can we (investors) be assured that the gold mining industry has not been infected with "Enronitis", and could therefore be vulnerable to some of the same accounting schemes that are popping up in other industries? Is there a place (source of information) where one could determine how "straight" the accounting practices of a particular gold/silver mining companies practices are?" The answer to this question is that the gold mining industry, while not immune to "Enronitis," will almost certainly not be experiencing this deadly malaise anytime soon. That's because the gold industry has already had its version of Enron with the 1997 Bre-X scandal. News-making corporate scandals and "book cooking" schemes commonly come to light about 2-4 years before the final trough along the dominant long-term cycle for any given industry. The techs and blue chips have entered this phase where scandals, excessive debts and hidden manipulations are coming to light. Gold has already passed this phase-about 2-3 years before the orthodox bottom in gold prices-right on schedule. The worst always comes to light just before the final collapse and sell-off. The gold mining industry is now clear to begin a new bull market as all the excesses from the previous cycle have been either absorbed or "washed away" by the market.

As for where information on potential Enrons might be obtained, the best place we know of is the chart itself which contains all an investor really needs to know about supply and demand along with any "unforeseen" events that will influence the supply/demand balance in the near future. The composite chart of the gold industry fits every criterion for an emerging bull market. As such, "Enronitis" does not appear to be a threat.

The XAU mining index has met a wall of short-term resistance beneath 70. It will likely take several days of consolidation before the XAU mounts an effective rally to break through this barrier. Many gold mining stocks share the XAU's recent chart pattern.

Newmont Mining (NEM) is presently consolidating from its recent run-up and should be avoided at the moment until the price stabilizes and shows signs of resuming its upward trend. Right now its 10-day moving average has pulled too far ahead of its 20-day MA for any upward move to be sustainable. Another week or so should do the trick.

Royal Gold (RGLD) will be a big winner among low-priced gold equities when the upward trend resumes next month. Prepare to get long this stock on our signal.

Blue chip Barrick Gold (ABX) looks like it may sell-off, short-term, down to the $17 area and possibly as low as $16 support. Avoid long commitments to ABX; aggressive short-term traders may wish to sell short Barrick with a close protective stop.

Gold Fields Ltd. (GOLD) has met resistance near the $9 area and is due a pullback in coming days. Await a crossing above $9.20 before re-establishing long commitments.