GOLD: Bullish factors

A new investment era has started amidst a sluggish economy, a falling Dollar, a bear market in stocks and bonds, deflationary pressures, deficit spending, soaring money supply, inflationary pressures, historically low interest rates, a booming housing market, the new war on terrorism, the Middle East and Pakistan-India conflicts. The list goes on, but the bottom line is, times have changed and it's now gold's turn to shine.

Gold's new bull market is based on fundamentals, probably more now than in 1980 when gold reached its last major peak. Then it was inflation, a weak Dollar, super high interest rates, with the grand finale being the Russian invasion of Afghanistan.

This time it's more complex with international tensions, terrorist threats and repercussions much greater than at that time. Plus, inflation and deflation are pulling at the markets, the stock bubble is deflating in an ongoing decline and the Dollar is at a 15-month low.

Inflation isn't a problem today, but it will be if the Dollar falls further and considering the soaring money supply and its inflationary implications. Keep in mind, Alan Greenspan has created more money than all of the Fed chairmans combined since the Fed was created in 1913!

Slowly, money is moving into real assets. The investing public isn't in the golds yet, but they're watching them outperform everything else and some investors are starting to move in. As this trend grows, it could drive gold sharply higher.

GOLD: At onset of major rise
The gold price is of course the motor behind the gold share boom and there seems no stopping the rise as long as the Dollar stays weak, which is THE key driving factor. And the way things are going, the Dollar could continue to decline for another year or two. You'll remember last time we showed you gold's big picture and the 1-4 cyclical movements since 1980. The #1 rises are the best rises in the cycle and the current #1 rise began two years ago.

Chart 1C shows a close up of the movements since 1997 and gold's leading (long-term) indicator is now at a 14½ year high! This is super bullish and it's leading the gold price higher. This means if gold can now rise and stay above $325, it'll be entering a new stronger phase of the bull market (see Chart 1A).

The next hurdle to overcome would then be the major downtrend at the $360-$380 level. Once broken, gold would be entering a potentially explosive type of bull market and the public would certainly take notice. After that, $500 is the next milestone, which was the strong resistance level in the 1980s. Then the 1980 peak would be the ultimate target. (Please refer to our article of May 28, 2002 for more on gold's bullish big picture.)

These are all stepping stones during gold's bull market rise. And as long as the major trend remains up above $283, the 65-week moving average, these stepping stones can be attained. But it may not happen right away.

Corrections are part of any bull market and some can be volatile. For now, a correction would be normal and it could last a month or so, considering that gold has moved up too far, too fast.

Gold's medium-term indicator has been excellent at identifying these intermediate moves because gold is a cyclical market and it consistently moves in an A to D pattern (see Chart 1B). In other words, these cyclical moves usually last a month or two within the major trend, which is currently up.

Despite the recent weakness, gold's C rise is still technically underway and it's the best intermediate rise during a bull market. The C rise began in mid-March and it'll continue if gold stays above $319. The indicator is now at a 2½ year high and this C rise could last a while longer.

But if $319 is broken on the downside, a D intermediate decline will begin. Gold could then fall to $305 but it would still be very strong. Even in the unlikely event gold falls to $283, it would still be bullish and the major trend would remain up, meaning gold is headed still higher.

  By Mary Anne and Pamela Aden
  June 15, 2002

  This commentary has been provided courtesy of adenforecast.com

Mary Anne & Pamela Aden are internationally known analysts and editors of The Aden Forecast, a market newsletter providing specific forecasts on gold, gold shares and the other major markets. Click here to visit their website at http://www.adenforecast.com