The fundamental case for a rising gold price is solid. It's important to remember that gold is the ultimate currency. It's been accepted as money for 5000 years. And gold's main reason to rise or fall continues to be based on the currencies. With the U.S. Dollar being the dominant currency in the world, it stands to reason that gold moves opposite to the Dollar.
Economic unrest is important too. But you could say, when the Dollar is falling it's because there's trouble in the economy. And that's precisely when gold rises.
Take the 1970s, for example, after Nixon closed the gold window. The Dollar began to float in the free market and the result was a falling Dollar and soaring gold all during the 1970s. Rising inflation was the problem then, which helped fuel both the Dollar fall and the rise in gold. But gold's basic reason for rising was due to Dollar weakness.
Gold then rose in 1985-87 when the Dollar fell, and again in the early to mid-1990s. But thereafter the Dollar was strong. Gold was not needed during the strong Dollar era and it declined.
That changed last year. The Dollar peaked 15 months ago and it's been falling in a bear market since then. In other words, gold has been rising this year primarily because the Dollar has been falling. The overall economic environment has fueled the bull market in gold, but as long as the Dollar stays weak, gold will continue to be a good investment.
WATCH $330 GOLD
As you know, gold and gold shares had a great rise during the first half of this year. Gold rose 19% and gold shares soared 66%. This rise caused a lot of attention, especially when gold shares became the best performing sector.
Since June, however, gold's been consolidating this year's rise. It tried and failed to surpass $330 in June and again in September, but the $330 level hasn't been an easy level to break because it's the next vital step in the bull market. When gold rises and stays above $330, the bull will be entering a stronger phase and this is very important to keep an eye on.
Chart 1 shows you why. It shows the gold price since 1982. The horizontal lines mark the major resistance levels in gold over the last 20 years.
The only two decent rises in gold's big picture since the explosive peak in 1980 were in 1985-87 and 1993-96. We call these rises #1 and they're the best rises in gold's major cycle. In both cases, however, gold resisted at its prior peak (#3). In other words, gold's been unable to rise above its prior peak since 1980.
The reason we're stressing this is because gold is at a similar level today. It's been resisting at the prior peak (#3 in 1999) since June. This means if gold can now stay above its 65-week moving average at $298 during weakness, and it goes on to break above $330 during the upcoming intermediate rise, gold will be flexing its muscles for the first time since 1980.
8-YEAR CYCLE COINCIDING
Another major cycle in gold's bullish corner is the eight year cycle (see Chart 1). The February, 2001 low marked the fourth consecutive eight year cycle low since 1969. And gold's been moving the same way it normally does following each eight year low. Gold tends to rise for three to five years after the low. Since gold's been rising for one year and nine months so far, this means it could still rise another year or two and the average time we could see a peak in gold would be in 2004.
GOLD: GOOD MEDIUM-TERM TOO
The good news is, gold's been unwilling to break below $300. It's been holding near or above $312-$315 since resisting near $330 in September. On a medium term basis, this shows strength.
Our subscribers know our intermediate indicator well shown on Chart 2B. Gold is full of cycles and this one identifies the medium-term. The As and Cs identify gold rises, and the Bs and Ds coincide with intermediate declines.
The latest "A" rise from the July 29 low to the Sept 24 high was an insignificant rise (see Chart 2A). It's the first time this year gold didn't rise to a new bull market high. But this isn't necessarily negative in the big picture.
As you can see, a B decline started in September and it may already be over. If it is, this would be very bullish action. So keep an eye on $315. If gold can stay above this level, the B decline was short and mild and a C rise is just getting started, and C rises tend to be the best and most bullish rises in the intermediate cycle.
Gold is looking good on a big, medium and short-term basis. We're keeping our eyes peeled because we're now at a critical point in the bull market.
By Mary Anne and Pamela Aden
November 7, 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