The Case for Gold
First of all I would like to advise readers that I am not a perennial gold bug, any more than I am a drug bug, tech bug, utilities bug or whatever. I had very little to do with gold or gold shares between 1980 and 2000 because, throughout this period, gold was stuck in a long, boring bear market. There were much more interesting things going on, like the dot.com and tech booms, for example, and even President Clintons extra-marital liaisons.
But what a difference a year or two can make! Suddenly everything is stood on its head - what was in fashion is now out of fashion and "that barbarous relic" is suddenly the place to be!
I seem to remember President Reagan revealing with pride that the thin black ties he'd hung onto since the 30's had come back into fashion in the 80's - it just goes to show what can happen if you wait long enough. But gold bugs maintaining a bullish stance on gold between 1980 and 2000 can be likened to Ronald Reagan wearing his black ties from 1935 clear through to 1985. I'm quite sure he didn't do that, except at funerals.
Anyway, the reason I've turned up on the gold scene is because I'm convinced it's the best game in town and will continue to be so into the foreseeable future. The case for a major bull market in gold is now overwhelming, both fundamentally and technically. While the fundamental arguments are both important and very interesting, I prefer to read about them than write about them, especially as they can get long-winded. As a market technician I will therefore, for the most part, stick to my area of expertise and attempt here to evaluate the outlook for gold over the next several years from a technical standpoint and also make an assessment of where we stand right now and of what is likely to happen in the near future.
There's a very true saying, which is "to know where you're going you have to know where you've been" and nowhere is that more true than with the analysis of charts.
So we'll start by looking at the very long-term chart for gold going way back to 1968.
We all know about the huge rise in gold in the 1970's, which was triggered by coming off the gold standard and fuelled by inflation and war fears etc. But since 1980 gold has been stuck in a miserable bear market while many other investment vehicles have performed wonderfully well. Notice how the dollar price of gold sank lower and lower over the 20-year period to 2000 and, although dollar inflation was low throughout much of this period, it was not non-existent, so in value terms we are looking at a REALLY SEVERE BEAR MARKET. The opportunity cost of remaining in gold and gold shares during this period has been enormous.
One of the reasons for the developing bull market in gold is that when gold bottomed at around $250 - $270 an ounce, gold producers were increasingly forced to abandon new exploration and "high-grade" their existing deposits in order to maximize revenue relative to costs. This has resulted in future mineable reserves dwindling - a bullish development for the price.
Another plus for the gold mining companies is that these prolonged low prices have resulted in surviving companies being "leaner and meaner" - they are much more efficient and every dollar increase in the price of gold goes straight through to their bottom line. Still another point to consider is that we are in dollar bear market - foreign capital is deserting the States - this means that the dollar price of gold must rise, just to hold the same value.
Looking now at the intermediate term chart above, there have been some exceedingly bullish technical developments over the past several years. The first thing to note is the development of a large, clear "double bottom" formation around the lows of 1999 and 2000. Many hack financial writers have picked up on the term double bottom and you quite often hear any two adjacent lows being described as a double bottom by the talking heads as a spurious justification for their bullish forecasts, but this is the "the real McCoy". Also of great interest is the fact that during the mid-late 90's and up to the present gold has marked out a massive Head-and-Shoulders bottom reversal against the Swiss franc, the world's top rated investment currency - meaning that gold is about to significantly out perform the Swiss Franc. The next point to note is the huge pickup in volumes in the gold shares when they rose from their lows - and whenever they go up. This is of enormous importance. This tells me that this is for real, not just another phony rally to be followed by another slump.
Now look at the 3-year chart below. Look at the rise from the low at approx. $255 to where we are now and you will see that this is an orderly uptrend which I have delineated with trendlines, in complete contrast with the unsustainable spike off the lows which occurred in 1999, which is also visible on this chart. Bear in mind, however, that until we clear the very strong resistance in the $340 area, we are still in the double bottom base area. Once $340 is cleared the uptrend should accelerate dramatically. Finally, we now have a rising 200-day moving average, a further indication of a long-term uptrend, which supported the price on the recent plunge back to $300.
"Ah", but I hear thousands of you would be buyers cry, "gold can't go up much, might even go down, because the market is manipulated - "they" won't allow it to go up, because of their huge short positions and will get the central banks to dump palettes of gold bars on the market if it threatens to". Oh, really? I'll tell you what I think of this widely disseminated theory. I think there is fair probability that it is a smokescreen to put ordinary investors off buying gold stocks, indeed to get them to sell, and also to prevent run-of-the-mill market advisors and letter writers from recommending them to their clients. GATA et al may even be "on the payroll" of this plot, if that's what it is - but I emphasize that this is an unsubstantiated suspicion on my part. Meanwhile, smart money has "backed up the truck" and is getting gold stocks on board like there's no tomorrow. When the time is right GATA et al will simply "evaporate" as gold goes steaming up. Even if these stories about huge short positions are true, it is quite within the realms of possibility that wealthy smart money investors are buying heavily while leaving corporate entities, who they possibly work for, to carry the can with the huge short positions. Again, if true, such short positions will eventually lead to a buying panic as those on the wrong side rush to cover or face ruin. If GATA and its associates are indeed correct, and I haven't ruled this out, Bill Murphy and the gang are making so much noise about this now that it can't be that long before the accused, that is to say, Goldman, JP Morgan and the others are dragged before the regulators and the matter is addressed. Either way gold goes up, either way, we as gold investors, win. The losers will be the mugs who have allowed this "red herring" story to deflect them from the opportunity of a lifetime. My bottom line in all this is that the charts say that gold shares are being heavily accumulated and are going up and going up enormously.
Gold has been turned back from the $320 - $340 area so far because it has come from a relatively long way beneath, as shown by the position of the 200-day moving average on the charts. But this average is rising inexorably towards that resistance level, signalling that gold is gaining strength and will take out that resistance level when it's good and ready and that time is not too far away now.
I see the pressure to break the resistance at $340 building steadily; we have ever increasing demand from investors looking for a safe haven, which is likely to accelerate dramatically, South America in deep trouble, inflation/stagflation in the US resulting from massive increase in the money supply and the risk of hyperinflation in Japan and last but not least an impending credit crunch resulting from the gradual realization by bond holders that, far from holding safe assets they are the proud owners of just another form of paper, which may never be honoured.
I don't buy Robert Prechter's argument that gold and precious metals are going to go down, in a deflationary environment, until the stockmarket bottoms (much lower than where we are now) for two big reasons. The first is that the massive increases in the money supply in the US and Japan don't suggest deflation to me, rather, the opposite. The second reason is the huge volume activity in gold stocks over the past year, which says to me that the bull market in gold is here - now. Prechter is one of the all-time great analysts who accurately predicted the great 90's bull market in stocks, but he called the top at 6000, I think, in the Dow, and it steamed on up to 11,500.
Likewise, Joseph Granville, another of the greats who understands market psychology better than anyone, got it horribly wrong in the 80's. Great they are, but even they can make mistakes - heck, even I've got wrong on occasion!
Technically the price is trending relentlessly towards that resistance within a clear trend channel with a rising 200-day moving average below. The third attack on a resistance level usually takes it out. The first was the vertical spike in 1999, the second occurred in May-June this year (I lump the July rally to approx. $325 together with this), the third assault on this level is likely to be only a matter of weeks away now and this should be really interesting.
Alright, we've considered the long term and the medium term outlook for gold and both are excellent, Now, what about the short term outlook, where are we now?
In late July - early August we had a short, sharp correction in gold and a vicious selloff in gold stocks, which had gotten ahead of themselves. This selloff took the gold stocks from being somewhat overbought on a medium term basis to being rather oversold. It did not dent the overall bullish picture - gold remains within its medium term uptrend channel with the rising 200-day moving average beneath - and the overall bullish pattern on gold stock charts was not broken. Gold and gold stocks now appear to be basing in readiness for renewed advance - and this time I reckon we will see $340 seriously challenged.
Many gold stocks are now basing in the vicinity of their rising 200-day moving averages and, in the case of many quality exploration stocks, just above the strong support of their long bases, which in some cases go back years - the perfect buy spot.
Many gold stocks are now straining at the leash and close to making major upside chart breakouts to start the next major move - there are so many I would need half a page to list them. I see the point we are at now as absolutely as the "last chance saloon" to get into these stocks at dirt-cheap prices. OK - we MAY pull back again a little over the next week or two, but I wouldn't bank on it. We will not see these low prices again for many years, if at all. Thousands, maybe millions, will in the future look back to this time and curse themselves for not getting in at these bargain basement prices just before the big move in gold. I see gold rising in the coming years in an accelerating parabolic curve culminating in a vertical spike to AT LEAST $2000. Another reputable writer is talking about $5000, but being somewhat conservative I like to err on the side of caution, but he may well be right.
So there you have it:-
Long term trend:- up
Medium term trend:- up
Short term trend:- after maybe a couple of weeks basing, up
What more do you want???
Gold Bullion
$311.10 at time of submission on 27 August 2002
Clive Maund
Clive.Maund@t-online.de
Kaufbeuren, Germany, 27 August 2002
DISCLAIMER by Clive Maund, Diploma Technical Analysis: No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.
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