Prepare for the Breakout
I am bullish on gold, as is known by readers of my articles. Bob Moriarty, Joseph Granville, Richard Russell and many other influential pundits are also bullish on gold. Robert Prechter is bearish on gold, at least over the intermediate term, although bullish longer term. This intermediate term bearishness by Prechter and his Elliott wave organisation is a source of deep disquiet to many actual and prospective gold and gold share investors. As Richard Russell pointed out a few weeks ago, we are only ever dealing with probabilities in this business and the only person who gets it correct all the time is a liar. I believe that Prechter is wrong on this occasion with his intermediate forecast for gold. My studies of the volume patterns in gold stocks over the past year, in addition to the price action leads me to conclude that the bull market in gold and gold stocks is here now. Only time will tell who is right. Prechter's gold bearishness is based on his deflation scenario, and while I agree with him over the longer-term, that half point cut in interest rates a couple of weeks ago, taken in the context of all that has gone before, tells a very different story. The message that a drop in interest rates broadcasts to anyone who really understood its implications was this - "We will die, and take everyone with us, before we take the medicine". The financial authorities responsible for this action know that unless they keep interest rates low and print money like confetti, there will very quickly be gridlock, a credit crunch, implosion and deflation, which would have immediate implications for their position and reputation as individuals. So they have decided to put off the day of reckoning for as long as possible and continue to feed the ever more voracious out-of-control credit monster that they have created. They have decided to take the inflationary way out, but the problem is that the demands of this monster are now so great, and growing exponentially, that no matter how many bonds they create, no matter how much money they print, in the end they won't be able to keep up with it - and international investors can only be soaked so much, especially when they wake up to the fact that they are about to get creamed by a falling dollar.
These are very unusual times. Businesses in the USA and many other countries have very little pricing power. The moment they try to raise prices, in swoop the South-East Asian products manufactured in sweatshops - beat that for competitiveness! Isn't globalisation wonderful? You want free markets - you got 'em! But the US financial authorities have one last card to play to overcome that problem: collapse the dollar and price out the imports! This also has the advantage of collapsing the value of US dollar-denominated investments held by foreigners, effectively defrauding them out of a sizeable chunk of their investments - this is the way to deal with gormless creditors!
There's just one problem with this crafty plan, which will take the edge of it a bit. Other countries have thought of it too, hence the phenomenon of what is known as "competitive devaluation", in other words, the global ballooning of un-backed money supply and liquidity. More money chasing the same amount of goods, not just in the US, but in a lot of countries. Inflation. The US authorities, by mushrooming the money supply and crashing the dollar against other currencies, may be successful in improving the pricing power of US businesses on the domestic front beyond their wildest dreams - by creating hyper-inflation. Whichever way you cut it, paper money and the vast array of IOU's such as bonds, shares etc will become increasingly worthless. That only leaves one money - real money - gold.
Eventually all this will lead to a monumental credit crunch, in effect, a global default. Vast debits and credits will simply have to be erased, written off. Maybe those people in the states taking on huge mortgages aren't so dumb after all - they may end up on the street, but they are currently enjoying assets that they may never have to pay for! This will be the time of the great deflationary depression, a necessary purging process that has to be faced sooner or later. The fact that they keep engineering ways to stave this off for as long as possible only ensures that it will be that much worse. This will be the corrective phase that lays the foundation for renewed real growth.
While gold has marked out a large triangular pattern, which I believe to be a consolidation area, not a top, since it peaked in June, many investors have been driven out of gold shares by fears of the power of the "anti-gold cartel", Prechter's prediction or plain impatience. The result is that many gold stocks, particularly the juniors, are once again trading at bargain prices - particularly considering what is likely to transpire in the near future. Regarding the alleged conspiracy to cap gold's advance at a "Maginot Line" at $325, I have this to say; a bunch of banks, even if backed by a government, are not going to stop a primary bull market in an important commodity. The banks said to be involved in any case face a severe problem with derivatives and huge debts that will turn sour. British readers may recall a fiasco in the early 90's when the British government tried to defend the pound and keep it in the European Exchange Rate Mechanism. At one point, in desperation, they raised interest rates 5% in one day to no avail - the power of the market was too great. This conspiracy to cap the price of gold, if it exists, has about as much chance of success as a hedgehog has of crossing the London orbital M25 on a Friday evening. I view the large triangle that has formed in the gold chart since June as a consolidation, pure and simple, which has unwound an overbought condition as shown by the 200-day moving average catching up with the price, thus putting gold in a good position technically to make a major breakout from the massive base formation which has been evolving since 1999. The psychological importance of a breakout from this base, which will be indicated by a move above $340, cannot be exaggerated. A huge number of investors and a vast amount of capital will realize that this bull market is for real, it will no longer be a matter for debate, it will become an established fact. At this juncture, holders of bullion and gold stocks will naturally be loath to sell. A fresh wave of buying interest will encounter an extreme paucity of bullion and especially of gold stocks. It is worth pointing out here that the total value of all gold stocks in the world does not exceed the capitalisation of Microsoft, so there will be an extreme supply/demand imbalance.
While gold itself has basically moved sideways since its June high, many gold stocks, particularly juniors, have drifted back and now represent excellent value, particularly as a very big rise is believed to be drawing close.
An advantage that buyers of gold stocks have at this time is that relatively close stops can be set to protect capital in the event that I am wrong and there is a breakdown, with better than usual odds that they will not be triggered by a whipsaw move. This is because, while gold has consolidated in a triangle focusing in on the $320 price area over the past few months, many stocks have also stabilized around a price level, and can therefore be bought for a big move with relatively close stops. I will provide a list of promising stocks with their stop-loss levels shortly in another article.
Clive Maund
email: Clive.Maund@t-online.de
Kaufbeuren, Germany, 25 November 2002
Clive Maund is an English technical analyst living in southern Bavaria, Germany where he trades US markets.
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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