WHY GOLD IS STRONG

The current world situation is also more serious than in 1980 when gold soared to over $800. But with or without war, gold is on its way up.

Certainly, war will add fuel to the bull market and the latest run up in January was proof of this. The war tension probably pushed gold up $20-$30 more than it would have gone, and it's bound to continue.

Overall, we've clearly been in a tangible era over the last few years and we think this era over financials will continue for years to come. The world is changing and it's only just begun.

GOLD'S 8-YEAR CYCLE

Chart 1 shows the gold price since 1967. Gold was held at $35 an ounce from 1933 to 1968. So gold doesn't really have much free market history to analyze, but since 1968 gold's movements have been very consistent.

As you can see, gold has experienced a major low every eight years since 1969. Sometimes it was on the short side, like seven years in 1976, or on the long side like 8½ years in 1985, but the point is, it's consistent.

The last low occurred in February 2001, right on the eight year mark. Most interesting, each eight year low was followed by a rise that lasted three to five years.

RISING ON COURSE

So far, gold is following the pattern. It's been rising from the 2001 low for over two years now. It's in a bull market and on course to rise further. If past is prologue, we could see gold rise another year on the short side, or continue up until 2006 on the long side.

Comparing the bull markets, two of the four rises occurred in the 1970s during the roaring bull market. The other two were moderate bulls in 1985-87 and 1993-96.

The worst performing rise was in 1993-96 and the current rise has already risen more in a shorter time span. We can safely discard that bull market because the environment was so different then. That was the start of the tech boom where now we're in the tech bust.

Taking the next moderate bull of 1985-87, it produced a gain of 72% in almost three years. This means a similar moderate bull could take the gold price to the $440 level.

But this time is different. Gold is behaving a lot more bullishly for the first time since the seventies, but it's still to be seen if the wild moves of the 1970s return.

GOLD'S INTERMEDIATE MOVES

The major trend is up but within the major uptrend, gold has intermediate rises and declines, which is normal in any market. There will be times when the intermediate rises overheat and rise further than normal, just as declines that can go too far down, temporarily.

The bottom line is, the intermediate moves tell us a lot. For example, the strong January gold rise overheated and the decline to date has been normal. This alone tells us the market is strong.

Gold's leading indicator on Chart 2B identifies the intermediate moves very well and it has since the 1970s. The A and C rises are the intermediate rises in a bull or bear market. If these rises are strong and take the gold price to new highs, then a bull market has force (see Chart 2A). The C rises are most powerful because they tend to be the strongest gold rise in the intermediate cycle during a bull market. Late 2001 was the first time the C rise rose higher than the previous C rise in gold, and it coincided with gold rising clearly above its 65-week moving average, the major trend identifier. This was the first solid sign telling us that gold's trend had indeed changed to the upside.

The A rises are also important. Gold may not rise to new highs but if it does, such as in early 2002, it tells us the bull market is in full swing. Last September's gold A rise, however, didn't reach a new high, but it preceded the sharp C rise in December and January.

The intermediate declines also tell us a lot. The D declines tend to be the worst decline in the cycle. So if a D decline is moderate, it means the gold market is strong. During bear markets gold tends to fall to new lows during D declines, and conversely during bull markets, the declines will end higher than the previous low. You can see this clearly on the chart.

The current decline is a D decline. But if gold holds at the $330 to $350 level, it would show strength. In a worst yet unlikely decline, gold could fall to its 65-week moving average at $317 and it would still remain bullish.

Timing is also fairly consistent. D declines tend to last 10-12 weeks, so this one could end in April. But once gold rises and stays above $359, the D decline will be over. If the upcoming A rise fails to close above the February high, it won't necessarily be a bad sign. But a super strong bull market would take gold to new highs where the next target is at $415, the 1996 highs. The intermediate declines like now are the ideal times to buy new positions.

  By Mary Anne and Pamela Aden
  March 17, 2003

  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