The CRB index is showing us that inflation is on its way, in a big way. The run from late 2001 has been relentless and coming off of a basing/consolidation pattern since 1986. Look carefully at the quarterly price closes of the CRB from late 2001 to present. Most of the closes are near the high of the price range. In addition the two quarterly bars which achieved the 'Jump over the creek' shows a classic confirmed valid breakout over a time frame of almost 20 years.
So the key words here with the CRB are strength, acceleration, consistency.
Make note if you will of the green shaded area during the mid 90's before moving onto the next chart.
Ok, so if the CRB index is an early warning indicator of coming inflation and gold is the ultimate inflation hedge, is it not reasonable to expect gold to jump the creek (and the green shaded area) just as the CRB index has done? In my opinion the answer is a resounding yes. I have been reading other various opinions that gold is now at a major intermediate top. But when I look at the chart above this text and the chart below this text I have a hard time coming to a bearish conclusion, especially with the enormous sign of strength shown by the CRB index quarterly tape action.
We do not have a 'Dow Theory' signal for the gold market, and yet I find myself thinking that the CRB index is the equivalent of the Dow Transportation index and the gold market is the equivalent of the Dow Industrials. So the CRB breaks out, and the soon to follow gold market does the same creating a 'Gold Theory confirmed buy signal' ? Well you get the picture of what I am trying to say here.
Note also the quarterly price bars on the CRB chart above during 1988. There was a sharp reversal and down-thrust that brought price back under the creek. This was quite bearish tape action and set the stage for lots more bear market action in CRB and gold. And yet we do not see any such bearish price action on the most recent quarters of price action on the CRB. A reaction down can still happen, but as of this writing and the most recent quarterly price bar on the CRB, price is holding firm providing additional evidence that gold will soon follow and not break down.
The more I look at the price movement of the last few years on the gold chart below, the more I can't help myself thinking the gold is price is running like a cheetah through the African grasses and is getting ready to jump the creek in a big way (See photos at bottom of this letter). This analogy may sound a bit comical, but in all seriousness price can run and jump just like any other 2 or 4 legged creature. In order to achieve a really good jump it is best to get a good run going first. A good run is precisely what we have in the gold market right now.
The second chart under the gold chart below is a chart of yearly inflation for the last 100 years. I posted this chart to show how inflation can creep in out of nowhere creating explosive spikes that burst out and then exhaust themselves. This helps explain why the gold market has such a volatile personality to it. Inflation starts to creep in slowly, settles itself firmly within the economy and into the psychology of the economy, but then it accelerates feeding and expanding on itself like bacteria in a chemistry experiment. Then it explodes in a vertical spike of exhaustion.
The 'spikey' character of inflation as seen in the chart below helps to provide insight as to how gold can tend to trade in explosive persistent price movements. This is important to understand before things become too active in the gold market.
Ok, onto the daily gold picture. I am speculating that we could be in the process of creating a reverse head and shoulders pattern below as of April 6, 2004. If so, then 410 gold is not out of the question. This could also be a cup and handle pattern with the head marking the bottom of the cup and the right shoulder being the handle.
The weekly MACD as of today's price close has again moved to the imminent crossover position instead of the 'bear-kiss' position. If price is able to hold above or at 420 for the rest of this week, it could be setting us up for a breakout much sooner rather than later.
I have not talked about the SnP or broad market at all, but it is worth noting that during March the gold market has pushed higher while the broad market suffered quite a severe beating. Before this, both markets were going up at the same time and correcting at the same time.
The shorter term bearish scenario is shown below and would suggest a move to 406-407 area for a test of the lower channel line. I am favoring the above scenario right now because of weekly momentum, but admittedly we are at one of those crucial decision junctures where near term price action could flip things either way very quickly.
In other words what I am saying is that we don't have enough price confirmation yet.
The next chart below is the monthly tape action of the golden bull run of the early 70's. I posted it to show the parabolic price arc trendline, and the persistent price strength that is characteristic of a bull market. Note in the chart where I point out those three 'most painful' swings at the bottom of each correction. Each bar looks like a shakeout and I cannot help thinking that the people who were watching the price action very closely right at the lows of that price bar probably thought that the bull run was over right before it reversed upwards and never looked back.
Notably each swing low kept occurring at a significantly higher level. This is symptomatic of 'sold out bulls' who sold too early and then later decided it was okay to pay an extra premium to participate in the continued strong price action. This is classic behavior in any type of bull market.
The bull run of the early 70's showed some amazing price strength as seen clearly in the first chart below. Note how price broke above the top channel line in very early 1972 and then held that level without breaking back down under the channel line. This is characteristic of a security or market with exceptional price and momentum strength. From April 6, 1972 to August 1st 1972 the gold price surged achieving its first double from the early 1970 lows.
Now I am not suggesting that the current run in gold is identical to the run of the early 1970's or that it has to be. But on the other hand there should be some similarities for the simple reason that gold trends to trade with a parabolic personality.
The second chart below shows the current gold run. Note how it too has broken out to the top of its rising upper channel line and as of this writing is still above it. This is starting to look like the similar setup that happened in the early 70's.
Note also the key date of April 6th and that we see price right near the 52 week high, similarly seen on April 6th 1972. Note that 2004 is also an election year.
The gold run of early 1970's made its first double within the first 3 years. Our current run has not done this and in my opinion is overdue to do so soon. Interestingly a double from the lows would put us right at next resistance around 520 level.
To keep this similarity alive in 2004, we really need to see gold hold above its upper channel line around the 405-410 area...
April 6, 2004