1987 to 2004: From bear to bull: the multi-year trends and the long-term picture

The chart below clearly shows one thing: long-term trends often last many years. The bear market that started in 1988 ended in 1993. The up-swing that followed lasted from 1993 until 1996 and culminated in what may be called a false break-out. Then another bear market unfolded taking the gold price down to $ 250 over a period of almost four years.

Then came the spike in the gold price as a consequence of the central banks' announcement that they would be limiting their gold sales.

The 1999 bottom was tested again at the beginning of 2001. At that time, when few believed that any money should be put into precious metals, the present bull market started; we deem a bull market is still in its infancy.

The gold price hit $ 432.20 on April 1, 2004, a level which could not be sustained. A sharp correction followed, taking the gold price down to $ 371 or 14% by May 10. While even confirmed gold bugs started to doubt and felt twinges of despair, it produced what now has become one of those rare opportunities where you can buy the metal and metal shares at bargain prices.

The chart of the long trend shows it clearly: gold simply corrected from the upper trend-line down to the lower trend-line.

Since those "days of despair," the gold price reached a new high at $ 456.70 on December 2. As gold reached a slightly overbought situation at the beginning of December, we are now going through another minor correction before the expected move towards the $ 500 level starts to unfold.

The medium-term picture

When a market reaches a heavily overbought condition, the end consequence is often a heavily oversold condition. Both conditions, overbought and oversold, are deviations from the trend itself, which then forms the boundaries of the channel within which prices fluctuate.

At the beginning of December, the gold price again reached the upper trend-line, for which reason a slight correction had to be expected. It is not possible to determine where it will stop, but when using the past as a guide to the future, we can imagine a "worst-case scenario" of a low of $ 390.

At this juncture, it is helpful to see how gold shares fared in relation to unhedged gold stocks. It is in fact quite interesting to note that gold made a new high in December but gold shares were not able to supersede the January high. The reason for this is easy to see: gold shares moved up much stronger than gold from March to December of last year. Consequently, when the correction sets in, gold shares also sold off more heavily.

At present, the medium-term chart suggests that gold and gold shares are at risk of correcting further to the lower channel trend-line. For this, we must see what the short-term chart tells us.

The short-term picture

The short-term picture does in fact look promising, as the short-term trend has resumed the up-trend right within the up-trend channel. If gold keeps holding at present levels, gold shares will likely continue to move higher and eventually take out the high established in January.

The US Dollar and the Gold price in Dollars?

The US Dollar has been in a down-trend since the start of 2002, as the above chart shows. We often hear the argument that gold has only gone up in terms of dollars. The fact is that while the US Dollar Index fell 33% from 120 to 81 points, gold increased 76%, from $ 250 to $ 441, during the same period.

As we expect the US-Dollar to fall further, an investor is well advised to hedge his dollar-investments. THE TIMELESS PRECIOUS METAL FUND, which we manage, is 100% hedged in favor of the EURO. (www.timeless-gold.com)

The following recommendations were valid at the time of writing, viz. at

and may no longer be pertinent at the time of reading.

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Yours sincerely,

Peter Zihlmann


www.pzim.com
investment@pzim.com
forex@pzim.com

December 22, 2004

Disclosure: The author has not been paid to write this article, nor has he received any other inducement to do so. The author is a shareholder in the company and will benefit from any increase in the company's share price. Disclaimer: The author's objective in writing this article is to invoke an interest on the part of potential investors in this stock to the point where they are encouraged to conduct their own further diligent research. Neither the information, nor the opinions expressed should be construed as a solicitation to buy or sell this stock. Investors are recommended to obtain the advice of a qualified investment advisor before entering into any transactions in the stock.