When a price trend is in the process of reversal, either from up to down or from down to up, a characteristic "area" or "pattern" takes shape on the chart, become recognizable as a reversal formation. The greater the reversal area—the wider the price fluctuations within it, the longer it takes to build, the more shares transferred during its construction—the more important its implications. (Robert D. Edwards and John Magee, "Technical Analysis of Stock Trends")

The rally from the July 19th low at 57.80 to the Sept. 28th high at 92.72 represented a gain of 34.92 points or 49%. Subsequently prices declined below the breakout area but volume dwindled. The low on the gap up on September 21st left a gap at 65.19 to 65.76. This small gap has not been filled. Last week the market made a weekly reversal. The market is now poised to resume its uptrend. This will be confirmed by a move above the recent high of 73.22. A close under the 65.90 level made on Nov 8th will weaken but not negate the above.

Assuming that the market does not take out the 65.90 level prior to resuming its uptrend the minimum count projects to 120. How does the above compare to prior rallies? In 1987 the XAU rallied from 104.48 on June 22nd to 156.69 on Sept 24th, again of 52 points or close to 50%. In 1993 the XAU rallied from 66.14 on Jan 18th to 129 .07 on Aug 2nd, again of 62.93 points or 95%.

However the initial thrust prior to a pullback was from 66.14 to 81.33 on Feb 10th. In 1995 the XAU rallied form 106.48 on November 1st to 155.60 on Feb 7th, a gain of 49.12 points or 46%.

The gold market has been in a bear market from Feb 1996 to Sept 1999. What occurred during that time?

One factor that Bill Fleckenstien focused on in his Contrarian report was an email from a reader that focused on money supply. "If you go back to Feb 1996, M3 was about $4.6 trillion. As of Oct 25th this year it was $6.3 trillion. You can apply that equation to what has happened and it predicts a doubling to the money supply about every eight years. So there's mathematical proof that Easy Al has engaged in one of the most expansive/explosive money-printing campaigns of modern times."

Von Mises has shown that an expansion in the money supply, or inflation, is a process of taxation and redistribution of wealth. In the current situation the inflation is in financial assets and the redistribution is in the form of higher equity prices. This is perfectly acceptable to the financial establishment, which is the chief beneficiary. However the ongoing love affair with government manipulation of money and credit become increasingly untenable as its exponential level is reached. Von Mises demonstrated in a series of articles that government intervention in the markets cannot work. (See the Essential Von Mises, Murray N Rothbard, libitarianpress.com) Now it is an axiom of markets that they do what they are supposed to, they just never do it when expected.

The explosive nature of the rally followed the now famous statement by the European Central Banks. This was a move that astonished bears. Writing in a letter to the "Alchemist", the LBMA's publication Ted Arnold stated, "We confess to being absolutely astounded by the Central Bank moratorium. We would never have expected such a development. We still want to know why they really did what they did." Not understanding an action did not prevent Arnold from stating that the central banks would not allow gold to move above $325. Subsequently the price did break. For the long-suffering gold bulls this has proved to be emotionally devastating. Record increases in the money supply, and record demand for physical gold and still no price explosion.

There are two answers to this. The first is that from a fundamental viewpoint fighting the entire financial specie system is not an easy battle. These guys play hardball. But in the end good money drives out bad.

From a technical view this is contained in the phrase "the longer it takes to build, the more shares transferred during its construction—the more important it implications."

Greg Pickup
November 22, 1998

Greg Pickup hedges risk for commercial agricultural firms and speculates for investors. He can be reached at 312-902-6720, or email him at gpickup@ix.netcom.com. He posts a daily overview of the grain markets at http://www.chicagoperspective.com

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