Gold market opportunities
We read much that is bearish on gold and gold stocks in the financial press, but little that is bullish in scope. When was the last time you heard an advisor or newsletter writer heartily recommend getting long of gold stocks? How sad that most advisories are content to avoid the yellow metal like the plague even as the greatest bull market is developing in over a century and rock-bottom buying opportunities have never been more plentiful.
In the paragraphs that follow we'll take a look at some of the more
attractive issues in the gold mining industry.
Although few people see it, gold has clearly bottomed above $250, has
thoroughly established its base of support with absolutely no chance of
breaking below it, and has been slowly drifting upward (though in sideways
fashion) in an early bull market cycle channel. From the vantage point of
our cycle charts this new-born is clearly visible. Right now there is a floor under gold prices around $278. Gold has better than a 50/50 chance of
breaking above $300 by year's end, and next year should be the one we've all waited for as gold futures meets an interim cycle channel with a 45 degree slope. That means a gold price of well over $400 by the second quarter and then a continuation to higher levels as the year wears on.
Old favorite Durban Deep (DROOY) is online for an extremely bullish 2002.
Currently coiling between $1 and $1.4, Durban has upside potential to end
the year above $1.50 based on the cycle channels. Interestingly, the
measuring implication of the triangle pattern in its chart also points to
$1.50. Its dominant interim cycle channel has an upward slope well into
2002. A firm bottom has been established between $0.80-$1 and Durban has seen its lows for the year. Any attempt at trading Durban Deep for the short term must be done with the frame of reference of the triangle pattern for setting stop losses.
Another low-priced gold stock that has a continuously ascending cycle
channel is Placer Dome (PDG). Although the slope of Placer's cycle channel
isn't as high as that of DROOY, it is impressive nonetheless if only for its
steady rise. Placer has seen its short-term bottom near $11 and should begin rising from here.
Anglogold (AU) has gold its bottom just below $16 and is consolidating
for a run to test its Year 2001 high of $22. Pronounced insider buying is
visible at just under the $16 supporting area on the tape. Anglogold will
be the gold that keeps on giving over the next few months.
Too good to be left out of our recommended list of mining stocks is
copper mine Phelps Dodge (PD). This stock must surely qualify as one of the
best opportunities for racking up big percentage gains from a major bottom.
Phelps Dodge has bottomed above $25, where insider buying was apparent on the tape. The cycles are starting to turn up for PD, which looks to have an
extremely bullish 2002. As one analyst recently noted, "Copper is the most
important metal needed for all economic activity and all those military
armaments use copper also. There's never been a bull market that didn't
start or end with copper. PD is so beat up it went back to the 1987 level!
A minimum bounce will take the stock up 50% so it is a buy in all accounts."
Many today believe that gold is a completely controlled market with no
hope of ever again realizing a bull market. They argue that central banks
and other financial power brokers have capped the gold market and control it to such an extent that any attempt at driving up the price of gold by free
market forces will instantly be quashed. But is this true? In his classic
book, "Bear Markets: How to Survive and Make Money in Them," Harry Schultz writes, "It's only reasonable to ask why we have to have bear markets. Many think we should have progressed far enough in social structure, in government guarantees, floors, and protection, that we should have no more depressions, recessions, or bear markets. But to so think is to say we have repealed the law of supply and demand, and stopped the pendulum that swings from surplus to insufficiency, or that we have been able to arrest all natural cycles." As Schultz correctly points out, the laws of supply and demand, of equilibrium and disequilibrium, of rhythms and cycles; indeed, of human nature itself, would all have to be eliminated before such an unmitigated level of control could be attained over the gold market by any one single interest. Put another way, the gold conspiracy theorists postulate that the natural and centuries-old cycle governing gold price fluctuations have been nullified and that greed and fear itself-the essence of all market dealings-has been eliminated. The fallacy in this line of thinking should be sufficiently clear.
Expect the XAU index to fluctuate in a more or less sideways trading range over the next few weeks. The parameters of this range are between $53
and $58. Closer to the end of the money the XAU should touch the extreme
lower boundary of this range where it meets with an important cycle channel
slope. This should mean that the XAU finally gets going again to the upside
in December and will be in a great position to enjoy a bullish 2002 as the cycle channel projects up to above $70 early in the first quarter of the
year. A lot of traders were fooled by the false breakdown below the XAU's
recent triangle pattern and assumed a new leg of decline had begun. This was little more than a "head fake" that was engineered to shake out the weak hands and small money traders while the big interests accumulate more gold shares under cover of weakness. We concur with the recent analysis of cycle expert Michael Jenkins who wrote, "Now that we're at the one year point from the lows last October it could be a time to watch for a six week to three month consolidation pattern and you would still buy dips but use stops on all positions. I think this is a major 5 to 7 year bull market for gold so any new high breakout would be a time to increase positions if you didn't buy on weakness."
Veteran invest counselor Samuel M. Robbins (300 Prince St., West Newton,
MA 02166), providing confirmation for our ongoing forecast, wrote in a
recent investment policy letter that the "greatest crash in history" should
occur beginning by no later than the first quarter of next year, adding that
"gold should anticipate the flight from the dollar with the final bottom
soon." His comments merit repeating:
"America is 'over-everythinged.' America is over-borrowed, over-spent,
over-consumed, over-stored, over-capacity, over-built, over-invested,
over-indebted, over-margined, over-leveraged, over-indulged, over-optimistic, over-confident, over-blow, over-inflated, over-regulated, over-governed, over-grown and over-sexed. That is just for starters.
"Don't even consider the rest of the world. Just remember that if America sneezes, the rest of the world catches pneumonia, especially in this day and age of antibiotic-resistant bacteria".
"A distant early warning may be seen in the price of Treasury bonds: they
have been declining ever since the Federal Reserve Board has been lowering
interest rates in anticipation of the great depression that will follow the
great crash." This may well be the beginning of the flight from the dollar
under the cover of the strong dollar which is killing our exports and
stimulating imports. We are shipping 30 billion paper dollars a month overseas. Foreigners may find our dollar safer than other paper currencies,
but not safer than the one international currency that has survived down
through all of human history-gold. Little wonder that the recent silly Bank
of England sale of 20 tons of gold fetched bids 4 times the amount offered,
and that in the face of future sales coming this year and next. How typical
of government to be selling after 21 years of decline. One must conclude
that gold is too important to be entrusted to government. Private investors
know what to do with it, especially Orientals." If it were not for bank sales,
the gold price would be skyrocketing. The first rule of investments is that
'ALL SALES ARE FINAL.' The banks can't sell the same asset twice."
Robbins also points out that the point and figure chart target for gold
is $470/oz. short-term, $950/oz., long-term, and $1275 even longer-term. His forecast again closely parallels ours, although we use different methods to arrive at the same conclusion.
We are adding a special gold stock portfolio to our Bear Market Portfolio
in the Bear Market Report. Subscribers will be updated as to trading
positions three times weekly. The precious metals sector is finally coming
into its own even as the bear market in stocks continues to develop.
November 15, 2001
Clif Droke is the editor of the weekly Bear Market Report, a combined
forecast and analysis of U.S. stocks and indices and international precious
metals stocks, and is the author of numerous books on trading and technical
analysis (most recently Gann Simplified, published by Traders Library). For
a FREE COPY of the Bear Market Report send e-mail to: firstname.lastname@example.org or write: The Bear Market Report, Clif Droke, P.O. Box 3401, Topsail Beach, N.C. 28445-9831.