The across-the-board rally among both the junior and senior gold producers is a testament to the greatly increasing demand for the safety of gold shares. This is made possible by greater awareness of the strength in the gold stock market, advertised in no small part by the market itself (after all, there is no greater advertisement than rising prices for attracting investor interest).
Fundamentally and psychologically, gold shares have the "war and terrorism premium" in their favor, which in part accounts for the rising prices and pronounced accumulation in recent months. Gold can smell war and political trouble like no other commodity. As America gears up for its next overseas battle, gold is already discounting the war(s) to come through its relentless strength and rising upside momentum.
Another reason why gold, and by extension, gold shares should continue to rise in coming months is the inflation that we've seen manifest in the physical economy. Commodities in general have been rising, a testament to this inflation, while the U.S. dollar index has been dropping. These and other economic indicators point to the recent flush of money that has been pumped to rescue the U.S. economy from collapse. The booming housing market (along with the refinancing boom) has helped in no small part, but ultimately this is allowing the economy to live on borrowed time and the gold market knows this. There are many treacherous battles to be fought on the economic front in the years ahead (not to mention the military front) and it will take everything the Fed has in its arsenal to keep the economy afloat during the next few years. Meanwhile, gold and gold shares should continue to prosper during these times of inflation/deflation/inflation in the economy (see my previous article, "An economic turnaround?" for details).
Yet another factor influencing gold and gold share pricing has been the expanding bubble known as the federal budget, which is surely nearing the proverbial popping point. According to a recent issue of the Richebacher Letter, "Between 2000 and 2002, the federal budget has swung from a surplus of $295 billion into a deficit of $257 billion, heading for a $400-$500 billion deficit in 2003. During the same two years, total nonfinancial credit zoomed $2,520 billion and financial credit by another $1,879 billion, both adding up to $4.4 trillion.
"And what was the effect of this credit and debt deluge on the economy? GDP during these two years grew in real terms by $248 billion and in nominal terms by $621 billion. To us this is an outright policy disaster." This federal economic disaster in the making, as perverse as it may seem, is music to the ears of the gold market.
The debt bubble of course also extends to the private sector. Mortgage debt alone threatens to swallow the average American household, and the gold market reflects this very real threat. According to The Daily Reckoning, quoting a Bloomberg News report, "In the past two years, mortgage debt has been rising at two to three times the rate of personal income....Mortgage borrowing rose $723 billion (annualized) in the first quarter of 2003, according to the Fed's Flow of Funds report. That compares with an increase of $667 billion in 2002 and $375 billion the boom year of 1999.' Not surprisingly, the ratio of the market value of real estate to disposable personal income is at an all-time high. At 1.73, the ratio exceeds the previous high of 1.6, reached in 1989."
This leads us to the question posed in this article's headline, "How much more room to rally do the gold shares have?" Taking two prominent, established gold stocks as an example, let's do a little parabolic analysis of the long-term weekly charts to see what the prospect is for higher prices.
Despite the recent weakness, I like the intermediate-term prospects of Gold Fields Ltd. (GFI). This is based, in part, on its strong-looking weekly chart which shows a rising 90-week moving average and strong support from the 30/60-week MAs. The 90-week MA is a key technical indicator and reflects at least three dominant short-term and two one intermediate-term cycles. The rising 90-week MA has been a key indicator for a number of gold shares across the board in recent months and hasn't disappointed yet.
Parabolically speaking, GFI also looks good from the vantage point of this 3-year chart above. Note the harmonic trend lines and rising parallel channel, reflecting the underlying demand for shares. Equally impressive is the large parabolic bowl that projects (in time) until the end of 2003.
Placer Dome (PDG) is an established and widely-recognized name among gold shares. It sports a promising parabolic bowl in its long-term monthly chart shown below. Prices are just starting to approach the rim of the bowl, which means the take-off phase hasn't even gotten underway yet. Parabolas show rate of change and shifts in the cycles as well as indicating underlying areas of support and shifts in trend.
Based on these two leading indicator stocks, I believe we can answer the question in the headline by saying that gold shares have considerably more room to rally in coming months.
August 22, 2003
Clif Droke is the editor of the Bear Market Report newsletter, a 3-times weekly forecast and analysis of stocks, markets, gold stocks, and equity cycles. He is also the author of numerous books on finance and investing, including the top-selling "Moving Averages Simplified." Visit his web site for free samples of his analysis at www.clifdroke.com