Bottoming Process Continues; May Should be the Magic Month

April 23, 2001

The precious metals sector looks to shine in the months ahead. There are many positive things from a chart/cycle perspective that support a bullish gold outlook. From a long-term perspective, it is plainly evident that the gold chart has been bottoming for the last seven years. The fact that gold bears have been unable to violate the benchmark $250 level is extremely meaningful.

The one-day, nearly five-dollar spike on the June Comex Gold contract yesterday (April 16) was impressive in terms of points, but not in terms of trading volume. This move was really nothing more than a reflection of one of gold's minor cycles, which happened to turn up late last week, but this cycle is so short in amplitude and duration that we can safely affirm that gold has probably seen its maximum upside objective for the week. At any rate, gold prices should carry no higher than $267 in the days immediately ahead. From a chart perspective, gold's consolidation process is still ongoing.

Open interest on the Comex, at just over 85,000 contracts, has been increasing in recent weeks, but is still not supportive of a big upward move in gold prices in the immediate future. Still, the increasing open interest must be viewed as supportive of our bullish intermediate-term gold outlook.

Of the other major precious metals sectors, platinum futures have looked the best, with the Comex platinum contract rocketing nearly $30 yesterday. Our cycle work suggests that this will likely be the maximum upside objective for platinum this month. The volume behind yesterday's big move was conspicuously light, which is not supportive of an upside continuation. Silver, meanwhile, is forming a base of support near the $4.40-$4.50 range and is technically in a short-term uptrend. Silver should move sideways to higher in the weeks ahead and will be in a strong position when gold makes its big move later this spring. In fact, from a relative strength standpoint silver has the brightest outlook of the three major metals.

The cycles governing the Rydex Precious Metals Fund (RYPMX) will produce a net sideways movement over the next few weeks; therefore, this fund should be rated neutral at present. The Amex Gold Bugs Index (HUI) is also short-term neutral, although the movement of this index over the next few days is pointing up.

Among low-priced issues, Echo Bay Mines (ECO) is a short-term buy candidate, although its intermediate-term cycle is pointing downward. We recommend purchasing ECO at current levels ($0.65/share as of this writing) in anticipation of a run-up to approximately $0.85.

Alliance Gold Ltd. (AGS.AX) is in process of bottoming, long-term, but shorter-term the cycles are still in the descending phase and will drag Alliance's price lower in the weeks ahead. Alliance may be sold short from present levels of approximately $0.08/share, with an expected decline to $0.06/share or lower by May.

Ashanti Goldfields Co. (ASL) is in a net sideways pattern, but the near-term cycles have turned up. ASL should be purchased at current levels (around $2/share) and held for the expected move higher over the next several days.

We have learned from the '90s bull market in stocks that when the dominant traders (viz., the bulls) have control of the ball, so to speak, they control the trend. Whenever bears get control of the ball they must run with it or else risk losing control almost immediately. Well gold bears have got full possession of the ball, yet despite their many advantages, they simply have been unable to drive gold prices below that critical $250 level-even when the most recent dominant interim cycle was in their favor. This proves they are impotent to drive prices any lower and that gold has indeed found a solid foundation from which to launch a major bull market.

As stated previously, gold's dominant long-term and intermediate-term cycles have already bottomed...only a couple of minor cycles remain to bottom before gold begins moving uniformly higher. When will this move begin? Probably by no later than May-only a few weeks away.

Fundamentally, the deteriorating economic shape of the U.S. will help to catalyze this incipient bull market in gold and will spur the investing public to a greater awareness of gold's de-facto position as the ultimate store of monetary value and safe haven in times of economic and financial chaos. 2001 will most emphatically be gold's year to shine.

The XAU gold/silver index is emphatically bullish from a short-term, intermediate-term and long-term perspective. In fact, everything about the XAU's chart gives us every reason to be bulls on the mining stocks right now.

There are only a few minor blights in the precious metals sector right now, mainly in terms of mining stocks that are declining under the influence of short-term cycles in the bottoming phase. On prominent example is Anglogold (AU), which, short-term, may be sold short, as its chart pattern and cycles are pointing downward into spring. Longer-term, Anglogold shares gold's positive outlook.

The cycle chart for Placer Dome (PDG) is pointing downward, short-term. PDG is therefore a safe short sell candidate right now. Use a protective stop of $9.60 when placing orders to sell short PDG.

Blue-chip leader Barrick Gold Corp. (ABX) is short-term bearish under the downward pressure of the 6-month cycle and should be sold short into May. Use a protective stop of $16.50. Expect a high of $15 or slightly above for Freeport McMoRan Copper & Gold (FCX) in the days/weeks ahead. After this, however, we anticipate a sizeable pullback from its impressive run-up of recent months. Look to sell short FCX later this month as the $15 level is approached.

Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy.  The forecasts are made using a unique proprietary blend of analytical methods involving cycles, internal momentum and moving average systems, as well as investor sentiment.  He is also the author of numerous books, including “2014: America’s Date With Destiny.” You can view all of Clif's books here. For more information visit www.clifdroke.com.

18 karat gold is 75% pure gold.

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