Gold Due for Long-Anticipated Rise Soon

November 3, 1998

The technical outlook in gold is looking better than it has in quite some time and it is starting to be confirmed by a rapidly improving fundamental picture as well.

Quite simply, gold's daily price chart hasn't looked this promising in nearly two years. On an intermediate-term basis, gold looks like it has registered a bottom (or is late in the process of registering one) and the intermediate—if not the long-term—picture is almost as lustrous as the yellow metal itself.

The positive "technicals" are so numerous we hardly know where to begin. Let's look first at gold's daily continuation futures chart (basis December). The chart we have labeled (courtesy of Franklin Sanders The Moneychanger). Three very prominent—and positive—technical features are evident on this chart. First, and on an immediate-term basis, gold is nearing the apex of a bullish "falling wedge" pattern. This portends a price rise to at least the $306/oz. level last seen on October 8. We cannot forecast exactly when this move might come about but we can probably expect to see it within the next two weeks. Gold's candlestick chart for the December futures is telling us that an upside breakout is imminent based on the consecutive "spinning top" candlesticks that have appeared in the last six trading sessions. This pattern usually augurs a sharp breakout.

More conspicuously, gold's daily futures chart shows what appears to be a bullish head and shoulders bottom pattern. Already the left "shoulder" and"head" (at $275/oz.) have formed and the right shoulder already appears to be forming. A drop to $290/oz. in the next few days should not surprise us and may in fact be necessary for the completion of this pattern. Keep your eyes firmly on the December gold contract on the Comex. As long as $290 support holds up over the next week or two gold has nowhere to go but up.

Our bullish technical outlook is further strengthened by gold's balanced Relative Strength Indicator (its most recent reading coming at 44.36 on the RSI). And its Percentage Retracement indicator shows a recent series of higher highs and lower lows—a bullish sign. Gold is currently trading slightly below its 50-day moving average but not enough to turn the outlook bearish. We view this as a temporary development to be sure.

As we pointed out in our last Gold Strategies Review commentary, gold has been "hanging tough" of late and has shown remarkable and uncharacteristic resilience in this stage of its 19-year-old bear market. It may be too premature to tell, and we probably should not even venture to say this right now, but it is beginning to look with each passing week that gold is finally—and truly—bottoming once and for all. For the first time in years we find ourselves growing more bullish on gold by the day.

To reiterate our long-term stance, we believe gold will begin the first leg of its next bull market (if it hasn't already) sometime in 1999. We should definitely be in an explosive gold bull when the year 2000 arrives. Unprecedented investor accumulation of the yellow metal, especially in bullion coin form (U.S. gold coin sales were up 102% in the second quarter), necessitates an explosive rise in price in the months ahead as fears over the global economic crisis as well as the introduction of the euro and the coming Y2K computing crisis combine to make gold the ultimate (and only true) financial safe haven.

Returning to our technical outlook, we also note with interest the bullish falling wedge and subsequent bullish "flag" formation in the XAU gold mining index. This index, too, appears to be hammering out a head and shoulders bottom (although its development is uneven compared to the gold futures chart). Near-term, the XAU should continue to perform well based on the recent rise in investor interest in gold mining stocks among other factors. The MACD for the XAU is on the verge of giving a buy signal so we should all be monitoring for this. Also, its RSI and Percentage R indicators are looking strong and provide further support for a bullish outlook.

Speaking of gold mining stocks, our commentary wouldn't be complete without our latest take on the major mining companies. Before we begin, we feel compelled to give ourselves a pat on the back for a recent call we made on the Canadian gold mining stock company, Argentina Gold (symbol ARP). We last analyzed ARP when it traded at a meager $0.5/share. We pointed out that the chart (provided by our friends at WIL-ARM) for ARP showed a very steep and very bullish falling wedge that appeared to have met ultimate downside objectives and was destined for a turnaround. And boy did it ever! We were informed by a Gold-Eagle forum visitor that ARP was up 400% since we recommended it four weeks ago!

Other gold stocks we have previewed in these pages in recent weeks have done equally well (though certainly not to the extent of ARP). Battle Mountain (symbol BMG) is coming out of a bullish flag formation and appears ready for a further rise in price. It currently trades at the $5.50/share level but we anticipate a rise to at least the $7/share level over the next two months. The MACD indicator for this stock is on the verge of sending a buy signal so investors should monitor this stock closely. Trading volume for BMG has been diminishing over the past several days (as is typical of its current chart pattern) so investors should be in the lookout for a breakout from its current level accompanied by a rise in volume. BMG currently rests on its 50-day moving average and this has served as a strong support for this stock in the recent past. High-risk investors may accumulate this stock now, setting a protective stop at congestion support at $4.75/share. If BMG's price can close above $6.5/share, we rate this stock a strong buy.

The bluest of the blue chips, Barrick Gold (symbol ABX), is also looking quite bullish. We last previewed this stock when it traded at $20/share and it most recently traded at over $21/share. It still has some upside potential and should be considered a strong buy candidate if it breaks its recent high of $23/share. At the moment Barrick is trying to work its way out of a bowl formation and it looks like it will be successful. Its candlestick chart shows a bullish-looking continuation pattern. The stock is trading well above its 50-day moving average and, like Battle Mountain, has an MACD that is on the verge of giving a buy signal. Percentage R and RSI indicators also confirm the bullish near-term outlook. As a word of caution, if Barrick's stock falls below its near-term support of $19/share, sell immediately, unless you are a speculative long-term investor.

Also in the bullish camp at the moment is Hecla Mining (symbol HL), which recently traded at $4.50/share. Unlike the above mining stocks, Hecla's MACD has already given a buy signal as its two stochastic lines recently converged. Like the others, its RSI and Percentage R look fairly strong. Hecla's candlestick chart produced last week what appeared to be a bullish pattern known as a "harami." Confirmation will be required this week but as long as the $4.75-$5/share level is penetrated, it will give us all the confirmation we need to buy this stock, at least for the near-term. Congestion resistance at the $5.75 level must be overcome before a full-blown buy signal can be given. Set protective stops at $4/share support.

Homestake Mining (symbol HM), while not looking as technically strong as the others, is still relatively strong trading at $11.5/share and is showing signs of a turnaround. While Homestake's MACD is technically bearish, its candlestick chart is giving signs of a coming runup in price. For one, its price chart last week hit a low of nearly $10/share before finishing the trading session at a close of $11/share. This produced a candlestick pattern known as a "hammer" that typically signifies underlying strength in the stock. Also, a bullish "harami" pattern was also registered last week, and this stock is trading right at its 50-day moving average, which so far has provided strong support. A close below $11/share would be bearish, but view any move above $12-$12.5/share as a potential buy.

Although it pains us to say it, Durban Deep (symbol DROOY) should probably be sold at this point, especially if it cannot hold above $3/share. The runup in price this stock experienced over the past two months was nothing less than meteoric, and perhaps it was too much too soon. The last several trading sessions have shown an extremely bearish-looking pattern in which prices fell out of a contracting triangle chart pattern. If the recent highs in this stock of $3.75/share are penetrated, consider this stock a buy. Otherwise, avoid it for now.

Finally, we bring to your attention another attractive mining stock that has won the favor of Charles Allmon, editor of Growth Stock Outlook. While we ordinarily analyze stocks only from a technical perspective with little emphasis on the fundamentals (which we view as only secondary), we cannot help but pay attention when Mr. Allmon, the world's premier fundamental analyst, speaks of a company's fundamentals. And according to Allmon, Euro-Nevada (symbol EN) possesses a stellar-looking balance sheet. Says Allmon: "While you may think the gold mining industry is dead as a dodo bird, that would be a false assumption. All mining firms are not created equal. Euro's CEO told us that even at current gold prices, current earnings estimates $0.19 per share for fiscal 1999 are attainable and very likely to be surpassed. The real story will be in the following fiscal years as the Midas Mine comes into production. We believe earnings, even in the depressed gold price environment existing today, will accelerate very dramatically and increase every year, for each of the next five years. Buy."

In closing, we would point out that gold now has everything in its favor as we head into a very ominous 1999. The rising yields in the bond market, the falling U.S. dollar and stock market, continuing global market fallout and widespread deflation, as well as the coming euro and Y2K crisis all powerfully converge to make gold's outlook a particularly bright one. In fact, the gold market may be one of the few bright lights in a dark and troubled world in the year ahead.

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.

The melting point of gold is 1337.33 K (1064.18 °C, 1947.52 °F).

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