Gold Launches Bull Market Right on Schedule

May 23, 2001

As we predicted in last month's commentary headlined "May the Magic Month for Gold," the gold market has launched the bull market we have waited for right on schedule. Last week, the mining stocks-which typically serve as leading indicators for the physical gold market-saw impressive rallies of upwards of 20% or more in price. This was followed on Friday, May 18 by an impressive rally on the Comex gold futures contract by nearly $14/oz. This represents not just another of gold's occasional one-day flings, but the start of a long-term upward trend in gold prices, a trend in sharp contrast to the long-term trend in equities.

Since the gold and gold mining stock outlook-including all the dominant time cycle-is essentially distilled in the XAU mining index, we will confine our short-term analysis of the gold market to this measure. The most outstanding feature of the XAU is the bowl-shaped accumulation pattern which has been visible in its chart for some time. Even more outstanding is the fact that its dominant long-term and intermediate-term cycles bottomed in November (in the case of the former) and in April (in the case of the latter), with the dominant short-term cycle having bottomed earlier this month. This puts the XAU in a position of tremendous strength, and this inherent strength should be enough to drive gold and mining stock prices to considerably higher levels this summer and throughout the year.

From a short-term perspective, the head and shoulders pattern in the XAU one-year chart projects a minimum upside objective of either 70 or 80, depending on how one defines the "neckline" of the pattern. In the here and now, we believe a much more likely objective is the 70 level, give or take a point or two, since the XAU's trendlines and channels all point to this level. This means we can expect a short-term pullack in the very near future before the XAU continues its incipient bull market.

A series of multiple ascending trendlines and channels can be drawn on the XAU chart across many different timeframes. It is also important to note that the declining trendlines and channels (representing excess supply) have all been broken, and the predominant governing forces are reflected by the preponderance of rising trendlines (representing demand). What all of this technical parlance translates to is that for the first time in years buyers have got control of this market. By all indications the sellers will have an extremely difficult time getting back control (and almost certainly will not). Finally, the time has come for the gold bulls to take charge.

For several months we have recommended Placer Dome (PDG) as one of the leading blue-chip mining plays of the year. Our investment in PDG has already started to pay off, and we expect Placer to lead the gold stock bull market that will intensify this summer. Writes one subscriber: "I currently own 80, Jan.02, 10 strike, call options on Placer Dome (PDG). What would be a good sell price for them to be sold at? What would be the approximate time frame for the sell price target."

Our answer: Based on a thorough cycle analysis of Placer Dome (PDG), we believe a good time to sell your options would be in the July-August timeframe. This should be the most dynamic point in PDG's intermediate-term cycle for cashing in at or near the top of the expected summer gold/mining stock rally. (Incidentally, most U.S. equities will be performing extremely well at this time, as well). PDG's dominant short-term cycle bottoms in early June, but it is obviously a "right translation" cycle, which means PDG is continuing to make new highs in the declining phase of the cycle. You can expect a pullback in PDG sometime over the next 3-4 weeks, but after this we expect an impressive rise in PDG's stock price well into summer. We would advise holding until summer.

From a long-term perspective, we are entering a timeframe in which falling equities prices (excepting mining stocks) and interest rates will collapse, while commodities prices (particularly precious metals) will steadily advance. This is attributable mainly to the confluence of the 55-year Kondratieff Cycle, or K-wave, and the 60-year primary financial cycle, as well as the 120-year "Master Cycle," all of which are scheduled to converge between the years 2004 and 2014. During this time the major currencies and stock markets of the world will collapse as the ultimate long-term store of value-gold-will once again come to be recognized by the masses of investors as the only worthwhile monetary investment. The following excerpt aptly summarizes this economic transition and is quoted from a fellow newsletter writer which we hold in high regard, not only for his perspicuity of thought and excellent grasp of market cycles, but for his approach to analyzing the gold market as well. Ted Slanker, editor of the Slanker Report, writes the following in a recent issue of his newsletter:

"If oil can go up like that and palladium can go up like that, why can't gold just go to normal? Well, it can and when it does you can bet it will not stop at normal. We hear a lot of talk about who is selling gold: central bankers, mining companies, hedged funds, big banks, etc. But nobody talks about who is buying all the gold. All of the gold that was borrowed and sold, all of the gold the central banks sold in addition, and all of the gold produced by the mining companies has been purchased. And yes, the gold price fell, but the gold was purchased nonetheless.

"I do not think the buyers were ignorant. They bought it because they wanted it. And they are well aware of the fact that central banks will sell more gold in the months (and years) ahead. But they are also well aware of the huge, unprecedented short position that exists in the world of gold today. They also know that the world is awash in paper money to an extent that has never before been seen in the history of man.

"This is why I think the gold move (a six-day, 29% spike up) in September 1999 was just a preview of events to come. When the main feature opens we will get to see the entire gold move unfold. It may be mind-boggling, and a lot of financial institutions will be squeezed unmercifully.

"Gold is money. Paper currencies are IOUs. That is the way it has been and that is the way it will always be. It cannot be the other way around. So, one should be taking advantage of the lull before the storm and stock up on some gold and a lot of gold mining shares. We have had a miserable three years. But the next 12 months may be payoff time.

"I keep looking back at the stock market peaks of the past. In every case they peaked with the gold stocks at a premium. I still think this granddaddy of all bull markets will also make its final peak with the gold stocks soaring. And that will usher in a 15-year transition away from intangibles back toward tangibles." Amen, well said Mr. Slanker. We share your opinion fully.

The short-term outlook for silver is turning from bearish to bullish. Look for an impressive rise in silver futures beginning sometime this summer (July would be out best "guesstimate"). A well-defined declining wedge pattern can be seen in the daily continuous contract for silver futures.

Concerning silver's outlook, we quote the following from the April 2001 edition of The Moneychanger newsletter:

"Following the technical method of W.D. Gann, [James Flanagan, editor of Past Present Futures] looks for a big move to make big money, and he's landed on silver.

"More accurately, he landed on silver in 1993, and has been watching for a big move since then. 'Our journey into past history and our belief that it repeats has brought us to one of the most extraordinary crossroads in history. It has been three generations since we have experienced a decline of the magnitude we are seeing in the silver market. I believe it is reasonable to suggest that this final low in silver will be equivalent to the precious metals what the 1932 low was to the stock market.'

"His argument involves cycles in the silver market running back to 1861. Eight out of 12 lows were made in the first or second year in the decade. Silver, 42% off its 1998 high, will soon make its thirteenth major low in 1861. Comparing the duration of the cycles, he expects a bottom higher than the 1991 and 1993 $3.50 lows.

"Mr. Flanagan also expects a shift away from equities and into commodities, viewing their performances as 'flip sides of the same equation.' During this expected commodity bull market, he expects silver to be one of the 'glamour' commodities."

We live in a time when owning gold has never been so important for reasons of financial security. There is no dearth of avenues for purchasing gold, yet finding a reputable dealer or broker from which to purchase gold from is difficult to find. Recognizing the enormous sums of money to be made from credulous, first-time gold buyers, scam artists have proliferated the industry. Frequently we are asked, "What can I do to protect myself from getting ripped off by persons or companies promising low-priced gold and don't deliver?" We are happy to report that now there is an answer. Our good friend and former radio colleague Kevin M. Bear, a long-time veteran of the gold coin brokerage industry, has written a wonderful little book entitled "How to Buy Gold Without Getting Sold." Kevin's wit and wisdom is incomparable, and there are precious few in this industry as conscientious in his dealings with his customers. Those same qualities shine forth in his book, which is truly a service to serious gold buyers, particularly those with little or no experience in buying precious metal coins. Among other things, Kevin posits a series of simple questions you can ask any gold brokerage or dealer whose reputation you are unsure of. If these questions are not answered correctly, you'll know you are dealing with either a dishonest or an unworthy seller.

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 volume of all the gold ever mined can occupy a cube 63 feet on each side.