Gold's Technicals are Very Bullish

Gold is getting hot and the environment is ripe for a sustained rise. Gold hit another over two year high for the fourth time since February and the bull market is gaining steam. Gold shares soared even more. As a group they're up 60% this year.

SETTING IS RIGHT FOR GOLD

For the first time in many years, the setting is right for gold. The Dollar is finally confirming that a major bear market is underway and it's at an eight month low. This is the key factor for a rising gold price and it looks like the Dollar decline has only just begun.

Gold has been sensing that something isn't right since 1999. That's when it began to quietly bottom, during the stock euphoria, and it's now outperforming all investment markets… stocks, bonds, the international currencies, the other precious metals and commodities. As more investors take note, they're going to move into gold, pushing it higher.

More important, we think this trend is only getting started. The 20 year old stock era, for instance, is changing to a golden era and gold is poised to rise further than most expect.

We're still in the early stages of the gold advance. Whether or not gold breaks clearly above $325 now or later this year is not as important as knowing the major trend is up and further advances this year are inevitable.

GOLD'S BIG PICTURE: Bullish

Chart 1 has been telling gold's technical story best. It shows gold above and its leading indicator below since 1978 and the bottom line remains valid: gold's at the onset of a major rise that could last a year or two.

As you can see looking at the big picture, gold is a cyclical market and it's been moving in a 1 through 4 repetitive pattern. To briefly explain, the number 1 rises are the best rises in the cycle (see 1980, 1987 and 1995 on Chart 1A). This strong rise is then followed by the worst decline in the pattern (#2). This is when the indicator falls to its maximum low for the cycle. The #3 gold rises are quick rebound rises, which are followed by a #4 decline that takes the gold price to a new cyclical low (see 1985 and 1993).

Meanwhile, the leading indicator's #4 low is higher than the #2 low, which forms a new uptrend and springboard for the next #1 rise (the best rise).

Looking at the current action, the latest #4 low occurred in February, 2001. Gold didn't fall to a new low for the cycle, which in itself was strong action because #4 lows usually reach new lows.

Last year became a slowly turning bullish year and in August gold rose above its 65-week moving average. It has stayed above it since then and the major trend is up above $280. The strongest rise in the cycle is now underway and this #1 rise is building momentum. Plus, the leading indicator is at an eight year high and in a solid uptrend (see Chart 1B).

The next major hurdle in the big picture is the prior #3 peak at $325. Since 1980, gold's #1 rises have essentially resisted near the prior #3 peaks (see 1987 and 1995). This means if gold clearly breaks above $325 it'll be entering a new, very strong phase of the bull market.

Gold could then rise to its major 22 year downtrend near the $360 to $380 level. But if broken, gold would then be entering a potentially explosive type of bull market.

Mary Anne & Pamela Aden are well known analysts and editors of The Aden Forecast, a market newsletter named 2010 Letter of the Year by MarketWatch, which provides specific forecasts and recommendations on gold, stocks, interest rates and the other major markets. For more information, go to www.adenforecast.com

78 percent of the yearly gold supply is made into jewelry.

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