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January 31, 2005

Is A Gold Bottom Imminent?
by Michael Swanson

Back in the final days of November I warned that a correction was probably about to begin. I did not give up on the gold bull market. I argued that the bull market would come back and surprise everyone in 2005, but that one final correction would likely take place before the next launch of wave 2 of the bull market begins. I said I would buy this correction when it came.

Since I wrote this two things have happened - the fundamentals for the gold bull market have improved while the gold stocks have undergone a healthy pullback.

Over the past 8 weeks we have seen news that the American trade deficit hit a new record, despite the recent short-covering bounce in the dollar. In November the trade deficit hit a whopping $60.3 billion during a time in which oil prices pulled back. This represented a 7% jump in the trade deficit over the course of a month, due to an across the board drop in exports.

In fact the the Congressional Budget Office just forecast a $1.3 trillion dollar Federal deficit over the next ten years. This is alarming because it is 60% more than their estimate made just four months ago. The LA Times reports:

"The near-term deficits pale beside the CBO's admittedly rough projections for 2030, when all the baby boom generation will have reached eligibility for Social Security and Medicare."

"If they keep growing at current rates, those two programs plus Medicaid for the poor will be nearly as large a share of the national economy as the entire budget is now, the CBO said."

"CBO Director Douglas Holtz-Eakin told reporters that the programs would have to be reined in before that happened. Otherwise, he said, taxes would have to rise to intolerable levels or the government would have to borrow so much money that interest payments would spiral out of control."

The only way out of this conundrum is for the US savings rate to increase and for George Bush to balance Federal budget or for the US dollar to spiral downward. It is doubtful that the politicians in Washington will make the tough decisions so the only answer is for the dollar to go down.

Recently Warren Buffett made these remarks on CNBC:

"I think, over time, unless we have a major change in trade policies, I don't see how the dollar avoids going down....I don't know when it happens. I don't have any idea whether it will be this month or this year or next year, but we are force-feeding dollars on to the rest of the world at the rate of close to a couple billion dollars a day, and that's going to weigh on the dollar."

Buffett also told Forbes Magazine that he has increased his currency position against the dollar from $13 billion to almost $20 billion. "The rest of the world owns $10 trillion of us dollar, or $3 trillion net...If lots of people try to leave the market, we'll have chaos because they won't get through the door," he said.

Of course this would lead to a spectacular rise in the price of gold and that is why I plan on personally buying back into this gold market once the current correction comes to an end.

And I believe we are just about there.

One thing I watch very carefully is what the commercial futures traders are doing. They have been very deft at timing tops and bottoms in the gold market. At each top commercial futures traders have been heavily short and during each correction they have covered their positions. The chart above shows you the size of their short position over their long position at every major bottom gold has made over the past few years.

You can see that usually the commercial futures traders have 40k-60k more short positions than they do long positions at major gold bottoms.

Since December they have been slowly covering their positions and as of January 25, the commercials have 100,000 more short positions than long positions. These commitment of traders reports are delayed, but if gold makes another drop down then the commercials should have completed their short covering.

What is more the XAU gold stock index is right on support, a place where it should bottom and bounce:

86-90 is solid support on the XAU.

Take the long-term chart support areas and the covering by the commercials and I feel very confident that a major bottom in gold and the gold stocks is right ahead of us.

I have been waiting for this moment for over 8 weeks and it is finally here. I think gold will have one last drop below 420 and may make new lows just like the stocks did Friday(remember the stocks tend to lead the metal), but if gold gaps down hard one morning this week and the stocks do too that will likely be it.

My plan is to buy a sizable gold position on such a gap down in my favorite gold stocks.

After gold bottoms I expect gold and the XAU to spend the next 4-12 weeks basing and going sideways. Towards the end of this phase the relative strength of the XAU to gold should turn up, much like it did in August before the last rally started. I will use such a signal to double or triple my gold stock position. Once that signal comes I think the stocks will attack their 52-week highs, break them, and the begin the next leg of wave 2 of the gold bull market.

I do believe it is important to take a position in the strongest stocks and most fundamentally sound companies before this happens, because some of them will lead the whole gold market and won't pull back or base much after this bottom.

To find out what gold stocks Mike Swanson holds and plans on buying subscribe to his free Weekly Gold Report at http://wallstreetwindow.com/weeklygold.htm.

Michael Swanson,
WallStreetWindow.com

Disclaimer: Michael Swanson is the President of USA Capital, Inc., which provides management, support, and research for institutional investors, hedge funds, and mutual funds. The ChartWizard is also an employee of USA, Capital, Inc. Both Swanson and employees and associates of USA Capital, Inc. may have a position in securities which they mention on WallStreetWindow or any of its services. In such cases, appropriate disclosure is made. Under no circumstances should the information received from WallStreetWindow represent a recommendation to buy, sell, or hold any security. WallStreetWindow contains the opinions of Swanson and the ChartWizard and is provided for informational purposes only. Neither Swanson, the ChartWizard, nor TimingWallstreet, Inc., which owns WallStreetWindow, provide individual investment advice and will not advise you personally concerning the nature, potential, value, or of any particular stock or investment strategy. To the extent that any of the information contained on WallSteetWindow may be deemed investment advice, such information is impersonal and not tailored to the investment needs of any specific person. Past results of WallStreetWindow, the ChartWizard, or Michael Swanson are not necessarily indicative of future performance.

WallStreetWindow does not represent the accuracy nor does it warranty the accuracy, completeness or timeliness of the statements made on its web site or in its email alerts. The information provided should therefore be used as a basis for continued, independent research into a security referenced on WallStreetWindow so that the Subscriber forms his or her own opinion regarding any investment in a security mentioned by WallStreetWindow. The Subscriber therefore agrees that he or she alone bears complete responsibility for their own investment research and decisions. We are not and do not represent ourselves to be a registered investment adviser or advisory firm or company. You should consult a qualified financial advisor or stock broker before making any investment decision and to help you evaluate any information you may receive from WallStreetWindow.

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Copyright © 2004-2008 Michael Swanson

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