Gold Market Update
Originally published July 13th, 2008.
Last week both gold and silver staged important breakouts from base areas to commence major uptrends. This is a development that we had been expecting for quite some time. On the 1-year chart for gold we can see how it first broke out from the 3-arc Fan Correction that we earlier delineated with the biggest one day rise for many years - itself a very bullish development. After that it reacted back from the clear line of resistance dating back to late March that marked the top of the base area. This reaction served to ease the short-term overbought condition. Then late last week it blasted through the resistance, this move synchronising with a breakdown by the dollar in response to the Fannie - Freddie catastrophe.
As should be plainly obvious from this chart, we now have a very bullish technical situation indeed in gold. For having reacted back very close to its 200-day moving average, the price has steadied and turned up to complete a base area above this indicator, and has just broken out from this base area at a time when the 50-day moving average has turned up just above the steadily rising 200-day - a most propitious setup.
With gold and silver staging major breakouts late last week it should come as no surprise that the dollar suffered a major breakdown at the same time. On its 1-year chart we can see how the dollar has remained within the confines of a weak countertrend rally since mid-March, this feeble advance serving to close up the earlier massive gap with the 200-day moving average and unwind the corresponding extremely overbought condition. It broke down from this uptrend on Friday, no doubt in response to the deepening Fannie - Freddie crisis in the US. Fannie and Freddie have gigantic liabilities and are collapsing, and it now clear that only government intervention at massive cost will save them. As we know the US Federal Reserve has no problems with creating the required liquidity - after all it is simply a vast money factory, kind of opposite to Las Vegas, which is a vast financial sinkhole - maybe the two are connected underground, although it would probably take about 1,000 Las Vegas's to keep up with the Fed's money creating activities. The problem is that creating another few trillion to bail out Fannie and Freddie is going to go down like a lead balloon in the currency markets. Hence a severe downtrend in the dollar is the immediate prospect that will result in a powerful uptrend in gold and silver. Returning to the dollar chart it is clear that once the support near the March low and then the round number support at 70 fails, the decline is likely to accelerate dramatically.
We have been long gold since before the breakout from the Fan pattern and added to positions on the last dip. Although now rather overbought short-term after the latest rise, it is still regarded as a strong buy because of the further gains in prospect, and of course any near-term dips will provide the opportunity to buy at better prices.
With regards to stocks, bigger gold stocks and ETF's are favored at this point in the cycle. Junior and exploration stocks, which tend to do best towards the end of major uptrends should at this point only be bought selectively and with care. This is especially the case because as a group they are still suffering from deep malaise as a result of prolonged naked shorting by Hedge Funds. The financial crisis of the past year has made it much more difficult to obtain credit generally and mining finance has been much harder to come by. Realising the plight of the junior companies - that they are forced to fall back on stock dilutions as a way to raise capital, the Hedge Funds have resorted to shorting them mercilessly, knowing that the price will be dumped later when the inevitable stock issue is announced. This has created a "survival of the fittest" environment that threatens to wipe out a number of juniors. However, with gold and silver rising strongly, the Hedge Funds are clearly playing an increasingly dangerous game, particularly as the larger mining companies, if they have any sense at all, will take advantage of the artificially deflated prices of junior mining companies to mop up the better ones with promising prospects or early stage projects on the cheap. One thing's for sure, many of the survivors in this sector, large and small alike, as set to do very well indeed in the environment that we are now moving into.