Gold: Where The Action Is
Gold is looking very good and the action is strong and bullish.
You may remember last month we thought the intermediate gold rise was over, but it obviously wasnt. The rise has been extended, in large part due to the weakness in the U.S. dollar. We felt this might happen, presenting a possible twist in the gold picture, and with the dollar now hitting new bear market lows, gold is showing great strength.
Gold is currently hitting a new 7½ year bull market high and it's reinforcing a solid bull market. Gold shares, platinum, copper and silver also shot up, backing up the bull market.
Gold has been in a solid rise for almost three years now. Some of the rise has been due to the weakness in the U.S. dollar because gold moves opposite to the dollar, and it looks like the dollar is going sharply lower. But gold has been rising for other reasons too.
Overall, gold's been moving higher because something isn't right in the world today. Uncertainty is keeping gold up, both in the U.S. and globally. Debt is literally soaring and terrorism is a new threat. China is also entering the market and it's now allowing its 1.3 billion citizens to buy gold, which is a very important factor since it'll strongly increase demand.
Plus, inflation signs are starting to surface, which is another important fundamental because inflation is very bullish for gold. The CRB commodity index, for instance, is at a new seven year high and commodities are up between 32% and 66% this year alone.
The bond market is reinforcing this too and so is the booming money supply around the world. This is now resulting in higher prices, which will soon filter down to the consumer level and the inflation index.
In fact, the latest producer price index soared at a 10% annual rate and it leads consumer prices. As this becomes more obvious, investors will increasingly turn to gold, the true inflation hedge, which all means gold will continue to be a good investment.
Gold Shares are Primary Beneficiaries
Gold shares have been even stronger than gold. The gold share indexes are hitting new six year highs and they've been outperforming gold over the past couple of years. When gold shares are stronger than gold, it's yet another good sign for the bull market.
Why? Because gold mining companies have fixed costs to produce an ounce of gold, regardless of the price. So as the gold price rises, it means bigger profits for gold mining companies.
Gold shares are set to be the best performers in 2003 for the second year in a row. The Scudder Gold and Precious Metals fund was the best performing mutual fund of all mutual funds in the third quarter. The U.S. Global World Precious Minerals fund was #3 and they've been two of our favorites.
Technicals: Also bullish
The technicals are also very bullish for both gold and gold shares. As an example, take a look at the latest chart of the XAU gold share index. As we've shown before, it's formed a huge six year head and shoulders bottom and it recently broke strongly out of this bottom formation.
This tells us gold shares have great upside potential and based on this pattern alone, the XAU could eventually reach the 160 level. Since it's now near 105, that would mean a rise of over 50% from current levels and many gold shares would of course rise much further.
Big Picture: Most important
It's important to remember, however, that no market goes straight up or straight down. Since these markets have risen almost non-stop for months, they're due for a breather. In other words, things are a bit overdone and these markets could soon correct downward to cool some of the enthusiasm, which would be normal in the months just ahead. But as long as gold stays above $350 during any upcoming weakness, the major, primary trend will remain up, meaning prices are headed higher over the longer-term.
The major trends in any market are the most important and that's where you'll make the best profits. But since they are major moves, they take time and you also have to be patient.
If you are though, any upcoming weakness in gold and gold shares will provide a great buying opportunity if you want to add to your positions or buy new ones, if you haven't bought yet.
We believe gold is the best and safest long-term investment today. It's stronger than stocks or bonds and it has greater potential. Gold coins like Krugerrands or U.S. American Eagles are the best way to buy the metal, and gold shares or gold share funds are the best way to reap the full benefits of the bull market since they're stronger than gold and they provide leverage.