Chart Walk: Looking Good
Gold has been quiet lately, but not to worry. The Summer consolidation time looks like it's coming to an end. Gold shares broke out today on the upside. They're likely leading gold as they often do and once gold gets going, it'll be important to see if it reaches a new bull market high.
Gold's Big Picture: Impressive
If it does, gold will be showing great strength as it will be entering a stronger phase in the ongoing bull market. And when you stand back and look at gold's big picture, you can see a potentially explosive rise coming in the years ahead (see Chart 1).
Note the massive uptrending channel gold has formed since 1967. The 1974 and 1987 peaks mark the top of the channel while the 1969 and 2001 lows establish the bottom. The mid-line connects the 1976 and 1993 lows.
When gold hit its 1980 peak it overshot the top of the upchannel. Who would've thought in those days that gold wouldn't reach a bottom for another 21 years in 2001 as it moved from the top of the channel to the bottom.
The worst part of the bear market was during the tech boom from 1996 to 2001 when gold fell to new bear market lows. The negative sentiment became so ingrained it's still in the market today, despite the 68% rise since 2001 and the fact that gold broke above its 21 year downtrend, which was very bullish. Sentiment is slowly changing, however, and it'll continue to change with each new bull market high.
For now, let's watch for a new high above $430. Assuming this huge channel stays intact, once gold breaks above this level, $500 will be the next target. After that, the 1980 highs would be the next stop on this big picture. This level would also coincide with gold reaching the mid-channel line.
So the question is, when is a likely time for gold to rise above $430? Our medium-term leading indicator on Chart 2B serves well in identifying the intermediate moves in the gold price and it'll help determine the timing of the next upmove. The As and Cs coincide with gold's rises and the Bs and Ds identify gold's intermediate declines.
D declines are the worst declines in the pattern, which already happened last May (see Chart 2A). An A rise then began and gold rose moderately, which is normal for A rises. Next, gold declined in a B decline, which is still in process, but these also tend to be moderate. This means a C rise will follow once the current B decline is over.
As we've mentioned in previous articles, C rises tend to be the best rise in the A through D pattern. During a bull market, C rises take gold to new highs. So at worst we could now see gold back and fill a while longer, similar to the mid-2002 time period. And at best, gold could soon move up above the April peak of $430.
The bottom line is, either way, gold is poised to rise in its best C rise in the coming months and $430 will likely be surpassed before year end.
For now, let's keep an eye on the numbers. Gold is strong in a renewed rise by staying above $399 and it has major support at $391. But once gold rises and stays above the August 20 high near $414, it could rise to test $430. A break above $430 would reinforce the bull market for several reasons. It would confirm that the bull market's C rise is on schedule and gold would then be entering a stronger, very bullish market phase.
Let's now take a look at some of the other markets and you'll see that they're reinforcing this outlook as well.
Gold & Oil: Move together
Gold and oil, for instance, tend to move together. In fact, as oil was soaring above $45, it started to boost gold. Chart 3 shows this relationship since 1985 and you'll see that gold tends to lead oil.
Gold and oil are both in major uptrends above $391 and $35.50, respectively, and as long as that's the case, prices are going higher and one will likely feed on the other. Oil has become volatile since it approached $50, but with global consumption the largest in nearly 30 years, it'll likely stay in a major uptrend.
We've had an unusual environment since 2000 where gold and oil rose, and so did bonds. Normally, rising gold is inflationary while rising bonds is a recessionary sign. In the past, they've moved opposite. But since 2000, bonds rose due to the recession that started following the bursting of the stock bubble. Plus, countries like China and Japan began buying huge quantities of bonds. The falling dollar, in turn, pushed gold up.
Chart 4, however, shows that gold has been stronger than bonds since 2001 and the ratio of these two markets has been rising. More important, the ratio broke above its mega 80 month moving average for the first time since 1984. This is not casual and it's saying gold will continue to outperform bonds in the years ahead. Does this mean inflation will be the greater threat as time goes on? This chart is telling us yes, which also reinforces higher gold and oil prices in the years ahead.
The Others Are Stronger Than Gold
And it's not only gold. Silver reached a four month high last month and it's bullish above $5.90. Chart 5A shows silver holding well above its 65-week moving average, on the higher side of the upchannel. This suggests silver will stay bullish.
Silver is also stronger than gold as the ratio remains above its moving average in a trend that started last year (see Chart 5B). This means silver will continue to outperform gold.
Are Gold Shares Leading?
Gold shares are now moving up and their basing period is finally coming to an end. Both XAU and HUI hit a five month high today, rising strongly above their basing level (see Chart 6A). They're firm above 89 and 195, respectively, and if they now stay above 96 and 210 they'll reaffirm their strength and they could rise to test the December highs.
In other words, a renewed rise is starting just when many investors were losing faith in gold shares. Plus, gold shares are resuming their strength over gold and the major trend continues to favor gold shares (see Chart 6B). Gold shares often lead gold and today's breakout is likely signaling that gold's C rise is just around the corner.
Platinum also reached a four month high last month. Platinum is again flirting with its 1980 highs and it's in a solid uptrend above $795 (see Chart 7). Like gold, platinum has been in a massive uptrending channel since the 1970s but the bull market is more advanced. Platinum is now on its way to the top of the channel and if reached, a record high would occur above the 1980 peak. Will gold follow and do the same? We'll soon see.
Basically, the trend is up for all commodities and that'll continue to provide upward pressure for the metals markets in general. And once gold starts up in earnest all of the gold shares should do well as they continue to move up with gold and outperform it.