Gold's $325 Maginot Line

By: Adam Hamilton | Fri, Sep 27, 2002
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Following the horrific trench warfare of World War I, the first immensely destructive "modern war," France vowed to never again be subjected to invasion by rampaging German hordes.

In order to protect its vulnerable northeastern border, the French government began construction of the "Great Wall of France" in 1929. The Maginot Line was a state-of-the-art network of hardened fortifications and heavy weapons designed to utterly smash any conceivable German invasion. The bulwark was considered to be utterly impregnable, and the world had never seen such a level of sophisticated and overlapping defense in depth.

While the Maginot Line fortifications, heavy gun emplacements, underground transportation networks, and soldiers' quarters were being carved out of the French countryside by legions of engineers, an upstart politician named Adolf Hitler was consolidating his control of Germany. The blighted seeds of World War 2 were being sown.

Almost a decade later in spring 1940 the German war machine had crushed Poland and was ready to unleash its full fury on France. Hitler's armies stunned the world by refusing to attempt a suicidal full-frontal assault on the impregnable Maginot Line. Instead, the wise German military generals ignored the hardened Maginot Line defenses and simply bypassed the heavy fortifications by swinging around them from the north.

The German armored Blitzkrieg shattered the defenses of France's northern neighbors of Luxembourg and Belgium with frightening speed. German Panzer tanks swept through the Low Countries like a malevolent plague of mechanized locusts and were soon thundering into France from the north.

The brilliant German generals, fully realizing the Maginot Line would be virtually impossible to pierce without suffering exceedingly heavy casualties, ignored and flanked the legendary fortifications to achieve their objective of invading France.

As I have traded and observed the gold markets in recent years, it has become ever more apparent that the $325 region for the Ancient Metal of Kings is a monumentally important resistance level for both the bulls and the bears. In our Zeal Intelligence newsletter and these Web essays (see "Gold Prepares to Erupt") I have discussed this intriguing phenomenon several times.

Since 1998, every time the US dollar price of gold has attempted to march north through $325 it encounters heavy resistance. Like an army of golden knights charging Maginot-Line-like fortified strongholds, every gold rally attempting to breach $325 has collapsed in rout. To gold investors, the mystical $325 gold line-in-the-sand seems as real as the actual decaying Maginot-Line fortifications still occupying northeastern France today.

For almost 5 years, a very long time by the instant-gratification capital-markets standards of today, gold has consistently failed to breach the solid $325 defenses. Five times gold has challenged or threatened to challenge the $325 Maginot Line, and five times it has been mercilessly repelled under heavy fire. Gold's track record of holding $325 since 1998 has been utterly dismal.

With gold once again withering under heavy selling fire in its most recent $325 assault attempt this week, is all lost? Will the gleaming artillery barrels dotting the gold landscape around $325 ever be silenced, or is gold destined to be trapped behind the $325 line-in-the-sand forever. These are crucial questions with enormous ramifications for every investor on Earth, not just gold investors.

The magnitude of the raw power of these thundering cannons easily shattering every gold advance near $325 is readily apparent in graphical form.

Gold's $325 Maginot Line

The red numbered circles above are like tombstones commemorating the times gold has launched campaigns against the $325 Maginot Line. All have been failures thus far, although technically the jury is still out on #5 since we haven't seen what will transpire in the next few weeks yet. Any way you slice it, the $325 resistance fortifications must fall if the yellow metal is to continue rallying higher. If $325 holds, the gold rally is over. If $325 falls, the gold rally is probably just getting started.

While it certainly is disheartening for gold investors to suffer through in real-time when $325 continually sends gold retreating with its tail between its legs, the longer-term strategic view in the chart above offers many encouraging insights.

Gold's strategic trend since early 2001 has been unmistakably up. As the blue trend lines above outline, gold has been marching north full speed ahead, damn the various resistance levels. As 2002 rolled in, gold was trading under $280 and the fabled $300 level seemed virtually unattainable. There were great celebrations when $300 soon fell however, as gold's strategic bull market crushed former resistance and swept relentlessly higher.

Today, at the dawn of autumn 2002, $300 gold now seems low to investors. The very same $300 level that appeared so far away merely 9 short months ago now seems psychologically discouraging when viewed from today's lofty perspective! Unless you were investing and trading in gold and gold stocks in late 2001 and remember how high $300 seemed before we breached it, it is hard to fully comprehend the magnitude of what gold has already achieved this year.

This is where the true value of perspective is found! While it is easy to get bogged down in the details and psychologically overweight the importance of recent short-term tactical action when one is slogging through the muddy trenches of daily trading, the God's-eye strategic view is liberating. Since early 2001 gold's strategic uptrend is simply gorgeous, exceedingly bullish, and this is critical to keep in mind while we watch the epic battle between gold and its long-time $325 nemesis unfold these days.

Contrast gold's rock-solid strategic uptrend today with its relentless bearish downtrend from 1998 to early 2001. While the spectacular Washington Agreement spike in 1999 (#2 above) visually breaks up the graph, if you draw in trend lines from 1998 to early 2001 and ignore the extremes gold was absolutely in a brutal bear market.

Ultimately the widespread-fear-of-central-banks induced plunge in mid-1999 and the resulting gargantuan reaction rally that soon followed were market noise not relevant to the primary trend. Even the subsequent Anti-Hedging spike (#3) had a super short half-life and soon faded into memory. The gold charts just looked plain ugly until early 2001, when something changed and gold's strategic downtrend screeched to a halt and suddenly started marching north.

While the $325 Maginot Line has held against all gold's assaults since 1998, it is exciting and encouraging to see from where each subsequent attack has been launched. Rather than viewing gold's attempts on $325 as the army of golden knights being shattered and fleeing, it may be more appropriate to view gold's skirmishes as scouting missions. With the longer-term perspective offered above, it almost appears as if gold is systematically probing the heavy $325 resistance bulwarks, sending out elite raiding parties to gather reconnaissance data and report back on exploitable weaknesses.

Since 1999, each subsequent assault on the $325 fortifications has been launched from higher and higher levels. The gold bulls, rather than fleeing in terror when fired upon by the bearish sellers at $325, seem to be gathering strength and camping closer to the battlefront each time as their boldness and courage grows.

As the white lines in the graph indicate, there is relentless ascending wedge forming between gold's trading range and the strong resistance at $325 gold needs to pierce to keep the young gold bull alive and rallying. Like a compressing spring, the wedge pattern exerts more and more force on the $325 Maginot Line each week as the distance between the primary gold uptrend and $325 constricts.

Way back in 1999, the spectacular Washington Agreement spike needed to rocket up by an enormous $70 or 27% to take a shot at breaking $325. The first attempt this year however, #4 above, made a raid on $325 by only rallying $21 or 7%. As gold's strategic uptrend thrusts it higher and higher, ever more buying pressure is applied to the heavy long-term resistance line. Soon the golden armies will probably be storming the very gates of the fortifications and the seller garrison manning the guns may flee out of the sheer terror of seeing gold completely unintimidated by the $325 Maginot Line.

As the wedge relentlessly closes, gold's invasion is advancing and growing bolder with each attempt. A breakthrough to new gold heights is all but inevitable!

If gold does decide to regroup after its 5th attempt on $325 this week, we could see some near-term weakness, but it will not nullify gold's magnificent strategic uptrend. The lower blue long-term support line of gold is around $290 now, shown above. While gold under $300 would utterly terrify a lot of gold-stock investors, it would not violate gold's young bull market at all. Gold's technical scene will remain bullish as long as gold trades above $290.

Things probably won't get that bad though. As I mentioned six weeks ago in "GoldTrends 3," it continues to look like gold's midline is evolving into its new primary lower support for its strategic uptrend channel. The midline is simply a new trendline between gold's existing primary resistance and support lines. It is the lighter blue central line in the graph. As anticipated, this midline held following the selling reaction when gold failed to hold $325 in June. If it holds again, and there is no reason to believe it won't, gold probably won't trade much lower than $310 or so before it launches its next attempt on the $325 Maginot Line.

If you are looking to add to your gold or gold-stock holdings on weakness, gold's next bounce off of this developing midline is as good of place as any to make another purchase. With gold's 50-day moving average (red) so far above its 200-day moving average (black) right now, it would not be surprising at all if the awesome gold rally of 2002 needs to regroup and consolidate a bit before launching its next glorious assault on $325.

As the ascending wedge of gold's history of attempts on $325 indicates, it is probable the fabled $325 Maginot Line will fall sometime in the next six months or so. That fateful event, once gold has held $325 long enough or pushed high enough for folks to believe it is for real, will be an immensely bullish omen. It is likely to spark a great deal more general interest in gold and gold stocks than we have yet witnessed to date in gold's young bull market.

The incredible behavior of gold-stock prices in 2002 readily concurs, indicating that investors fully expect the $325 Maginot Line to fall soon, buttressing the bullish message emanating from the gold charts.

Gold Stocks

Between the dawn of 2002 and gold's first attempt on $325 this year, the unhedged HUI gold-stock index rocketed up by an astonishing 127%. Accentuating the enormous degree to which investors' psychology affects their investment decisions, most of this year's HUI rocket-ride didn't occur until gold broke the psychologically heavy $300 level. With all this excitement erupting for the conquest of $300, imagine what the scene will look like when gold breaks through and consistently trades over $325?

Observing the HUI as a proxy for general gold-stock investor sentiment over time provides an interesting commentary on the enthusiasm surrounding each of gold's attempts on $325 in the last five years or so.

In the first attempt in 1998, #1, gold-stock investors were pretty excited and the HUI was bid up in an awesome rally. The gold world hadn't yet witnessed the depths of bearish despair that probably marked gold's ultimate secular double-bottom in 1999 and 2001, so their spirits seemed high and they had some faith when gold launched its first assault on the $325 Maginot Line. While not apparent in the time horizon visible above, gold had traded over $400 in early 1996 so gold-stock investors were betting on a quick return to $400+ levels.

After gold's first assault on $325 failed, gold-stock investors had to wait about a year-and-a-half for the massive Washington-Agreement spike, #2. Because of gold's precipitous plunge earlier in 1999, gold sentiment was absolutely rotten at the time. Predictions abounded of gold soon collapsing under $200 as the central banks seemed to control the markets with an iron fist. So, even though the spectacular Washington Agreement spike was the fastest and largest gold rally in recent memory, the HUI spike on it was not super impressive as is evident above.

By the time the third attempt on $325 rolled around in early 2000, gold-stock investors had virtually no faith and demanded hard evidence of a bottom and trend change. Since this crucial evidence was nowhere to be found at the time, the HUI's anemic rally (#3) on the Anti-Hedging gold spike was pathetic. Morale was dismal and gold stocks began to plunge after gold's third $325 assault failed.

For another year gold drifted lower and few believed in its potential. Then, amazingly, gold held above its 1999 levels in early 2001 and carved out a perfect symmetrical heavy double-bottom on the charts. Gold's current bull market was born and the yellow metal hasn't looked back since. The HUI rallied with gold, but nothing spectacular happened until the intimidating $300 level was broken.

Note the amazing gold-stock rallies at gold's fourth and fifth attempts above. Unhedged gold stocks have literally soared in 2002! With $300, which seemed so high and unattainable for so long, now behind us, gold-stock investor sentiment is growing more and more positive by the month.

The growing interest and enthusiasm for gold stocks in 2002 is even more impressive when the countless obstacles arrayed against investors learning about their huge gains are considered.

While unfortunately I can't possibly answer each of the 400 personal e-mails I receive every week, I am extremely thankful for all the wonderful information with which I am blessed from investors across the globe. Like a cosmic black-hole drifting in space, sometimes I feel like an information gravity-well where countless fascinating facts, observations, and anecdotes are perpetually poured in. Some of the folks who write to enlighten me are stockbrokers and Wall Street professionals, and some of their observations and experiences are very troubling.

Dozens of American stockbrokers, from many different companies, have independently shared similar stories with me. They claim they are being pressured into not speaking with their own clients about the magnificent performance of gold stocks. Common threads in their accounts include harsh peer-pressure, withholding of financial incentives, and even threats of being fired if they lead their clients into gold stocks. A few brokers have told me they actually were fired because they wouldn't toe the party line and hype US mega-cap stocks rather than truly help their clients make money in the star sector of 2002, gold stocks.

It is immoral at best and criminal at worst for Wall Street to be pressuring its own employees into not helping to protect their clients through the worst supercycle bear market in seven decades. As of September 25th the HUI was up an incredible 93% year-to-date while the S&P 500 was down a sickening 27% over the same time period. If any sector other than gold stocks was up 93% YTD in these tough times, Wall Street would be crowing about it from their rooftops!

Adding fuel to the fires these brokers are reporting, we have been collecting gold-stock research reports from mainstream Wall Street investment houses here at Zeal. Every report I have seen, and we have the original hardcopies actually issued by the big US firms, continues to hype hedged gold stocks rather than unhedged gold stocks. While the unhedged gold stocks are soaring because they have full exposure to gold's strategic uptrend, the hedgers have been performing horribly.

Wall Street is apparently sometimes systematically intimidating its own employees into not even mentioning gold stocks to their clients. Wall Street, when it does publish research on gold stocks, is also recommending that investors deploy capital in the losing hedging companies, the worst performers that don't fully benefit from a rising gold price. Probably not coincidentally, these hedging companies are usually larger and offer investment banking and derivatives business to Wall Street banks. Yet another conflict of interest, perhaps?

These nefarious activities are stunning and extraordinarily risky, especially in our current environment where burned investors and self-righteous politicians alike are enthusiastically trying to rend as much flesh from Wall Street's hides as possible.

In light of this strong headwind explicitly created to keep general investors from knowing about gold's and gold stocks' spectacular performances in 2002, the HUI activity this year is truly amazing. Even with the de-facto embargo on gold-related information to investors, the word is getting out.

Truth cannot be suppressed for long in the Information Age!

If gold stock levels are indeed a valid proxy for gold-investor faith in gold's near-term future, the probability of gold making a successful assault on $325 is the highest we have witnessed since 1998. The gold bears manning the $325 Maginot Line seem to be deserting their posts and the gold shorts are probably wetting their pants at the relentless advance of the golden armies on their garrison positions.

With Decision Day for the $325 Maginot Line drawing nigh, uncharted territory lies ahead. Once gold resistance at $325 crumbles and the Ancient Metal of Kings convinces investors it has achieved that crucial hurdle, the sky is the limit. As we haven't seen gold consistently trade above $325 for five years, who knows how high the breakouts of gold and gold stocks could ultimately run?

As gold's enormously strong strategic uptrend carries it ever closer to storming through the $325 Maginot Line in the coming months, the best is almost certainly yet to come for gold and gold-stock investors.


 

Adam Hamilton

Author: Adam Hamilton

Adam Hamilton, CPA
Zeal LLC.com

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Mr. Hamilton, a private investor and contrarian analyst, publishes Zeal Intelligence, an in-depth monthly strategic and tactical analysis of markets, geopolitics, economics, finance, and investing delivered from an explicitly pro-free market and laissez faire perspective. Please visit www.ZealLLC.com for more information, www.zealllc.com/samples.htm for a free sample, and www.zealllc.com/subscribe.htm to subscribe.

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