Don't Lose Sight Of The Forest...
Gold's bull market is alive and well and a renewed rise is currently underway.
The recent low in gold actually clocked in on April 7 at $321.50 and gold's been on the rise since then. Gold surged $9.50 on May 19 and there's more to come.
More important, gold formed a major bottom in February, 2001. And despite its ups and down, the major trend has been up for over two years now. As long as this continues and we believe it will, then gold is headed higher and that's where our focus has to be.
Remember, the daily ups and downs in any market can be confusing and they actually detract from what's really important as we've seen over the past few months. As gold moved lower, for instance, many investors threw in the towel feeling that gold's days were over.
In other words, these investors were sucked into the day to day action and news. They got excited and made decisions based on these noisy distractions, which bombard investors every day on TV, in the newspapers and on the internet.
…focusing on each tree
We know it's hard to resist and we listen to it too. We have to because it's our job but we also know that the more we hear, the more we understand how investors can become overwhelmed.
Every daily movement is emphasized as a big deal when in reality it's not. Then there's the analysis and theories that go on and on. This information is actually geared to traders, not investors, and we know that traders lose money, something like 90% of the time.
As we've said many times, far more important are the major trends. These are the trends that last for years and that's where the best profits are consistently made, year after year. And if you invest with the major trends and stay with them, you'll do far better over the long haul than any short-term trader could ever hope to.
Go With Major Trends
Major trends don't change often but when they do you have to go with them. This simple truth is often hard for investors to accept because as humans, we basically don't like change.
Stock investors, for example, were resistant to accept the change that happened three years ago in the stock market. As a result, most are facing big losses.
It was the same for many gold bugs in the 1980s, ourselves included. Since we thought gold was going higher, we were slow to accept a major trend change had happened. But we learned very valuable lessons that have hopefully made us better analysts.
Looking at Chart 1, for example, you'll see that despite the recent ups and downs in these markets, and the fact the primary trends were tested last month, the major trends remain intact.
Gold's major trend is up and the downward correction that began last February ended right on schedule.
It's the same story for the U.S. dollar. The dollar's major trend is down and it's at a new over four year low. This in turn will continue to be bullish for gold since these two markets move in opposite directions. And as the dollar falls further, gold will head higher.
Massive Deficits = Weak Dollar
The world has changed dramatically since September 11, 2001 in more ways than one. At that time, the dollar was strong following a six year rise. But within months of 9/11, the dollar started a major bear market and it'll likely continue for some time to come. Why?
The main reason is the massive budget deficit. Two years ago, a surplus of nearly $6 trillion was projected for the next 10 years. But in the most abrupt reversal in history, the big surplus became a historically unprecedented deficit, which is now expected to be more than $1 trillion in 10 years, in large part because of the war on terrorism and its repercussions.
Just in the first six months of this fiscal year, the deficit has grown over 90% compared to last year and, in hindsight, that's probably what the dollar was anticipating as it looked ahead and began its steep decline. These deficits are going to have to be covered by running the printing presses full speed ahead. That is going to devalue the dollar, which is essentially what's currently happening.
Then there's the trade deficit. At over half a trillion dollars a year, it's also at record high levels, which coincide with devaluations. Historically low interest rates are another negative that makes the dollar unattractive compared to other currencies. The weak economy and the possibility of recession or deflation are also hurting, and the loss of foreign confidence has been adding fuel to the dollar's bear market which could easily intensify.
The dollar has already lost 70% of its purchasing power in the past 30 years. And with the deficits now soaring with no end in sight, it's not hard to imagine what this is going to do to the dollar. That's why we feel this bear market could be a shocker and that'll be very bullish for gold.
For now, gold's major trend is up above $323 and the current rise will remain in process by staying above $335. A possible scenario could go like this: gold peaks in June or July, declines into August, which tends to be a seasonally low time for gold, then the best rise in the cycle could start by the Fall, reaching new bull market highs as the year nears an end. In other words, we could see gold above the $415 level, which is the next important resistance, either during the current rise or before year end.
Gold Shares: Don't worry, they'll come around
Gold shares are still lagging gold. But as gold continues to rise, gold shares will eventually catch up and they'll likely again outperform gold, which is what they normally do in a bull market.
Chart 2A shows that the HUI gold share index is in a major bull market above its 65-week moving average at 121. And since the ratio of HUI to gold remains above its moving average too, the major trend favors gold shares over gold, meaning the returns will be greater in gold shares over the long-term (see Chart 2B).
The bottom line is, gold shares are still a bargain. They're a good buy and, of course, so is gold.