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December 20, 2002

Behold the Gold Bull!
by Adam Hamilton

The naysayers claimed it would never happen. The Keynesian socialists claimed there was no place for gold in their brave new age of fiat paper. The Wall Street perma-bulls claimed that gold was dead. The lion's share of mainstream investors didn't even know that gold existed in the real world, believing it to be some mythical fairy-tale concoction.

They were all dead wrong.

The magnificent and exciting events unfolding in the new gold bull market in the past days have rendered the naysayers' endless prattle completely impotent. The radical anti-free-market crowds who continue to oppose and fear gold are now exposed naked to the world as the fools they have been.

With all the subtlety of a mighty sledgehammer blow to the skull, the Ancient Metal of Kings crushed its legions of critics into dust as it burst out of its long-festering $325 shackles and screamed towards the heavens. What a wondrous sight to behold for longsuffering gold investors!

Hallelujah!

Dear friends, gold's spectacular breakout is a huge, huge deal. Even as a wordsmith I find myself at a loss for words this week on how to effectively communicate just how important the events we just witnessed are in the grand scheme of the markets. As a speculator I have learned the hard way in the trenches that I need to suppress my own lethal emotions when trading, but I have to admit that gold's stellar breakout this week was one of the most exciting market events I have ever witnessed. What a wonderful Christmas blessing!

The anticipation for this glorious week has been building for a long time amongst the vibrant international community of contrarian investors. The $325 level has been vexing gold and gold-stock investors since 1997, seemingly a lifetime ago when considering all the market chaos through which we have sojourned since those days.

Last year less than a month after the new gold bull was born we published an essay called "Gold Prepares to Erupt" on May 25th, 2001. In this essay I wrote, "With these recent historical technical precedents, we believe $325 gold is the current mega-critical level, the nexus of the struggle to liberate gold from its oppressors."

While gold proved hopelessly unable to rise to the occasion to challenge the $325 line in the sand in 2001, several valiant assaults on these fabled levels were launched this year. Unfortunately they all failed, demoralizing countless gold investors as is quite evident in gold-stock prices since June. Yet, just one month ago a new glimmer of hope emerged from the ever-enigmatic markets.

As any freshman economics student can tell you, manipulating markets always turns out badly. The free markets are naturally designed to perfectly match supply and demand of everything through the mechanism of price. As long as the price of anything trades freely, it will have no surplus or deficit and scarce resources will be allocated efficiently to their best possible use. No, I am not talking about physical gold here, but the mighty US dollar.

Since 1913 the hideous unconstitutional abomination that haughtily calls itself the Federal Reserve, even though it is neither federal nor a reserve, has utterly destroyed the very US dollar it was supposed to protect. Over 95% of the original value of the US currency has been destroyed by the Fed's disastrous ever-inflationary policies. The Fed has shamelessly raped and pillaged the savings of the American middle class like a demonic vulture straight out of the abyssal pits of Hell.

The Fed is just like the worthless old Communist Russian Central Planning Committees as it doesn't produce any valuable goods and services. All it can do is manipulate the quantity of US dollars outstanding and the price of the US dollar, commonly known as interest rates. Manipulation of markets is always ultimately futile and inevitably creates far bigger problems than it initially sought to solve. Last month the Fed finally pushed the limits too far and manipulated real interest rates negative for the first time in over two decades.

As far as I know, there is no more powerful and incendiary rocket fuel for a gold bull market than negative real interest rates. Negative real rates are an artificial and inherently unstable environment that occurs when a government decides to rob its savers through an immoral stealth tax on their savings, inflation. If you are interested in more detail on real interest rates, I have written three essays on them in the last 18 months.

In the most recent, "Real Rates and Gold 3" just published a month ago, it was growing increasingly obvious that the next stage in the gold bull couldn't be delayed much longer with negative real rates rearing their ugly heads again for the first time since October 1980. I said…

"Even though many gold investors grow pretty forlorn when gold is repelled from $325 under heavy fire, the new negative real rates today change the whole ballgame. Historically negative real interest-rate environments have been one of the ultimate indicators that a massive gold bull market is underway, and today this signal flare has been shot up into the heavens again. I believe the $325 Maginot Line will fall, with gold surging through to the upside, if the real interest-rate environment remains negative. ... Gold will not remain shackled under $325 if real rates remain negative!"

And so it was, praise God!

The magnificent fall of the mighty gold-short fortresses hulking along the seemingly impregnable "Gold's $325 Maginot Line" in recent days was every bit as spectacular as I had long hoped. The steadfast contrarians are once again vindicated!

The stunning technical significance of gold's breakout cannot be overstated. As is apparent above, one has to look back across a great gap of time the size of the Grand Canyon, almost six long years, to observe the last time the Ancient Metal of Kings traded at these levels. The red circles above mark gold's earlier unsuccessful attempts at surging decisively through $325, hence spawning the nearly universal dread of $325 amongst gold investors.

The blue fulcrum above marks The Turning Point, the dark days in early spring 2001 when a vicious secular gold bear, finally satiated, stealthily entered hibernation without fanfare and a spectacular secular gold bull was quietly born from the ashes. This fateful moment is certainly easy to see on a chart with 20/20 hindsight, but at the time the gold markets were crushed under near hopeless despair as gold threatened to break down to excruciating new lows not seen in decades.

I believe the impressive gold spike off its hellish plunge in 1999 shouldn't even be on the chart. As you can see above, gold had a well-defined downtrend channel in the last years of its bear market punctuated by the enormous sine-wave oscillation marking the Washington Agreement. Since both the steep 1999 plunge and its resulting fleeting over-correction of a short-covering frenzy were the direct bitter fruits of central-bank manipulation of the price of gold surrounding the surprise Bank of England gold sales announcement and the Washington Agreement, I believe that it is largely technically irrelevant.

For all intents and purposes the brutal gold bear decided it had feasted to its fill and quietly unilaterally ended its campaign of terror in early spring 2001. Since those incredibly dark and awful days, the whole gold arena has changed as the gold bull quietly entered the world and began galloping northward with few even noticing. During the bear gold was seldom above its black 200-day moving average line shown above, while during the bull it has seldom traded below. The glorious new gold bull changes everything.

A couple relevant side notes are appropriate here.

First, general stock-market investors and speculators can learn an absolutely priceless lesson from this gold chart. The horrific general equity bear in US equities will not end with a mighty bang when everyone is eagerly searching for it. It will continue its gruesome work with remorseless malevolent glee until US equities are driven so low that no one even cares anymore. The ultimate bottom in US stocks will arrive, sans fanfare, only after the vast majority have stopped looking for it.

If you search Internet archives you will find that most folks thought gold would plunge under $250 in early 2001 at the very moment the gold bull was born. Great Bears don't end when people enthusiastically want them too, they end when practically no one even cares anymore and the market is largely forsaken. Never forget this essential market lesson!

Second, as you know we at Zeal crave the long-term strategic perspective so we can gain a higher probability of being blessed with superior investments and speculations for our clients and ourselves. Legendary profits are almost impossible to achieve without the benefit of the proper perspective. With this core belief in mind, my partners and I were trying to understand the gold breakout in strategic context so we created a new giant graph to analyze gold and gold-stock index movements.

While originally built as an internal graph, we decided to dress it up and make it freely available to all in the spirit of the joyous Christmas season. If you are interested in checking out a big 1024x768 pixel highly-detailed gold and gold-stock graph, it is available at http://www.zealllc.com/2002/gold.htm . Enjoy!

While the proper perspective is essential to place the new gold bull in strategic context, we do need to zoom in a bit to a more tactical level to analyze its technical evolution.

Wow! This is the kind of price chart that is so gorgeous and pristine that one would expect to find it only in arcane textbooks on technical analysis. The Ancient Metal of Kings has steadily and resolutely run up 34% in about 21 months. This is hardcore relentless secular bull-market behavior not even resembling sharp and fleeting bear-market rallies, which I have discussed ad infinitum in stock-market terms in various essays this past year. This bull market in gold is for real!

It is really intriguing observing gold's support points since early 2001, the levels at which temporary bull-market pullbacks bounce and then march northwards again zealously seeking brave new highs. The blue arrowheads above mark these support bounce points and offer some valuable insight into the raw strength of this galloping golden bull.

Initially gold's lower support line held the day, with gold recovering in 5 strong bounces off these levels into early 2002 making a textbook-perfect uptrend line. Then, also following classic bull-market behavior, a mid-channel technical line we call the midline evolved from being a secondary resistance level early on to a rock-solid primary support line since late July 2002.

Once again, since there have been so many bull markets in history to observe and learn from, the midline morphing from resistance to support was also something that could be anticipated if the gold bull market was to be the real thing. In "GoldTrends 3" published in August I said…

"One key bit of wisdom in technical analysis states that in bull markets old resistance levels gradually morph into new support levels as the bull run charges ever higher. In the delicious gold chart above, the midline appears to have changed from a level of topside resistance to gold last year into a bulwark of bullish support for the gold price this year. My partners and I are starting to wonder if the midline will actually turn out to be the new heavy bottom support line for gold's ongoing strategic uptrend. Only time will tell, but evidence is accumulating in favor of this hypothesis."

While the midline is indeed holding strong now, there are hints emerging that the black 200-day moving average line above may instead prove to be gold's new heavy bottom support level, which is even better. 5 of the 8 technical bounces above rallied off gold's 200dma, which is a great omen for gold investors going forward.

If the 200dma is where the gold bull will brook no more selling pressure and start surging higher again, then gold investors have rock-solid support right under $315. If gold backtracks to this level, gold stocks can be zealously and aggressively accumulated again on their pullback as weak-nerved gold-stock investors begin to fear the usual market noise.

On the other hand, if the original lower support line is still valid, we could witness gold correct back down to the $300-$305 level and still be unequivocally in an immensely powerful gold bull market. Obviously we will be watching these two potential support lines closely in the coming months and will keep our Zeal Intelligence newsletter subscribers informed of any stellar gold-stock buy signals that emerge out of the mists of time.

And, as if the gold rally itself wasn't reason enough to be excited and very thankful, the new golden bull has been pure ambrosia from the heavens for gold-stock investors. Marvel at the wondrous gold-stock rally to date!

Incredibly interestingly, the gold-stock mega-bull market launched many months before gold itself bottomed and commenced its own bullish operations. The white fulcrum above is mid-November 2000, about four and a half months before the Ancient Metal of Kings carved its own bear bottom.

This truly impressive development fills me full of great hope as it means that there is really a considerable army of contrarian investors out there like us that anticipated gold's bottom and accordingly deployed capital early. This means that there will be a powerful remnant of fearless contrarians who will be immensely blessed to be able to watch their fortunes multiply through the worst equity bear market in three generations.

On the backs of these brave souls may lie the very future of the general US stock markets. Sadly but literally, the gold-stock investors may prove to be the only significant population of investors who survive the brutal general equity Great Bear market with large pools of capital intact. We will be among the few with the precious capital available to buy the legendary once-in-a-lifetime general-stock bargains at the ultimate bear-market bottom when the Long Valuation Waves reach their abyssal troughs in the coming years.

Unhedged gold stocks, like a rocket, have soared a phenomenal 299% thus far in the new gold bull market! Similar to gold itself above, the HUI's 200dma appears to be its new level of strong support, providing enticing clues to potential future levels to aggressively accumulate larger gold-stock positions on any normal healthy bull-market pullbacks. We will be monitoring these levels closely in the coming months.

Hedged gold stocks, the companies that remind me of the Biblical Esau who foolishly sold out his birthright for a mere bowl of stew, are drastically lagging unhedged gold stocks. The hedgers made the silly bet that gold would never soar over $325, believing greedy Wall Street bankers with conflicts of interest rather than studying history themselves. Their shareholders are now paying a fearsome price for their folly. As the big graph discussed above shows, the hedged XAU is lagging the unhedged HUI buy an enormous amount.

The free markets are ruthlessly punishing those naïve enough to invest in heavy hedgers in a secular gold bull as the "hedge tax" rockets through the stratosphere. For the life of me I can't even begin to comprehend why any serious investor on Earth would even consider risking their scarce and precious capital in heavily-hedged derivatives-laden toxic waste like Barrick Gold or their dark brethren during a secular gold bull market. Perhaps they are just masochistic and enjoy pain.

At Zeal right now we are running five short-term elite unhedged gold and silver stock positions that have exploded in December. Our current Zeal Intelligence equity trades that our subscribers and we own are up 35%, 41%, 36%, 29%, and 32% so far this month alone! And we suspect they are just getting started. What a huge mega-blessing! I love secular bull markets and am so thankful for this week's gold breakout assuring the world that this gold bull is the real deal.

Finally, I would like to close this week before we break for Christmas with the latest iteration of a graph we originally ran in May in an essay appropriately titled "Gold Defies Naysayers". It simply superimposes today's gold rally in yellow over the last Great Gold Bull of the 1970s in black. It provides a unique big-picture strategic perspective that transcends the tactical charts above.

Now I certainly don't have to tell you that no mere mortal can see the future. I know I sure can't. Only God, who the incredibly wise ancient Israeli prophet Isaiah called "the high and lofty One that inhabiteth eternity" is outside of and transcendent from the space-time continuum He created. We mere mortals who are trapped within the physical dimension of time, especially when dealing with the markets, cannot see the future and at best can only traffic in probabilities.

This crucial caveat aside, as exciting as our wonderful new gold bull is to date it is barely in its earliest stages in historical context. The way gold today (right axis, yellow) is tracking the progression of the last Great Gold Bull (left axis, black) is absolutely uncanny. If today's new gold bull even approaches the magnitude of its most recent noble ancestor, the big party is just barely beginning for gold and gold-stock investors!

Could we see another 1970s magnitude gold bull market again today? Absolutely!

Real interest rates haven't been negative for over 20 years, when the last Great Gold Bull peaked. Negative real interest rate environments are the most potent elixir known for igniting out-of-control and spectacular gold bull markets. If you are not familiar with their colossal power, please digest the first graph in my recent "Real Rates and Gold 3" essay.

Since we are now sojourning through dangerous negative real interest-rate waters for the first time since the last Great Gold Bull, it is entirely possible the gold action this time around will also far exceed the grandest upside expectations of most investors today.

Coupled with the appalling inflationary rape of savers by the Fed which all but forces them to flee into gold's unparalleled 6000-year track record of rock-solid safety and refuge, US equity investors are facing the most brutal Great Bear market in 70 years. 2002 will be the third down year in a row for US equities, which ties this losing streak with ugly episodes last witnessed in the bowels of the notorious Great Depression of the 1930s.

If stocks are down again in 2003 too, which I suspect they will be due to the outrageous equity valuations still rampant today, I believe it will be the first time in the history of the United States of America when the stock markets have fallen four years in a row! In such unprecedented and frightening territory, investor fear and panic will grow to epic proportions not seen in generations. If you think the July 2002 and October 2002 mini-panics we just witnessed were scary, just wait until 2003! Unprecedented flight capital will likely deluge into gold and gold stocks to escape the horrific general-equity carnage.

When gold's spectacular and decisive breakout above the $325 Maginot Line is coupled with a vicious negative real-rate environment not witnessed since the last Great Gold Bull and a general equity environment so bad it may end up making the Great Depression of the 1930s look like an investors' paradise, anything could happen in gold. The sky is truly the limit!

Enjoy the new gold bull, deploy your capital accordingly, and think in terms of the proper magnitude for a new massive strategic long-term Great Gold Bull market, not a mere tradable bear-market rally. If this market cycle continues to rhyme with history, and it certainly looks like it will, the best is undoubtedly yet to come. We ain't seen nothin' yet!

Legendary profits and great fortunes abound, just waiting for brave contrarian gold and gold-stock investors to stake a claim on a fantastically blessed and prosperous future. Have you staked yours yet?

Behold the Gold Bull!

Adam Hamilton, CPA
Zeal LLC.com

Do you enjoy these essays? Please help support Zeal Research by subscribing to Zeal Intelligence today! &www.zealllc.com/subscribe.htm

If you have questions I would be more than happy to address them through my private consulting business. Please visit www.zealllc.com/financial.htm for more information.

Thoughts, comments, flames, letter-bombs? Fire away at zelotes@zealllc.com. Due to my staggering and perpetually increasing e-mail load, I regret that I am not able to respond to comments personally. I WILL read all messages though, and really appreciate your feedback!

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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