2003: Go With The Trends

January 17, 2003
Mary Anne & Pamela Aden

Gold broke through the important $330 level in mid-December and it hasn't looked back since. It's currently at a six year high over $350, it's risen more than $27 in the past month and the bull market is now in a stronger phase for the first time since 1980.

Over the past month geopolitical tensions have increased tremendously. War with Iraq seems to be a certainty, probably this month or next, which was one of the reasons why gold surged higher.

GOLD & DOLLAR: Move opposite...

Gold and the Dollar also move opposite. If there was ever a doubt about this relationship, you saw it first hand this past month. It wasn't a coincidence that gold entered a stronger phase of the bull market while the Dollar fell to a three year low as it started the second leg of its bear marke.
The Dollar's continuing deterioration will keep upward pressure on gold as well. Low interest rates, soaring deficits, slumping stocks, a slowing economy and an inflationary monetary policy are also working against the Dollar and they're a solid base for gold.

... and more fuel for gold

But geopolitical tensions like the probable war in Iraq, the North Korean nuclear threat, another possible terror attack and the crisis in Israel will fuel the gold rise too. Plus, gold has become a safe haven and the more it rises, the more it'll become an even larger safe haven. You can see this in the sales of gold eagle coins. Since July, there's been more than triple the coin sales compared to the first six months.

GOLD'S STEPPING STONES IN PLACE

As you know, we've been taking gold's bull market one step at a time, so let's review the steps. The first important trend identifier is the 65-week moving average. This simple tool has identified the major trend since the 1970s. When gold is above it, the major trend is up and when gold is below the 65-week moving average, the major trend is down. Gold rose above this average a year ago August where it has stayed since then. This means the major trend is up as long as gold stays above $307.

Chart 2 shows the gold price since 1981. The horizontal lines mark the major resistance levels in gold over the last 20+ years and these are now the stepping stones on the upside. Gold and its indicator (not shown) move in a 1-4 movement. This doesn't happen often since there's only been three full 1-4 cycles since 1980. The fourth one started in February, 2001. The #1 rises are the best rises in gold's cycle, which are followed by the worst declines (#2). The #3 rises tend to be short while the #4 declines tend to fall to new lows for the cycle.

The current #1 rise is alive and well. It's almost two years old and last month it flexed its muscles. As you know, gold's been resisting at its 1999 #3 peak since June. This $330 level is important because with gold now solidly above it, it means gold's broken through prior resistance, which it hasn't been able to do since 1980. This is impressive action for the yellow metal since it's showing strength unlike any time over the last 23 years.

UPSIDE POTENTIAL & TARGETS

Many have been asking for gold's upside potential. The stepping stones are our targets and now that the 1999 high has been broken, our next target is the 1996 high near $415 (see the 1996 #1 peak on Chart 2). This is a level that can be attained this year. But first, the current rise is nearing our target in time and price near $360. This means we'll likely soon see a downward correction, and then gold near $400 possibly during the next rise in a few months.

Once the $415 level is surpassed, the bull market will strengthen even more and the 1987 high near $500 will then be the next target (see Chart 2). If this occurs, the gold market would be hot because the current #1 rise would result in the best percentage rise in gold since the surge of 1980. And if gold breaks above $510, it would enter an explosive phase of the bull market where it could then surge to the $850 peak and beyond.

All of this can be attained as long as the bull market remains in process. And if it does, the upside for gold is wide open.

WHAT TO WATCH FOR

It's important to keep in mind that the bull market will remain underway as long as gold stays above its rising 65-week moving average at $307, and the stronger phase is in process above $330. The current rise could now end at any time or on the long side in February. Keep an eye on $345 as a close below it means the current rise is over and a normal downward correction will be underway.

WHAT ABOUT THE YEAR AHEAD?

Gold and gold shares were the big winners in 2002. Gold shares ended the year up 41% and gold rose over 22%. On the other hand, stocks were down on average 25% both in the U.S. and abroad.

The pendulum is now swinging gold's way. Gold's been talked down and held back for over 20 years, but times are changing.

We believe these major trends will continue as we go into 2003 and they'll probably continue throughout the year. So we're on the right side of the markets as the new year begins. We look forward to a good 2003 and we wish you the very best in the new year ahead.

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