Gold to Catch Fire in August

The McClellan Market Report #199

July 28, 2003

Extracted from the 25 July 2003 issue of The McClellan Market Report #199

First, let us apologize for the title of this segment, since every chemistry student knows that gold does not even oxidize let alone burst into flames. We are referring to the strength of a coming price advance in gold prices which we think will see its maximum upside velocity in August. The main reason for this expectation is portrayed in our first chart, although we have confirmation from other indications.

This first chart compares the current action in gold prices to what gold did back in 1986-87, and the resemblance is phenomenal. The current structures are not perfect in their replication of the prior pattern, but the general trend and the timing of the major turns are right on. This comparison says that the fattest part of the uptrend is going to take place in August.

One piece of confirmation comes from a favorite leading indication of ours, which is featured in the second chart. For several months, this leading relationship between T-Bond prices and the XAU has not been working so well, but lately it has fallen back into coincidence. It too shows a steep uptrend due in August, with a bit of bumpiness leading up to that fat uptrend.

But why is this all happening now, you ask? One reason is that we are closing in on the next top in the 8-year cycle in gold prices. The bottom chart shows an idealized portrayal of this cycle pattern, which is not like other cycle patterns that you have seen with a more conventional sine-wave pattern. Actually the pattern is a lot more variable in between the cycle highs, but the 8-year cycle tops are the most regular feature of this cycle pattern. It is tough to show how this pattern worked before 1975, since gold was not freely traded back then, and so we do not start this idealized pattern until just before the release of gold prices to trade freely.

The strength we foresee in August should be the main part of the final advance into that 8-year cycle top. Ideally this top should arrive in January, although we won't be surprised if it comes a month or two on either side of that target.

Bottom Line: Hold on tight for a big up move in gold during August.

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