We have been cautious on the gold market over the past two to three weeks, urging readers to lock in some profits on their high-flying precious metals stocks as gold hit a record high of $1,225 early this month. We remain cautious as there is, we believe, continued near-term downside risk before gold resumes a powerful advance early in the New Year. Ultimately, we see gold reaching new highs (between $1,300 and $1,500) in 2010.
We urged readers yesterday to review Clive Maund’s gold market update at www.clivemaund.com (that article is available to everyone, just scroll down to the bottom of his home page). Clive is one of the best technical analysts in the business when it comes to the commodity markets, and we do subscribe to his site and highly recommend it. Clive is at his best when he stays away from fundamental analysis, which he sometimes slips into, and sticks instead to strictly technical analysis. His individual stock picks are not as accurate as his precious metal and oil forecasts which often are bang-on.
Our view on the current gold market is this: We are likely to see gold re-test the $1,025 area in the near term (as it did in late October) which will present an incredible buying opportunity. The gold bull market remains firmly intact and $1,000 is here to stay (there’s also strong support for gold just below $1,100, so at the very least we expect a decline to about $1,080).
Gold often moves in the opposite direction of the U.S. dollar, and right now the American dollar has regained some technical strength after being deeply oversold. Recently, it broke out out of a bullish “falling wedge” pattern and moved past its 50-day moving average for the first time in eight months. This morning, as of 6:30 am Pacific time, the U.S. dollar is trading at nearly 77 on the Index. It seems certain to us that it will soon move up to its declining 200-day moving average of 80 cents before meeting major resistance (the 200-day M.A. should continue to decline for some time). We expect the dollar to react around 80 cents, and that should be when gold turns the corner and resumes its advance.
Another reason why we’re so bullish on gold right now is the action we’ve seen in the Venture Exchange, the CDNX. While gold is down nearly 10% since its peak a couple of weeks ago, the TSX Gold Index has lost 11% but the Venture Exchange is down only 2.5%. This is very significant because the CDNX has been an extremely accurate leading indicator of the gold and commodity markets in general over the past 18 months (the Venture broke down in July, 2008, before the commodity markets broke down and before the other major markets broke down. Since near the end of last year, the Venture has been telling us that gold is going higher).
We are, however, beginning to see some short-term technical weakness creep into the CDNX, but what we believe that’s telling us is that gold’s correction has not yet run its course. We believe it’s possible the CDNX could again test its 50-day moving average in the coming days, which means a decline to about 1,365 from yesterday’s close of 1,425. The last few trading days of the year are historically very bullish on the CDNX, so we expect any weakness to occur between today and the 23rd of December (8 trading sessions). This will be a buying opportunity in advance of what we expect will be a significant move to the upside in January. At some point next year, we expect a major CDNX correction of around 20% but that may not happen until it has jumped to between 2,000 and 2,250 which is a very significant move from current levels.
Gold is clearly in a long-term bull market, and every major gold bull market in modern history has consisted of three main stages:
1) Currency devaluation stage
2) Investment demand stage
3) Mania stage
During these three stages, gold prices typically rise in parabolic fashion – the 1970’s gold market is an excellent example.
We have seen evidence of the first two stages (currency devaluation and investment demand) of this gold bull market, but the “mania” stage has yet to arrive. That will happen when everyone is literally in a panic to buy both physical gold and gold shares.
