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Gold Market Gains Momentum

By: Mary Anne & Pamela Aden
November 2002

Gold is a special market in more ways than one. Gold and gold shares are starting a renewed rise right on schedule. Gold is a cyclical market, which makes it easier to follow compared to other markets. That's why we've been taking this bull market one step at a time and so far the steps are in place.

GOLD: A step by step bull market

Going back a moment to explain what we mean... gold reached an eight year cycle low in February, 2001. That step is complete and so far gold's been following the path it normally takes after a cycle low. Gold, for instance, tends to rise for three to five years afterward and gold turned bullish a year ago when it rose above its 65-week moving average (see Chart 1A below). So this bull market still has a few years to go.

This average has also worked best over the years in identifying the major trend. This means the major trend is up and gold is going higher as long as it stays above the moving average now at $294.

Within the major trend, however, gold has an intermediate cycle that identifies medium-term highs and lows. These are equally important to watch because it tells us the ideal times to buy more and it helps to identify the strength of the market (or the lack of strength).

It told us, for instance, that the downward correction that began on June 4 was a normal correction in the bull market. In fact, it was the first correction this year. It also told us to start buying gold shares again in early August because we were at an intermediate low.

GOLD $325: Next step

So far, so good. The steps are in place and the next important hurdle for gold is breaking clearly above $325. Once that happens, a more bullish phase of the bull market will begin. This level is very important because it's the 1999 high. Since 1980 the only decent gold rises, in 1985-87 and 1993-96, failed to rise above the previous peak. This means if $325 is clearly broken, it'll be the first time since 1980 that gold has risen higher than the previous peak. This is the next important step and gold is currently close to that level.

Chart 1B shows gold's leading indicator, which identifies the intermediate cycles. The As and Cs identify gold peaks and the Bs and Ds show the bottoms. This is one of our favorites because it's worked so well in identifying intermediate moves within the major trend.

The gold decline that started on June 4th was a D decline (see Chart 1A). Gold declined from a high of $327.90 to a low of $302.50 on July 29, while the indicator fell to a low area. The gold decline was moderate compared to the strong rise this year. And the fact that gold held above $300 during weakness showed great strength.

An intermediate A rise is now in process and as long as gold stays above $315, it's strong within the A rise. Gold essentially resisted at its 1999 high last June, which makes it even more important to see if gold rises clearly above this high. For a clean breakout, let's see if December gold closes above $330.

Gold will gain bullish momentum above this level, and it could then easily jump to $340 as the next medium-term target before the current A rise is over. If the A rise accomplishes this, then the major bull market will be strong and well on its way as the steps continue to fall into place.

On a timing basis, the A rise could last until November, which is the average time of previous A rises. It should then have a normal downward correction, which will provide another good buying opportunity around year end, before the bull market again resumes its upward path to higher levels.

GOLD SHARES: Strong renewed rise

Gold shares are more volatile than gold. They fell much more than gold in the D decline and they're generally rising more than gold in this renewed A rise with several shares reaching new highs for the year.

Gold shares are a great investment to just buy and hold for the entire ride. Some people prefer selling at intermediate peaks and buying near the lows, which is fine if you're prepared to stay on top of the market.

Besides our gold indicator, the XAU gold share index and its leading indicators also serve well in telling us when a rise is overheated and when a low area is at hand.

Chart 2A shows the XAU bouncing up from its major uptrend, while the leading indicator is bottoming in an oversold area (see Chart 2B). This is great action because it shows that the renewed rise has strength and gold shares have room to move up further in a sharp rise before they're overbought. XAU is back above its 65-week moving average, now at 66 and it's poised to enter the strong side of the rising channel. In other words, gold shares are still oversold and they have good potential during the current gold rise.

Mary Anne & Pamela Aden are internationally known analysts and editors of The Aden Forecast, a market newsletter providing specific forecasts on gold, gold shares and the other major markets.
Click here to visit their website at www.adenforecast.com