Gold - BREAKOUT!

Mary Anne & Pamela Aden
August, 2003

Gold's been rising over the past week. It shot up $8.00 yesterday, reinforcing its major bull market. This breakout marks the end of gold's weakness over the past couple of months. But there's much more, and it's all good news for gold and gold share investors.

As we discussed last time, the overall backdrop is very bullish for gold. The fundamental steps are in place and so are the technical steps.

On the fundamental side, we've got a weak U.S. dollar, and gold moves opposite to the dollar. That's been the case ever since Nixon closed the gold window in 1971 and allowed the dollar to float on its own merit.

Chart 1 shows these movements. As you can see, gold's major trend has been up since the early 1970s while the dollar's has been down. Plus, each major gold peak went hand in hand with a major dollar low, and each major gold bottom coincided with a major dollar peak. The latest one happened in 2001 when gold bottomed and the dollar peaked. The extent of the movements can differ but these two markets have clearly been moving in opposite directions for over 30 years.

GOLD IS MONEY

Gold has been accepted as money for over 5,000 years. It's outlasted all paper currencies and the last 30 years tells us its role hasn't changed.

Gold rises when the reserve currency of the world stumbles. It rises when there's trouble in the economy. Inflation was the problem in the 1970s, but today it's debt and deflation. If the dollar continues to fall as we suspect due to deflationary pressures, super low interest rates, the massive debt load and the unprecedented twin deficits, gold will rise further.

We've often discussed the huge debt levels, but putting it into perspective illustrates how truly serious the situation has become. Plus, there's no end in sight.

The U.S. is the world's largest debtor nation. It's also the world's biggest spender. In fact, it spends $1 billion every four hours.

Currently, the government is facing unbelievable liabilities of $44 trillion. Just in the first eight months of this fiscal year, the budget deficit has soared to a record $291 billion and it's expected to reach a new all time high of $450 billion for 2003. But that's not all...

We're spending $350 billion for military expenses alone, which is more than all other countries combined, and nine to 18 times more than what Russia and China spend. And even though the war in Iraq is over, soldiers are being killed daily and Deputy Defense Secretary Wolfowitz is now saying we may be in Iraq for 10 years.

This means military expenses are going to stay high to cover the $3 billion a month in Iraq, on top of the $1.5 billion monthly in Afghanistan. We may also soon be going into Liberia, but our role as world policeman is getting awfully expensive at a time when we can't afford it, which is being reflected in the weak dollar. Again, this is bullish for gold.

TECHNICALS: Reinforcing Fundamentals

On the technical side, gold just keeps getting better. Last December, for instance, gold rose above its previous high at $330, which was something it hasn't done in 22 years. That was a big deal, signaling this bull market really is different, and it's going to be bigger and better than anything we saw in the 1980s.

Despite its ups and downs, gold has also held above its 65-week moving average for two years now, which is the major trend identifier (see Chart 2A). And as long as it stays above this average, now at $332, the major trend is up and gold is headed higher.

Most important, however, is where gold currently stands, especially considering its breakout this week.

As you can see, gold and its leading indicator move in a consistent A to D pattern and that's been the case for decades (see Chart 2B). The As and Cs identify the intermediate rises while the Bs and Ds show the intermediate declines. Each one has characteristics of its own, but the timing has been quite consistent.

The last A rise ended on May 21 with gold at $372.50. The movement was good because A rises tend to advance and possibly test the prior high, but they don't usually reach a new high. The performance was on target, even though the rise was on the short-side.

Gold's B decline followed. These tend to be moderate and this last one was. Based on timing, the B decline was due to end this month or next. It ended last week, right on schedule and a new C rise is now just beginning.

C rises tend to last two to three months and they're the most thrilling in a bull market because it's the best rise in the cycle. This is when gold rises to a new bull market high.

This means gold is now poised to rise above the February high at $380 in the months ahead with its next target near $415. If it were to move clearly above that level, then $500 would be the next major resistance area and target.

Gold shares are already getting excited and many moved up sharply this week. Plus, some shares are now breaking out of a six year head and shoulders bottom formation. That's very bullish action. It's telling us there's a lot more to come and if you haven't bought gold or gold shares yet, the time to buy is now.

By Mary Anne and Pamela Aden
This commentary has been provided courtesy of adenforecast.com

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 http://www.adenforecast.com