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On February 9th I sent out a missive telling anyone who
could read that gold wasn't correcting just yet and then I stated that this
particular leg up would more than likely break 700.00 before we see a
significant correction. By significant I mean a correction greater than 6%. I
can't begin to tell you the amount of e-mails that article generated. Most
were what I would classify as non-believers. Some were just plain rude. One
fellow from Hong Kong, bless his heart, took
the time and effort to send me a nine-page diatribe (I always wanted to use
that word) on how the Bull Market in gold was over and we were headed back
down to 350.00. I did what I always do, I sent a polite "thank you"
and let it go at that. A word to the wise, I'm from the Ronald Reagan School
of Reading. Anything more than a page and a half and my eyes glaze over. So
spare me, please!
Let's get back on track,
this is a short article about gold. I just love the stuff, and I can think of
five hundred and eighty-two reason why you should
too. That just happened to be the price as of the close of business on March
31st. It was a great week for gold Bulls as we finally broke out from our
trading range. If you take a look at the following is a Daily Chart of gold,
you'll be able to see the surge up, and it is a thing of beauty:
 
Notice our run-up into the early February highs
followed by our first panic sell-off. The Bears watched this, the subsequent
recovery, and the next decline. That first recovery took twelve days and
failed to bring in a higher high. The next decline down took just six days to
give back all the gains from that rally. A clear sign of weakness! And that
lead to numerous ominous forecasts.
So just where did the Bears go wrong? They failed to
focus attention on the first top. There was an obvious absence of any
reversals or gaps in either direction that typifies gold tops. That to me was
a dead give-away that the gold price had not in fact topped and I told you so
on February 9th. From there we did exactly what gold did last year before the
price took off to the upside; we consolidated! That consolidation was
typified in a sideways movement that lasted until the end of the third week
in March. The break out finally came early this week as we managed three
consecutive closes above the spot price of 569.75. That number is extremely
important as it represents the 50% retracement form
the Bear Market low of 1999 back up to the Bull Market high of 1981.
Now that we officially know that gold has broken
out, the question becomes: where to from here? First you must understand that
the reasons for gold's rise are as true today as they were five years ago.
Diminishing supply, increasing demand, massive debt, too much liquidity, and
political concerns are all in play. Most novice investors, and some
sophisticated ones as well, do not even begin to comprehend the damage done
to the mining industry by the price decline that stretched from the 1981
highs of +/- $860/ounce to the 1999 lows of +/- $252/ounce. Here's a simple
example: in 1988 there were twelve mining stocks listed on the Peruvian
Exchange whereas today there are four. Very few companies were left standing
and the survivors were interested in just that, surviving! There were little
or no funds designated for future exploration. It takes seven years to start
up a new big mine. If the survivors began in 1999, the Bear Market bottom,
they should have it ready by early 2007. I don't know of anyone who took that
risk. A side effect included the brain drain as good geologists found other
ways to make a living and the new college crop wouldn't even dream of
majoring in the subject. Given everything that I've just mentioned, a normal
Bull Market in gold would last a minimum of 40% of the previous Bear Market
duration. If the Bear Market lasted eighteen years (1981 - 1999), that
translates to a 7.2 year Bull Market, i.e., well into the year 2008. 1
For the record though, this is anything but a normal Bull Market.
I originally projected this particular leg to end
somewhere around the spot price of 569.75 and when we hit that price in early
February, and then declined sharply for seven days,
it looked like I was right. Only I wasn't. That's why I came out on February
9th asking if the fat lady had sung or not? I modified my position and said
we would see a test of 644.73 at the very least, and maybe even a run up to
722. I am even more certain today than I was back in early February that this
will be the case. Why? I suspect that gold is seeing something in the future
that it really doesn't like. Incidentally, I think the same thing can be said
about oil. If I were to guess, I would say that this negative reaction is
related to some future event in the Middle-East. What ever it is, rest
assured it will not be pleasant.
In conclusion, gold has another $65 to go on the
upside and maybe even as much as $140. Over the very short run, I would not
be very surprised if gold falls back to where it broke out from, i.e.,
$569.75. That's normal behavior. From there, we
should head up toward our next target of 644. I actually feel that the real
target is 722. The road to 722 will be bumpy, and we will experience some
corrections, but nothing that will exceed 6%. Once the top is reached, I then
expect to see a serious correction of +/- 25% that could last as long as 9
months. If 722 is in fact the top, that would mean a
decline down to 541. I advised my clients to buy the recent breakout and just
sit tight. Don't try to time the secondary/tertiary tops and bottoms. That's
a game for suckers. Just sit tight and hang on to the Bull for dear life.
Enrico Orlandini
Website : Dow Theory Analysis
Dow Theory Analysis S.A.C.
Lima, Peru
Phone:
001-51-56-973-5599
Email: ebo@dowtheoryanalysis.com
For those of you interested in receiving
information on the Funds we manage, please feel free to e-mail us at ebo@dowtheoryanalysis.com and we will respond as soon as possible.
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