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This is my fifth, and in all probability, my last
Gold Report for 2006. It's been an interesting year to say the least. We
didn't hit US $1,000/ounce as some projected and we didn't fall back below US
$400/ounce as others anticipated. What we did do is make good upward progress
with one exception, a spike up to a US $730.40 high on May 11th. That spike,
although pleasant to watch, may have done more harm than good to the psyche
of the average investor. It created an atmosphere of "irrational
exuberance" if I can borrow a phrase from the greatest alchemist the
world has ever known, Alan Greenspan. From the March 7th breakout to the
upside, to the May 11th top, every day was a holiday for the gold bugs. As
usually happens with periods of irrational exuberance, they are followed by
periods of complete despair, and that was the case as the price of gold
plummeted all the way back down to US $542.27 just one painful month later. Currently,
the price of the yellow metal stands at US $622.50 and the stench of anguish
is still in the air. That's uncalled for as far as I'm concerned and I would
like to use the space below to explain why that is the case.
We began the year still entrenched in the first
phase of a multi-year bull market in gold and we are going to end the year in
the second phase of that same bull market. As you may recall, I defined the
phases as follows:
The first phase is where the so-called smart money
takes great pains to build a position. They do so quietly trying always not
to call attention to themselves.
- The second
phase is where the institutional investors enter the market, and
- The third
stage is where the general public, your neighbor for instance, jumps on
the bandwagon and the price goes vertical.
I then went on to mention that we could even
experience a fourth stage highlighted by a dollar collapse and gold
actually becoming money, which is really what is it anyway. Gold is not a
commodity; it is money. Always has been and always will be! The paper with
the pretty little pictures on it that you carry around in your pocket is not
money. Rather it is a fraud perpetrated on you by the central banks of the
world. Better yet it is the biggest unpublicized transfer of wealth the world
has ever known.
Enough of that! I want to focus on what gold has
done this year and what I think it will do in 2007. Think of it as a road map
if you will. Below we have a weekly chart of the Continuous Gold Contract:
What gold has done is maintain an upward bias using
the 50-week moving average as support and in the process has staked out a
series of three higher lows. For the record, the fourth higher low may have
been posted on Friday with the intraday low of US $614.50 but we'll have to
wait a few days and see. Furthermore, as you can easily see on the daily
chart of the Continuous Gold Contract below:
we've had a breakout to the upside. You can see how
the two blue lines form a megaphone. In a bull market the odds favor a
breakout to the upside whereas the opposite would be true in a bear market. The
movement that follows the breakout usually has the potential to be
significant.
On the opposite side of the spectrum, we see that
gold has registered two lower highs as well and that is crucial to what I
think is going to happen in the coming weeks and months. I believe the
breakout will now be followed by a higher high and that in turn will be
followed by a close above US $686.20 1. As you browse through the
numerous gold-related websites and read all the articles, you'll come across
a lot of numbers. Some of them are important while some aren't. Given
Friday's close, these are the important numbers for an investor to focus on:
SUPPORT RESISTANCE
602.70 624.60
616.60 644.50
664.20
686.20
728.60
Anything else is just noise. Given these numbers, I
would like to discuss last week's price action before I conclude my
commentary. With the exception of Friday (November 17th), every day saw a
positive open on the GLOBEX and then an attempt to sell gold during the New York session. Sometimes
gold was sold right from the New York open
(Tuesday) and sometimes it was sold into the New York close (Thursday), but Friday was
different. We opened down in the GLOBEX and fell harder once the bell rang in
New York. Shortly
after the open, we fell down to the US $616.60 support, traded below it for a
minute or two, and then began to rally. This rally began in spite of the fact
that oil was down more than a dollar, grains were falling, the dollar was in
rally mode, and copper was looking bad as well. Gold rallied on its own and
went against the other markets. We finally closed Friday's session in
positive territory, up US $ .80 at US $ 622.50.
In conclusion, I believe one of two scenarios are
possible once we open for business on Monday:
- We fall
down to US $616.20 and eventually break below it, going on to test
support at US $602.70. The latter support will hold and a major rally
begins, or
- We begin a
significant rally right from Monday's open, moving above resistance at
US $624.60, and going on to test resistance at US $644.50 in short
order.
Given what I saw on Friday, I believe the latter
scenario will play out and we'll go on to test resistance at US $686.20 by
the end of the month. In either case, we are headed higher and it is just a
question of whether we must endure some short term discomfort this coming
week or not. Looking a little further out in the calendar, I believe we'll
see a close above US $730.40 in the spring of 2007 and a new all-time high
sometime later in the year. Rest assured that there will be volatility along
the way, and some pain, but the trend will remain up for years to come.
1 All prices are "spot" prices unless
otherwise noted.
Enrico
Orlandini
Website : Dow Theory Analysis
Dow Theory Analysis S.A.C.
Lima, Peru
Phone:
001-51-56-973-5599
Email: ebo@dowtheoryanalysis.com
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