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Several months back I predicted that this particular
leg up in the gold Bull Market would not top out until we hit a minimum
price of 728.60. Time wise, I was looking for mid-summer. At that particular
point in time we were trading around 590.00 and my target seemed a bit
optimistic to say the least. As luck would have it, we hit 728.00 on May 11th
and have since traded above it (intraday) on two separate occasions. So much
for mid-summer! Such lofty levels have led to a dramatic increase in
volatility and many people have mistakenly assumed that volatility implies a
top. Fortunately nothing could be further from the truth. All that can be
implied from increased volatility is an increase in losses for the average
trader. A $44.00 trading range in gold, such as we experienced on Thursday
May 18th, eats stop/losses for breakfast. The investor who cut his teeth on
the NASDAQ bull market is going to learn the hard way that this is a
different breed of Bull.
Let's get down to basics. Originally I stated that I
expected a 25% correction when 728.00 was hit and that would have taken us
down to +/- 545.00. A month ago, I modified that to read a 644.00 minimum. Why?
Precisely it is due to the strength of the rallies and the weakness of the
declines. Also, it has to do with the type of short-term tops we put in
when a target price is reached. These tops are notorious for an
obvious absence of any reversals or gaps in either direction and it's these
same gaps that typify a significant gold top. Given that absence of such a
top, gold will do what it usually does when we "test" a significant
resistance level. Consolidate and proceed! This consolidation process will be
highlighted by a sideways movement that could last several weeks. The break out,
assuming there is one, will finally come when we manage three consecutive
closes above the spot price of 728.60. That number is important as it
represents the 75% retracement form the Bear Market low of 1999 back up to
the Bull Market high of 1981 and it is the last stand for the Bears.
Mind you, I'm not saying that gold will break out
above 728.60. What I'm saying is that gold is not done testing 728.60. So far
there have been three tests, and there could be two or three more. Pressed
for an opinion, I would tell you that I believe 728.60 will be exceeded
sooner rather than later. In short, based on what I've seen, we'll break
through here. Although we haven't yet tested 644.00, Friday's action came
close as we traded as low as 651.00 in thee JUNE 06 GOLD futures contract.
What's more, I have the feeling that silver and the HUI just might have
bottomed on Friday. Specifically, the HUI bounced off of very good support at
307.00 early on Friday before closing at 321.62. That type of action has the
smell of people selling precisely when they should be buying. We'll know in a day or two.
 
Assuming that 644.00 holds and we eventually surpass
728.00 one has to ask what the next target could be? Will we rocket up to the
all-time high of 887.50, or is there some intermediate target along the way. As
a matter of fact, there is. We will find resistance at 808.00, and although
it is not what I would classify as strong resistance, it will have to be
dealt with. I don't know if we'll get through it or not, no one does, so well
just wait and see. What I do know is this: with respect to gold, we are faced
with one of the strongest bull markets for any commodity in the last fifty
years. I also know that gold is money, and what's more it is a store of
value. When I see money, not fiat currency backed by smoke and mirrors,
but real money acting in this fashion, I have to sit up and take notice. When
we broke through the 50% retracement level of 569.70 with relatively little
effort, I told you that gold was seeing something horrendous in our future. Nothing
has happened to change my thinking. Look at the historical chart of gold
above! The only word that comes to mind is relentless. We're not talking
about tulip bulbs here, folks. This is real money and it is acting in a way
that it's never acted before! You can make a comparison to 1980, but it
really doesn't fly. We had 20% inflation back then. If the government is to be
believed, inflation is only 4% and everything is humming along nicely.
In conclusion, the warning signs are all there for
even a blind man to see. You're standing on the tracks and a freight train is
coming straight at you going 80
mph. You have two choices: get the hell off the track
or get run over. A correction, should it occur, is of so little importance
right now and yet that is where everyone has focused their attention. That's
just like a gold bull; it gets you looking where you shouldn't. What has gold
acting this way? No one really knows but you'll recognize it when you see it.
A little light bulb will go on and it will all become clear. Too late for
most though! My best advice is to just sit tight. If you don't own any, you
should. Don't try to time the secondary/tertiary tops and bottoms. That's a
game for suckers. If you do own gold, just sit tight and hang on to the Bull
for dear life.
Enrico Orlandini
Dow Theory Analysis
Ignacio Merino 636, Santa Cruz,
Miaflores, Peru
Phone: 001-51-56-973-5599 - Fax
: 001-51-19-280-8796
Email: ebo@dowtheoryanalysis.com
Website: www.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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