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Attention! Bull Bugs!

Attention! Bull Bugs! < News < Bet On Markets

Take your position and get ready to ride the reborn secular gold bull market. Gold closed the week at a 16 year high and more than $3 above the double top resistance of January and April 2004. Simultaneously, the US dollar index broke down below its 2004 support and made a new 9 year low. Although gold stocks as measured by the XAU and HUI have not yet made a new high and remain slightly below their December 2003 double top highs, long term charts are not overbought and show lots of room for more positive action. Long term 200-day moving averages have bottomed and are climbing again. Both the XAU and HUI just broke above resistance at US$105 and US$240 respectively.

Clearly, the odds favor a very significant move towards US$475-$525 as the 16 year resistance at US$433 is now behind us. Since we never can be sure of everything as the markets have a tendency to come up with some surprises, I will still be watching the US$ $409-$418 range. Moving below would be the sign that this breakout was a false one. But truly, I do not expect to see these prices anytime soon.

So it should be clear sailing for the months ahead. But then, what’s next? If you believe like I do that gold is money and a mirror image of the current global reserve currency, the US dollar, you then must look at a long term chart of the US dollar to get a clue of where the next battle will take place. In the 1990’s and also in previous decades, the US dollar index built a formidable support zone near $80. This is just 4-5% below the current level of the USD. It is impossible to say in how many weeks or months the USD free-fall will reach the $80 floor, but I suspect that it will coincide with an intermediate term high on gold. Will it be US$475 or $525? I can’t tell. But what we can say is that gold stocks will be much higher by then and ripe for profit taking. In recent months, I have suggested that the 30%, 3-year decline in the US dollar had to give birth to a significant multi-month rally in the dollar that would recapture a good portion of the lost ground. It has not happened yet. All we got was an 8 month long weak rally. Well it now appears that if we are to get a significant rally on the USD, it will most likely come from the $80 level.

Short term, I cannot find any fundamental reason for the US dollar to stop its decline here and there is no reason for gold to stop its advance either. Longer term, I am still expecting a much higher Gold/USD exchange rate in the years ahead, well above the 1980 high of US$850. But the road will be bumpy. Several of our favorite gold & silver stocks have produced gains in excess of 50% so far this year. It certainly looks like there is much more to come for many of them. Some laggards look ready to move and I will have more to say on these in the near future as we refine our list of favorites for next year.

Claude Cormier
Editor, The Ormetal Report
Bruce Robbins
Consultant geologist

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