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.
Editor, The Ormetal Report
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