We are about witness the largest upleg of the gold bull, wave III, which will make the gains of the dotcom boom seem like minor blips on the radar. An outstanding statement no doubt, but the bullish indicators are all lighting up and we are forecasting some fireworks on the horizon.
Supply & Demand Creating Upward Price Pressure
First, there is news that several new gold ETF’s will be launched in India this month. With the popularity and appreciation for gold in India, we have no doubt that the ETFs will receive a warm welcome.
As buyers take advantage of this new and easier investment medium, large amounts of gold will be removed from the open markets. Exactly how much remains to be seen, but considering the population of India, their improving economic conditions (i.e. more capital and discretionary income available for investment) and love for shiny metal, we are anticipating significant upward pressure on the price of gold.
In other news, the EuroNext trading platform in Europe is opening futures and commodities trading in several sectors, including precious metals. This will increase the awareness, availability and investment options for precious metals across Europe. Any investment generating new demand and facing declining supply, is one in which I’d like to have an early position.
But wait, that’s not all! Act now and you also get…
The Russian Central Bank announcing changes to their FX Basket, moving the euro component to 45 cents and dollars to 55 cents. They have been discussing such a move for a while and are amongst a growing list of countries diversifying their foreign reserves away from U.S. dollars. Bad for the greenback - good for gold.
Plus a free gift…
Total investment in the StreetTracks Gold Trust (GLD) setting new highs as it reaches towards $10 billion. The fund began trading in November 2004, giving investors a more convenient way to own the physical metal. Along with the iShares Silver Trust (SLV), these new investment platforms have served to remove massive amounts of physical gold and silver from the market, thus adding to the upward pressure on prices.
Technicals Forecast Big Move Up
For the past 10 months, the price chart for gold has been compressing (making lower highs and higher lows). Think of it as a spring, which has been pushed continually tighter and is now coiled and loaded with high levels of potential energy. When the spring finally releases, the floodgates will be let loose and the price will explode upwards.
The gold price is above both the 50-day and 200-day moving averages and both of these averages are trending upwards. We are in the midst of a rally that typically follows the golden crossover (50-day moving average crossing through 200-day moving average) and it is our opinion that the rally is just getting started. If gold can hold above $650 a few more days, we are set for a major move back towards $720. There is literally no resistance between these two points.
We may see some brief profit-taking just above $700, but it will be short and sweet. Concurrently, we expect the HUI to have a quick ride back towards the 400 mark, at first trailing the advance of the metal, but quickly leapfrogging and taking the lead. The HUI needs to break through resistance at 355 in order to confirm the current upleg as wave III of the gold bull.
While gold above $720 will be a welcome event, we are still sticking to our forecast for gold reaching above the $1,000 mark sometime in 2007. Tall order? One needs only remember that gold today would be priced near $2,000 per ounce if it were adjusted for inflation. And although we view it as an incredibly foolish move, we are fully expecting some type of military confrontation with Iran before Bush slithers out of office. Fool me once, shame on… The price of both gold and oil will go vertical on any such news.
They say it is a fool’s game trying to time the bull market in gold. While we agree with this philosophy and maintain a core position through the ups and downs, we have been able to substantially increase our returns by following that silly rule about buying low and selling high. Good luck and happy investing.