Last week we took a look
at the current tactical, or short-term, trends affecting
The white metal is certainly languishing near its major
support lines these days, but thankfully both its bull
market and its current tactical uptrend remain very
This week I would like to return our analytical
focus to gold. While our subscription newsletters continue
to monitor and evaluate the tactical gold trends as
they unfold, it has been a couple months now since the
Gold Trends essay was published. With the exciting
autumn trading season dawning, an update is in order.
Gold really is the ultimate precious metal
and its behavior is certainly the single most important
driver of investment performance in everything precious-metals
related. As long as gold's secular
bull market remains intact and healthy, investors
and speculators can overlook technical weakness in other
arenas like silver or precious-metals equities. Gold
truly is the PM key.
As in my original tactical gold trends
essay, there are three charts that we need to consider
when discussing gold trends. First, obviously, the gold
chart itself is absolutely crucial. No surprise here!
Second, since gold still trades like it's in a Stage
One currency bull, it is important to consider the
behavior of gold's arch nemesis in the fiat-paper world,
the mighty US dollar. Finally, since leveraged gold
stocks continue to be the most popular gold investments
and speculations, we will examine the HUI gold-stock
Charts are so important to prudent investing and speculation
because they place recent price movements within their
proper context. Whether gold rises or falls tomorrow,
this move in isolation is probably meaningless. But
when series of price moves are considered in trends,
clear patterns emerge that help us view the markets
objectively and short-circuit our emotions that are
so hyper-sensitive to the immediate. Perspective is
And the technical perspective on gold
remains outstanding. There is no more important tactical
chart for PM investors and speculators to monitor than
that of the current gold scene.
Even after gold's necessary, healthy,
expected bull-market correction earlier this year,
gold's key 200-day moving average continues to march
northwards. Rising 200dmas are one of the most foundational
bull-market technical signatures for two reasons. First,
200dmas tend to run parallel with the primary strategic
trend, which in gold's case is indisputably higher.
Second, 200dmas usually form the strongest bull-market
support zones from which corrections tend to end and
bounce higher. The early 2004 gold correction ended
up slicing through its 200dma support initially, but
gold has since made a strong comeback. The metal is
now clawing relentlessly higher and soon its 200dma
will be under it and acting as major support once again.
And, while not evident in this tactical
chart, back in May gold really didn't break materially
below its 200dma when considered in the context of its
entire secular bull. It merely traded down to its bull-to-date
linear support line before bouncing higher and recovering
in early May. Last year gold also traded slightly below
its 200dma in its early 2003
correction before a powerful upleg, so temporary
sub-200dma readings are nothing to fear.
The red line tied to the left axis of this graph, Relative
Gold (rGold), normalizes this important relationship
between gold and its 200dma so it is easier to compare
over time. Calculated by dividing gold by its 200dma,
it shows gold as a constant multiple of its major 200dma
support. When gold bottomed in May, rGold traded down
to 0.953, or 95.3% of gold's 200dma. The preceding April
2003 major interim bottom was similar when rGold bounced
at 0.978, again slightly under gold's 200dma.
As the red support line drawn above shows, rGold is
now climbing in a definite uptrend. It is spending more
and more time above the crucial 1.00 level, where the
gold price equals its 200dma. Whenever an asset's price
is consistently gaining ground relative to its 200dma
it is a very bullish sign and provides strong evidence
that its bull market remains strong.
From a tactical perspective, gold's new uptrend, which
I believe will ultimately blossom into a full-blown
upleg, looks absolutely fantastic since its correction
ended in May. The rising blue support and resistance
lines on the right side of this graph frame this current
tactical gold trend perfectly. There are all kinds of
interesting developments in the gold price in the past
four months that ought to excite gold investors and
speculators. Things are looking good!
We will start our tactical gold analysis
from the bottom, its current support line. Note above
that gold has made three consecutive higher interim
lows since May. These bounces in June, July, and earlier
this month are numbered above. Collectively a best-fit
line drawn through these three higher lows and the May
correction forms a rock-solid tactical support zone.
This current support is slightly shallower than gold
initially indicated in June and July, but it is
nevertheless quite bullish.
It is also exciting to note that this support line
is due to intersect gold's 200dma in the coming weeks.
Thus, if gold remains in its current uptrend, it should
be trading back above its 200dma for good, at least
until the next major correction after dazzling new bull-to-date
highs are achieved. Gold's investment appeal will definitely
rise for technically-oriented players worldwide once
it leaves its 200dma in the dust to clearly signal its
re-emergence in strong bull-market mode. I can't wait.
And it is not only the bottom half of gold's new tactical
uptrend channel that is technically gorgeous. Its top
resistance line is also very well defined and continuously
ramping higher than gold's 200dma. There have already
been three consecutive higher interim highs since May,
numbered above, in June, July, and August. A best-fit
line drawn through these highs runs parallel with the
lower support line and forms a textbook-perfect uptrend
Technical analysis is simple, but elegant. It allows
the prices, considered in context, to do the talking
rather than our own volatile emotions. The message of
this tactical gold chart is very positive and bodes
well for gold in the months ahead as this upleg starts
Since its correction ended in May, gold has carved
a flawless series of higher interim lows and higher
interim highs. These new higher lows and highs form
a crystal-clear uptrend channel, which is rock solid
with several intercepts each on gold's lower support
and upper resistance. We couldn't ask for a more persuasive
and bullish tactical technical chart.
This is great news friends! If you are like me, perhaps
this past summer just felt slow and lethargic to you
in gold terms. It certainly did for me at times. Gold
hasn't yet rechallenged its January and April bull-to-date
highs, it hasn't seemed to have a lot of staying power
above $400, and we certainly haven't seen any real fireworks
But as this chart reveals, all is well in spite of
the perceptions of slow times for gold. Our capricious
emotions, driven almost solely by random day-to-day
market noise, led many PM players to conclude that gold
was struggling over the summer. But this dazzling technical
picture shows anything but struggle. Rather we have
a very methodical, determined, and potentially powerful
new gold upleg systematically materializing.
Of course gold uplegs don't develop in
a currency vacuum, at least not in Stage
One. Until gold breaks into Stage Two, its near-term
fortunes are heavily dependent on dollar weakness. This
current US Dollar Index tactical chart provides a fascinating
study in contrasts. While gold's chart is technically
as unambiguous as a chart can be, the dollar's latest
trend has grown muddled and unclear. As technical confusion
often portends, the dollar may be on the verge of a
Not coincidentally, the US Dollar Index
reached its latest interim highs in early May on the
very day that gold was hitting its own interim lows.
Gold and the dollar are ultimately competing currencies,
six-millennia-old real money with timeless intrinsic
value versus three-decade-old
100% fiat money ultimately worth nothing more than the
paper on which it is printed. There is no doubt that
gold will win this titanic battle in the end, as no
fully-paper currency backed by nothing but faith has
ever lasted long in the grand scheme of things.
Nevertheless, over the short-term there are some epic
battles waged between sound money and Washington's hollow
IOUs. Right now one of them seems to be raging just
below the surface, not readily apparent to the world
as a whole yet but quite evident to those willing to
pay attention. I think this struggle is contributing
to the dollar's extreme technical indecisiveness of
the past couple months.
Following its May interim top after a
normal and expected bear-market
rally, the dollar's downtrend resumed in what will
probably ultimately prove to be the fifth major downleg
of its secular
bear market. In June and the first half of July
the dollar fell right on schedule, probing new lower
interim lows marked by the blue numbers above. These
established a solid downtrend support line.
In late July the dollar surged, rocketing
from the bottom to the top of its downtrend channel.
As I discussed last
week in regards to silver though, full swings through
tactical trend channels are not at all uncommon and
nothing to get excited about. While the dollar tried
to surge above its 200dma primary bear-market resistance,
it couldn't hold these lofty levels for long and soon
failed lower. This failure helped define the parallel
top resistance line that enclosed the dollar's new tactical
downtrend. So far so good.
Then the dollar bounced again in mid-August, but this
time starting well above its tactical support at the
light-blue point 1 drawn above. This bounce was nothing
exciting technically either, as prices tend to oscillate
more or less randomly all over the place within their
tactical trend channels. The dollar frenetically surged
higher again and broke tentatively above its resistance
line in late August, although the breakout was not decisive
or material. Since then the dollar has continued its
technical flirting with breaking out of its downtrend,
albeit without much success.
Now typically there would be no reason even to discuss
this non-breakout, but Wall Street technical analysts
have been making a big deal out of the dollar's "new
uptrend" and frightening some PM players. This
supposed uptrend is marked in light blue above, a new
multi-month support line with two higher lows. Obviously
this new-dollar-uptrend thesis is of great interest
to the gold community since gold is so dependent on
dollar weakness during the early years of its bull market.
If the dollar rallies strongly, gold will probably take
a serious hit.
While we could indeed be witnessing the advent of a
new dollar uptrend, as the markets are just a study
in probabilities and anything can happen, for a variety
of reasons I remain skeptical and continue to read this
dollar technical ambiguity as bearish. I'll start with
the least important and conclude with the most important
dollar bearish arguments.
Check out the latest dollar highs above, which are
numbered. The US Dollar Index hit 92.01 in May before
rolling over and heading south. In June it rallied up
to its 200dma and closed briefly at 90.01. In July it
rallied again, streaked up through its entire downtrend
channel, but only managed to close at 89.95. Then, in
August, its attempt to break out of its downtrend ended
unceremoniously at a closing level of 89.84. So what
does the series 92.01, 90.01, 89.95, and 89.84 reveal?
While this is subtle, any series of lower highs is
certainly not a bullish omen. This bearishness is reinforced
by the dollar's major moving averages. The dollar's
shorter 50dma has been decaying lower all summer, betraying
a tactical downtrend once the random market noise is
distilled away by the moving average. Even more importantly,
the dollar's key 200dma, its primary bear-market resistance,
remains in its long descent. This has bear market written
all over it.
If the dollar was to rally significantly higher from
here, near both its tactical and long-term resistance,
then it would put the dollar's secular bear in jeopardy.
Yet, relative to historical precedent, our current dollar
bear remains relatively young and unlikely to end so
soon. Since the early 1970s when our current totally-unbacked
fiat dollar was born, major secular dollar trends have
tended to run for 5 to 7 years or so before giving up
their ghosts. Our current dollar bear, however, is barely
3 years old now so it is highly unlikely that it has
already fully run its course.
And dollar fundamentals are certainly not improving,
with the States running record deficits, staggering
levels of debt completely unprecedented in world history,
and trivially low interest rates designed to ruthlessly
punish international dollar investors. The dollar bear
I believe that these three factors, the dollar's lower
highs, its descending 200dma, and its relative youngness
as far as dollar bears typically go far more than outweigh
any dollar bullish arguments based on the short light-blue
trend line above. The dollar has been challenging its
upper resistance zone, but so far it has failed to break
out decisively after multiple attempts. And if the dollar
can't break out in the light summer season when trading
in the northern hemisphere evaporates, then I doubt
it can do it in the winter either when global currency
traders are paying attention and ready to short the
primary dollar bear.
Instead, the dollar's recent apparent strength in terms
of support has crunched it into one tight wedge. The
light-blue support line and the blue downtrend resistance
line are compressing the dollar price. This zone of
compression, or indecision, will probably break out
sharply one way or the other in the next month or two.
My guess is the highest probability outcome is a break
lower, potentially down to the dollar's lower support
now running around 85ish. Naturally such an event would
unleash gold to soar.
In this scenario where gold catapults
higher as the dollar cascades through its downtrend
channel, unsurprisingly the primary beneficiaries would
be the elite unhedged gold stocks. Our final chart of
interest this week examines the HUI unhedged gold-stock
index. Like gold, gold stocks have remained bullish
even through what felt like a slow summer psychologically.
This HUI chart is pretty interesting,
especially since the expected
and healthy correction ended in early May. The HUI's
current tactical uptrend is not as precise as gold's
nor as messy as the dollar's, but kind of in between.
Nevertheless, we are witnessing a series of higher lows
and higher highs in the HUI just as we ought to when
gold is strengthening.
At the moment the HUI is in a fascinating place technically,
tightly meandering at the convergence of several major
zones. First, the HUI is challenging its latest tactical
resistance line, the ascending blue line on the right.
Second, it is also challenging its old downtrend resistance
line that arose from its correction in early 2004. Finally
and most importantly, it is also challenging its key
200dma, which has been its major support for most of
its bull to date.
Once this consolidation period is over and the HUI
breaks out of this triple-technical zone in which it
is mired at the moment, I suspect it will head higher.
And it won't have to rally much to claw back above its
200dma once again. Once the HUI trades decisively back
above its major 200dma support, it will put a lot of
nervous PM investors at ease and the capital chasing
gold stocks ought to grow significantly and bid up their
While this HUI chart is generally bullish and there
is an uptrend, there are a couple bearish developments
of note. It is interesting that the dollar strength
and gold weakness in July was scary enough to PM-stock
investors and speculators to cause them to sell the
HUI down below its earlier interim low in June. July's
lower low is certainly not a bullish sign when considered
in isolation, but the HUI has recovered nicely from
it and has already surged back up to the top of its
trend channel. Hence the late July weakness is nothing
A bit more disturbing however is the HUI's 200dma.
200dmas tend to run parallel with the long-term trend
in a market, and the HUI's has been nosing lower all
summer. While this could be construed as an early technical
warning that the HUI is on the verge lapsing into bear-market
mode, I suspect it is just a peculiar technical anomaly.
I have been pondering this odd development all summer
and finally think I understand the reason why it happened.
The massive 2003 gold-stock upleg, which
witnessed a stellar 125% gain in the HUI in only 8 months
or so last year, had a curious non-gold component that
contributed to it
copper! The third
largest HUI component is a copper miner for some
silly reason, and copper prices soared in their biggest
rally in at least a decade last year. Naturally this
copper stock rocketed higher skewing the HUI upward.
If this copper miner hadn't been included in the HUI,
its 2003 rally would not have been skewed as high and
its 200dma wouldn't have been dragged high enough to
roll over this summer.
The current September issue of our acclaimed
Intelligence monthly newsletter discusses this copper
skewing of the HUI's 200dma in more depth, as well as
digs deeper into the tactical gold trends. In addition,
all of our actual PM-stock and options trades carefully
researched and chosen to ride the probable accelerating
gold upleg are detailed inside. Please consider subscribing
today to learn how to apply all of this research to
earning real-world profits in your own portfolio!
The bottom line, as always, is gold. Gold's
tactical uptrend looks gorgeous regardless of the dollar's
ambiguity or the technical blemishes on the HUI. If
gold is due to head higher, gold stocks will absolutely
follow sooner or later. The higher gold goes the higher
the earnings of the unhedged miners multiply. As
their earnings rise their valuations fall and pretty
soon even conventional investors will break down the
doors to rush into the gold miners. Gold is the key!
And with the US dollar poised right on the verge of
probably breaking lower and plummeting through its downtrend
channel after failing three consecutive times to reach
new higher highs, gold may indeed be preparing to soar
to fresh new bull-to-date highs itself. Contrarians
need to be ready and positioned to leverage this exciting
Adam Hamilton, CPA
September 17, 2004
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