Shouldn't this article's title have been written
a few days ago, with gold once again above $420 and within
striking distance of a break to new highs? Actually, I think
this headline is more compelling now that gold has backed
away from those levels and has caused many to suspect that
a larger pullback is on the way.
This essay has little to do with fundamentals and more to
do with the chart pattern that has developed in the metal
over the course of this year. For fundamental commentary,
my recent article, "Bonds, Gold and Oil: More of the
Same," provides my case for creeping inflation and, thus,
gold as a timely investment. The same piece, it should be
noted, also highlights that I am not one to breathlessly predict
higher gold prices at every turn as the gold bugs always seem
I am, however, writing this article to suggest that higher
gold prices may finally be at hand, an argument that is based
on how strikingly similar the recent price action in gold
is to the consolidation phase we saw in the metal a couple
of years ago.
As gold finally started to rally from its lows near $250/ounce
in early 2001, it did so in a very orderly fashion until finally
encountering resistance near $325/ounce more than a year later.
A look back at the correction that ensued is what I thought
investors today should see:
In the chart above (May 1- December 1, 2002), it can clearly
be seen that the first correction of that run, while sharp,
was enough to shake out weak holders and provide enough relief
to set the stage for the next phase of the metal's rally.
The balance of that correction (early August through late
November) was one of time, not price, and actually formed
a nice, orderly pattern of higher highs and higher lows.
Now, look at gold's action over the last 12 months:
Is it me, or do those two corrections look virtually identical?
big rally, scary correction, then some backing-and-filling
in a quietly positive march back to old highs. No, I don't
think it's just my imagination.
Is this analysis too simplistic? Admittedly, I presented
the price action above without additional studies to more
clearly show the similarity of the two moves, so yes, the
thinking presented is rather simple. To this point, however,
I would ask a little leeway; I'm an experienced, widely-quoted
technical analyst who has peeked at more than his share of
charts, one who has made some pretty darned accurate predictions
on currencies, interest rates and equities in the last couple
of years (if I do say so myself). To highlight one such call
as well as to prove that I'm not a stopped-clock precious
metals bull, I encourage investors to also glance at "Silver
Rallying on Questionable Rumors" from earlier this year.
In today's case, I'm trying to share a little bit of my "gut
feel" or instincts with readers, something I feel I can
By all counts, short- and long-term, gold simply appears
to be in a powerful bull market, one that seems poised to
make another push higher in the near-term.
So what, exactly, am I suggesting for investors?
First, don't forget what the price of the metal did when
it did breakout from that first consolidation range by moving
below is the same chart as the first
one shown in this essay, but extended by one month:
Here, the start of the rally that took gold to $390 in just
two months can be seen. Gold literally exploded when it broke
Likewise, a move solidly above $430 would likely see similar
action, in my opinion. Indeed, I think the move would be even
more explosive. Why? For the answer to that question, I need
to include one more chart, this one longer-term in nature:
A nearly 15-year chart of gold shows heavy, heavy resistance
in the area near $400, the level that I warned coming into
this year might bring about a period of consolidation. Indeed,
if I am wrong in suggesting today that a gold price breakout
is imminent, it will be that 3-year resistance level from
the early-1990's that causes the metal to continue its sideways
action. If I am right, however, a break to new highs will
be made more significant due to that past resistance seen
This leads me, finally, to my point: despite the volatility
in 2004, all that has really occurred is that gold has paused
to consolidate its gains. In my opinion, the worst-case scenario
for the metal will bring more of the same. In the best case,
the $430 level falls and gold sprints higher.
Take a look again at gold's price action over the course
of this year. Since that first big pullback to $375, a clear
pattern of higher highs and higher lows can be seen; with
this in mind, any rally from here will put considerable pressure
on that $430 level and might be the surge that finally causes
By my analysis, there seems to be little chance of a meaningful
pullback in the price of this metal; the fight appears to
be between more sideways action or a powerful upside breakout.
Could the metal pull back a few dollars, say to $400, before
surging again? It could without changing any of the thinking
Investors, however, should not get cute about their pricing/timing
of precious metals purchases at this point. For those that
don't yet own any gold but want to, it would be wise to purchase
at least a partial position now for fear of missing the boat
and being left on the dock as gold sails above $500, which
is what I expect to happen quickly following the next break
to new highs.
Again, here's the point of all of this: don't get cute- act!
C.O.O./Chief Domestic Strategist
Euro Pacific Capital, Inc.
A renowned technical analyst, Mr. Hanlon oversees
Euro Pac's entire advisory staff in addition to driving
the firm's domestic research. He was the president of Unfunds,
Inc., a registered investment advisory firm in Huntington
Beach, California, prior to its acquisition by Euro Pacific
Capital in January 2003.