Gold Report - The Last Word... Maybe


By Enrico Orlandini

November 22, 2006

This is my fifth, and in all probability, my last Gold Report for 2006. It’s been an interesting year to say the least. We didn’t hit US $1,000/ounce as some projected and we didn’t fall back below US $400/ounce as others anticipated. What we did do is make good upward progress with one exception, a spike up to a US $730.40 high on May 11th. That spike, although pleasant to watch, may have done more harm than good to the psyche of the average investor. It created an atmosphere of “irrational exuberance” if I can borrow a phrase from the greatest alchemist the world has ever known, Alan Greenspan. From the March 7th breakout to the upside, to the May 11th top, every day was a holiday for the gold bugs. As usually happens with periods of irrational exuberance, they are followed by periods of complete despair, and that was the case as the price of gold plummeted all the way back down to US $542.27 just one painful month later.  Currently, the price of the yellow metal stands at US $622.50 and the stench of anguish is still in the air. That’s uncalled for as far as I’m concerned and I would like to use the space below to explain why that is the case.

We began the year still entrenched in the first phase of a multi-year bull market in gold and we are going to end the year in the second phase of that same bull market. As you may recall, I defined the phases as follows:

  • The first phase is where the so-called smart money takes great pains to build a position. They do so quietly trying always not to call attention to themselves.
  • The second phase is where the institutional investors enter the market, and
  • The third stage is where the general public, your neighbor for instance, jumps on the bandwagon and the price goes vertical.

I then went on to mention that we could even experience a fourth stage highlighted by a dollar collapse and gold actually becoming money, which is really what is it anyway. Gold is not a commodity; it is money. Always has been and always will be! The paper with the pretty little pictures on it that you carry around in your pocket is not money. Rather it is a fraud perpetrated on you by the central banks of the world. Better yet it is the biggest unpublicized transfer of wealth the world has ever known.

Enough of that! I want to focus on what gold has done this year and what I think it will do in 2007. Think of it as a road map if you will. Below we have a weekly chart of the Continuous Gold Contract: 

What gold has done is maintain an upward bias using the 50-week moving average as support and in the process has staked out a series of three higher lows. For the record, the fourth higher low may have been posted on Friday with the intraday low of US $614.50 but we’ll have to wait a few days and see. Furthermore, as you can easily see on the daily chart of the Continuous Gold Contract below:

we’ve had a breakout to the upside. You can see how the two blue lines form a megaphone. In a bull market the odds favor a breakout to the upside whereas the opposite would be true in a bear market. The movement that follows the breakout usually has the potential to be significant.

On the opposite side of the spectrum, we see that gold has registered two lower highs as well and that is crucial to what I think is going to happen in the coming weeks and months. I believe the breakout will now be followed by a higher high and that in turn will be followed by a close above US $686.20 . As you browse through the numerous gold-related websites and read all the articles, you’ll come across a lot of numbers. Some of them are important while some aren’t. Given Friday’s close, these are the important numbers for an investor to focus on:

Anything else is just noise. Given these numbers, I would like to discuss last week’s price action before I conclude my commentary.  With the exception of Friday (November 17th), every day saw a positive open on the Globex and then an attempt to sell gold during the New York session. Sometimes gold was sold right from the New York open (Tuesday) and sometimes it was sold into the New York close (Thursday), but Friday was different. We opened down in the Globex and fell harder once the bell rang in New York. Shortly after the open, we fell down to the US $616.60 support, traded below it for a minute or two, and then began to rally. This rally began in spite of the fact that oil was down more than a dollar, grains were falling, the dollar was in rally mode, and copper was looking bad as well. Gold rallied on its own and went against the other markets. We finally closed Friday’s session in positive territory, up US $ .80 at US $ 622.50.

In conclusion, I believe one of two scenarios are possible once we open for business on Monday:

  • We fall down to US $616.20 and eventually break below it, going on to test support at US $602.70. The latter support will hold and a major rally begins, or
  • We begin a significant rally right from Monday’s open, moving above resistance at US $624.60, and going on to test resistance at US $644.50 in short order.

Given what I saw on Friday, I believe the latter scenario will play out and we’ll go on to test resistance at US $686.20 by the end of the month. In either case, we are headed higher and it is just a question of whether we must endure some short term discomfort this coming week or not. Looking a little further out in the calendar, I believe we’ll see a close above US $730.40 in the spring of 2007 and a new all-time high sometime later in the year. Rest assured that there will be volatility along the way, and some pain, but the trend will remain up for years to come.

All prices are “spot” prices unless otherwise noted.


Enrico Orlandini
Dow Theory Analysis SAC
Lima, Peru