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Gold - Where is it Headed?

By Dave Skarica             Printer Friendly Version
October 27 2004

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We feel there are two major questions in the gold market, which are as follows:

1. Has gold begun a new leg up in this bull market?

2. If it has, then when is this party really going to get started?

1. It looks as to us that gold HAS begun a new leg up in its bull market. Our reasons for believing this are two fold:

(A) The gold stocks are showing relative strength to the metal - Since the summer the gold stocks have gone up at a faster rate than the metal. Since this gold bull market began in 2000 whenever the stocks have outperformed the metal it is has occurred during a time frame when both were increasing in price. Meanwhile, when the metal has outperformed the stocks it has occurred during a time when both the metal and the stocks have been going down in price.

To show you an example of this we have enclosed graphs of the Amex Gold Bugs Index (HUI - an index of unhedged gold stocks) and the Philadelphia Gold Stock Index (XAU - an index of large cap gold stocks) and their performance against the price of gold. Note that the bottom portion of the graph represents their performance against the price of gold.

(B) Weakness in the U.S. Dollar Index (The U.S. Dollar’s performance against a basket of currencies) - Gold trades inversely to the U.S. Dollar meaning that when the U.S. Dollar trades up, gold usually trades down and vice versa. Recently, we have seen a crack in the U.S. Dollar index. It had support at 87. However, 87 was taken out over the past week. The next level support for the U.S. Dollar is 84 (the lows of earlier this year), then after that 80. We are looking at virgin territory for the U.S. Dollar if it falls below 80. The current and coming weakness in the U.S. Dollar is another reason why gold should continue to increase in price.

2. There is a major reason that the party in gold stocks has not begun. This being the “R” word. Resistance. Gold possesses major resistance in the 420-430 dollar an ounce range. On no less than 5 occasions in the past 15 years gold has traded up to the 420-430 range and then failed at this level. Therefore, the 430 dollar range represents a lot of resistance and is going to be difficult to breach.

Recently, gold touched the 430 dollar an ounce level. We expect that gold will pullback over the short term. However, the good news is once gold does break 430 dollars it should climb like gang busters. We feel that the 420-430 dollar an ounce level is to gold what the 40-42 dollar a barrel level was to oil. Oil bounced down off 40 dollars a barrel numerous times over the past 14 years but once oil broke it it did so in impressive fashion rising all the way to 55 dollars a barrel.

Expect a similar move in gold once resistance is breached.

It looks to us that gold is well underway for another bull move. However, there is some serious resistance in the 420-430 range. The good news is if/when gold takes out these levels, it should really begin to move explosively to the upside.

Sincerely,

Dave Skarica

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