Is a Gold Bottom Imminent?
Back in the final days of November I warned
that a correction was probably about to begin. I did not give
up on the gold bull market. I argued that the bull market
would come back and surprise everyone in 2005, but that one
final correction would likely take place before the next launch
of wave 2 of the bull market begins. I said I would buy this
correction when it came.
Since I wrote this two things have happened - the fundamentals
for the gold bull market have improved while the gold stocks
have undergone a healthy pullback.
Over the past 8 weeks we have seen news that the American
trade deficit hit a new record, despite the recent short-covering
bounce in the dollar. In November the trade deficit hit a
whopping $60.3 billion during a time in which oil prices pulled
back. This represented a 7% jump in the trade deficit over
the course of a month, due to an across the board drop in
In fact the the Congressional Budget Office just forecast
a $1.3 trillion dollar Federal deficit over the next ten years.
This is alarming because it is 60% more than their estimate
made just four months ago. The LA Times reports:
"The near-term deficits pale beside the CBO's admittedly
rough projections for 2030, when all the baby boom generation
will have reached eligibility for Social Security and Medicare."
"If they keep growing at current rates, those two programs
plus Medicaid for the poor will be nearly as large a share
of the national economy as the entire budget is now, the CBO
"CBO Director Douglas Holtz-Eakin told reporters that
the programs would have to be reined in before that happened.
Otherwise, he said, taxes would have to rise to intolerable
levels or the government would have to borrow so much money
that interest payments would spiral out of control."
The only way out of this conundrum is for the US savings
rate to increase and for George Bush to balance Federal budget
or for the US dollar to spiral downward. It is doubtful that
the politicians in Washington will make the tough decisions
so the only answer is for the dollar to go down.
Recently Warren Buffett made these remarks on CNBC::
"I think, over time, unless we have a major change in
trade policies, I don't see how the dollar avoids going down....I
don't know when it happens. I don't have any idea whether
it will be this month or this year or next year, but we are
force-feeding dollars on to the rest of the world at the rate
of close to a couple billion dollars a day, and that's going
to weigh on the dollar."
Buffett also told Forbes Magazine that he has increased his
currency position against the dollar from $13 billion to almost
$20 billion. "The rest of the world owns $10 trillion
of us dollar, or $3 trillion net...If lots of people try to
leave the market, we'll have chaos because they won't get
through the door," he said.
Of course this would lead to a spectacular rise in the price
of gold and that is why I plan on personally buying back into
this gold market once the current correction comes to an end.
And I believe we are just about there.
One thing I watch very carefully is what the commercial futures
traders are doing. They have been very deft at timing tops
and bottoms in the gold market. At each top commercial futures
traders have been heavily short and during each correction
they have covered their positions. The chart above shows you
the size of their short position over their long position
at every major bottom gold has made over the past few years.
You can see that usually the commercial futures traders have
40k-60k more short positions than they do long positions at
major gold bottoms.
Since December they have been slowly covering their positions
and as of January 25, the commercials have 100,000 more short
positions than long positions. These commitment of traders
reports are delayed, but if gold makes another drop down then
the commercials should have completed their short covering.
What is more the XAU gold stock index is right
on support, a place where it should bottom and bounce:
86-90 is solid support on the XAU.
Take the long-term chart support areas and the covering by
the commercials and I feel very confident that a major bottom
in gold and the gold stocks is right ahead of us.
I have been waiting for this moment for over 8 weeks and
it is finally here. I think gold will have one last drop below
420 and may make new lows just like the stocks did Friday(remember
the stocks tend to lead the metal), but if gold gaps down
hard one morning this week and the stocks do too that will
likely be it.
My plan is to buy a sizable gold position on such a gap down
in my favorite gold stocks.
After gold bottoms I expect gold and the XAU to spend the
next 4-12 weeks basing and going sideways. Towards the end
of this phase the relative strength of the XAU to gold should
turn up, much like it did in August before the last rally
started. I will use such a signal to double or triple my gold
stock position. Once that signal comes I think the stocks
will attack their 52-week highs, break them, and the begin
the next leg of wave 2 of the gold bull market.
I do believe it is important to take a position in the strongest
stocks and most fundamentally sound companies before this
happens, because some of them will lead the whole gold market
and won't pull back or base much after this bottom.
To find out what gold stocks Mike Swanson holds
and plans on buying subscribe to his free Weekly Gold Report
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