After seven consecutive losing weeks - the Comex Gold spot future price finally snapped the string this week and closed with a GAIN of $US 7.80 on the week. On top of that, Gold is getting more "volatile". Take a look at the daily closes in the data above. The smallest daily close was a fall of $US 3.70 on May 18. And there were two comparatively LARGE daily upmoves - a gain of $US 7.10 on May 19 and of $US 6.40 on May 21. There have only been two bigger daily upmoves this year, a rise of $US 8.70 on January 5 and one of $US 8.40 on March 5. All of a sudden, Gold is getting "interesting" again.
So, how do we stand? Well, take a look at this weekly bar chart
The chart goes back to the $US Gold bull market which began in April 2001 - just over a year after the US stock market bubble burst and about four months after the US Dollar bubble burst. Looking at the chart as a whole, there's nothing remarkable here. The bull is perfectly intact with the major channel lines holding nicely.
The one potential concern is the fact that the price has been below the 40 week (200 day) moving average (MA) for the past five weeks. As you can see, since the beginning of 2002 and especially since Gold finally consolidated ABOVE $US 300 in late March 2002, the price has only been below that MA once. That was for two weeks in April 2003 - shortly before Mr Bush flew out to a US carrier to declare "mission accomplished" in Iraq.
What this situation emphasises is the severity of the correction since Gold hit its 2004 high closing level ($US 427.80) on April 1. Given the "severity" of the penetration of the 40 week MA, and the fact that Gold has remained below it for more than twice as long as it did in its March/April 2003 correction, the present correction definitely qualifies as the most severe of the post 2001 Gold bull - so far.
BUT - as long as the trendlines hold, and they are holding nicely, Gold is STILL in a bull market in US Dollar terms. What we have with the upmove this week is simply the first SOLID evidence that the current correction has found support - ABOVE the trendlines and therefore still comfortably in the uptrend.
Here's another chart. This one is the chart of the Dow over the first three years of its bull market which began in August 1982. The chart covers the period May 1982 to October 1985.
This is the same relative time span (a little over three years) as shown on the weekly Gold chart above. The red line, as with the chart above, is the 40 week (200 day) moving average. The difference is that we know what happened next with this Dow chart. We don't yet know what is going to happen with the Gold chart above - as it is up to date.
Look at the first half of 1984 on this Dow chart. The index stayed BELOW its 40 week moving average for the whole period. At the time, that caused a lot of gnashing of teeth on Wall Street. The same attitude which most people have about Gold now was prevalent in the stock markets then. Don't forget, the Dow has suffered through a "doldrums/bear market" period of 16 years prior to 1982. In early 1984, when the Dow dipped severely and then slid below its 40 week moving average and stayed there, many took it as a sign that the bull market was over.
Of course, as we all know now with 20/20 hindsight, the bull market was NOT over. It had barely gotten started. ALL bull markets worthy of the name climb "walls of worry". Every correction the Dow took in the period between 1982 and about 1996 - most certainly including the crash of October 1987, produced the same chorus that this one was the one which signalled the end of the bull market.
The time to get concerned about a bull market is when the wall of worry vanishes. Remember the "buy on dips" crowd on US stock markets in the late 1990s? Remember the growing consensus during the late 1990s that stock market gains were going to average 12 - 15 -18 - 20 - or even 20% plus in perpetuity This was the signal that investors had finally convinced themselves that the stock market would NEVER go down. That's the time when the rational investors DID start to worry.
Ever since it began its run up in early 2001, and especially since it broke above $US 300 in early 2002, Gold's "wall of worry" has been as solid as the Rock of Gibralter. Within days of the start of every significant correction over that period, the conjecture about the "end" of the bull market has begun anew. The more serious the correction, the greater the worry. This present correction has certainly been no different, has it?
The time to start "worrying" about Gold - as an investment, NOT as a form of financial insurance - is when the "wall of worry" evaporates. That has only happened once in the "fiat era" - the era since Gold and the Dollar were finally and completely uncoupled in August 1971 - and that was in the last few months of the Gold "blow off" of late 1979 - early 1980. This writer clearly remembers seeing a lineup of people which stretched out the door, down the street, and around the block outside a bank which sold physical Gold to the public in late 1979. If that was not the "writing on the wall", nothing was.
We repeat - we are a VERY LONG way from seeing a repeat of that this time.
Gold in $US terms has broken a seven week losing streak this week. It is getting more "volatile", which is an encouraging sign, with each sell off being met by an even bigger move upward. There is now a distinct support level in the mid-high $US 370s. Gold closed the week at its highest level since May 6. Even more encouraging, there were two SUBSTANTIAL daily upmoves this week.
It is certainly true that confidence that the present correction is over can only come when Gold gets back above its 40 week moving average, currently just below the $US 396 level. That is still more than $US 10 above where Gold finished on May 21. We have the first signal that the present correction is over. A stronger one would be a Gold close ABOVE its 40 week moving average. The definitive one would be a close above Gold's high thus far in its bull market. On a spot future basis, that is the $US 427.80 close set on April 1, 2004
In the current issue of The Privateer (#501 - published on May 16), we said this: "Ignore the 'price fluctuations' of Gold, except as they bring opportunities to add to your holdings." Please note that the context here is holdings of PHYSICAL Gold, not Gold stocks and especially not any kind of "derivative" Gold holdings. If you are reading this, you have a concern about the parlous state of the Global paper money system. There is only one form of MONETARY insurance against severe convulsions or a breakdown in that system, and that's Gold (yes, Silver too, but to a lesser extent). REAL wealth (a bought and paid for house is a good example) is also important in this respect, but it is not "monetary" insurance. Gold is.
The current Gold correction has found support, if not yet a proven bottom. Last week, that was not the case. This week, if you were looking for an opportunity to add to your Gold holdings, you have found one. Nuff said?