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Gold – It’s a Bull Market Stupid!

By: Eric Hommelberg


-- Posted Wednesday, 13 September 2006 | Digg This ArticleDigg It!

In case you’ve missed it, the gold price crashed by almost $60 in less than three trading sessions thereby cutting through multiple support levels like a knife through butter.. Sure enough it scared the hell out of many gold investors and many questions came my way of what to do next.. Many gold advisors are declaring the bull market now for dead referring to the broken 5 year uptrend in the CRB index.. To the market players gearing themselves up for shorting the gold market these days at current levels I would say ‘good luck’, not me! Why not? Simple, shorting could be a prudent thing to do at severe overbought levels, not at current oversold levels. In contrary, we’re approaching here a major buy opportunity.

 

Please let me explain.

 

First of all, the primary trend of the gold market is up, not down. Wouldn’t you be glad if someone told you one year ago when gold was trading at $475  it would be trading now at almost $600? Well, I would have signed for it immediately!

 

  • Gold, bull or bear market?
  • rGold chart indicates major buying opportunity approaching

 

 

Gold – Bull or Bear?

 

The primary trend is up since all critical drivers for gold are still pointing towards much higher gold prices the years ahead.. It goes far beyond the scope of this small update to explain in detail but the key-points are:

 

·         US$

·         Demand/Supply

·         Oil

 

US$:

 

To maintain the dollar at current levels a foreign inflow of almost three billion dollars each working day  is required. At one point the world will say, enough is enough, the dollar will tank. A declining dollar translates itself into rising gold prices..

 

Headlines like these certainly won’t boost confidence in the dollar:

 

U.S. trade gap widens to record $68.0 bln in July

 

By Greg Robb

Last Update: 9:21 AM ET Sep 12, 2006


WASHINGTON (MarketWatch) -- The U.S. trade deficit widened by 5.0% in July to a record $68.0 billion, the Commerce Department said Tuesday. The July deficit surpasses the previous monthly record of $66.6 billion set in October.END.

 

Well, ever soaring deficits, were will this end? Bankruptcy?

 

Please don’t think these ideas are weird. According to  Prof. Laurence Kotlikoff (a former  senior economist at the President’s Council of Economic Advisors (CEA) during the first Reagan administration) the US is heading towards bankruptcy indeed. Kotlikoff was  quoted recently by the Daily Telegraph:

 

 A ballooning budget deficit and a pensions and welfare timebomb could send the economic superpower into insolvency, according to research by Professor Laurence Kotlikoff for the Federal Reserve Bank of St Louis, a leading constituent of the US Federal Reserve.

 

Prof Kotlikoff said that, by some measures, the US is already bankrupt. “To paraphrase the Oxford English Dictionary, is the United States at the end of its resources, exhausted, stripped bare, destitute, bereft, wanting in property, or wrecked in consequence of failure to pay its creditors,” he asked. According to his central analysis, “the US government is, indeed,bankrupt, insofar as it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has explicitly or implicitly promised future net payments of various kinds’’. END.

 

You don’t have to be a rocket-scientist in order to understand that a world reserve currency backed by a country heading into bankruptcy won’t generate that much confidence therefore a massive exodus out of the dollar can be expected coming years and is in fact already taking place. So out of the dollar but where to invest next? When paper money looses its credibility gold is the only alternative.

 

That’s why you hear continued talk about Russia, China, Argentina, Korea, etc.. increasing (or planning to) their gold reserves.. Yes, Gold is a currency and is slowly crawling back into the monetary system again. George Kapasakis, a senior foreign exchange trader at Mizuho

Corporate Bank in Sydney recently said:

 

“Central banks will use gold as a fourth currency instead of the dollar, euro

and yen” to hedge exchange-rate risk, Gold will be underpinned.”

 

Well, hard to argue with that statement when you see headlines like

these over and over again lately:

 

China Should Buy Gold, Central Bank Adviser Says

 

China should use its foreign-currency reserves, the world’s largest, to buy gold and oil as a hedge to guard against the risk of a sudden drop in the U.S. dollar, said an adviser on the central

bank’s 13-member policy board. END.

 

A flight out of the dollar causes the dollar to fall, it’s as simple at that! A dropping dollar is gold (and base metals) friendly.. Therefore just based on a further dollar decline it ain’t likely at all that gold has seen its ultimate top already.

 

 

Demand/Supply:

Gold demand is growing each year. India, world’s biggest gold consumer is expected to grow its demand from its current levels of 800 tons to 981 tons by 2010 and 1,153 tons by 2015 according to the Associated Chambers of Commerce and Industry of India. Where is the supply coming from coming years? Who is going to meet the ever increasing supply/demand deficit exceeding 1500 tons a year?

Well, it certainly ain’t the gold producers since mine supply will be flat to down for the next several years. Headlines like these speaks for themselves:

SA gold output falls 7.2% y/y

12/09/2006 12:34

 

Johannesburg - South African gold output fell 7.2% in volume terms in July while overall minerals production declined 0.8% compared with the same month the previous year, official data showed on Tuesday. END.

 

Aussie annual gold production sinks 5%
Sunday Sep 3 13:12 AEST

Australia's annual gold production fell five per cent last financial year, according to a new research report. END.

DRDGold chief executive officer Mark Wellesley-Wood

 

“Global gold production is set to decline dramatically over the next

four years and this is set to generate a scramble for gold ounces.

END.”

 

Newmont President Pierre Lassonde:

 

 “The decline in output will continue for at least another couple of

years simply because the industry didn’t put money back into the

ground when the gold price was very low”. END.

 

 

OIL:

 

Many analysts declared the end of the oil bull market this  week.  Well, isn’t that wonderful?  All we have to do in order to avoid ‘PEAK-OIL’ is to throw some derivatives at the market, painting the tape into a ‘bear-market’ and voila, problem solved! Again, it goes far beyond the scope in order to explain why oil-prices aren’t likely to come down coming years but readers interested can take a peek at the Gold & Oil chapter of the Gold Drivers Report. Even if oil prices were to stay flat from here on (what I don’t believe), still then the price of gold should be around $1000 according to the historical Gold/Oil average.. Please take a peak at Gold & Historical Norm for further explanation.  

 

The bottom line is:

 

If you don’t believe the primary trend for gold is up then you shouldn’t be investing  in the gold shares anyhow. However if you’re convinced that the uptrend in gold will last for many years to come (as I do)  then it’s just a matter of spotting major BUY opportunities. We’ve had about 6 major BUY opportunities since 2001 and it’s my strong believe we’re approaching another one.

 

 

rGold chart indicates major ‘buy’ opportunity

 

I’ve been using relative charts (introduced by widely respected gold analyst Adam Hamilton) in order to pick major bottoms in gold and HUI. The problem with the relative charts however is  they won’t show you ALL buying opportunities but  they do tell you whenever gold or HUI do approach real  major bottoms therefore providing the investor with a unique ‘buy’ opportunity.

 

Lets’ take a peek at the rGold first..

 

 

 

 

This rGold chart tells us that the latest killer down move is just the last move down of a correction which started in May (rGold travels from GOLD BUY ZONE towards GOLD SELL ZONE and vice versa..).. as said before, 6 major BUY opportunities have presented themselves over the past 4 years and it’s quite obvious we’re heading towards another one. Just judge yourself, buying during one of the previous green ‘BUY ‘ zones would have benefited you tremendously. In other words, the rCharts didn’t let us down for the last 4 years.  Sure enough I’m not  suggestion here that gold will shoot up like a rocket from here on, no, all I’m saying is that the downside risk in gold from here on is very limited. And yes, rGold could easily stay in the green BUY ZONE fore another couple of weeks. The bottom line however is, when you buy in the green ‘BUY’zone you’ll be buying cheap and that’s what investing is all about, buy low, and sell high!

 

The rHUI chart shows a similar pattern. The HUI touched its green BUY zone as of yesterday and so buying  the HUI from here on puts you on the right side of the risk/reward ratio (downside risk very limited)

 

 

 

Conclusion;

 

Investors should be on high alert from here on since these opportunities are a gift and don’t occur that often (6 times so far in 4 years)

 

Ok you’ll say, so should I buy shares like crazy now? No, it ain’t that easy since gold itself  still finds itself in a downtrend which started in May this year. So a confirmation of gold breaking out of its down-trend would be a something to watch for. We will notify our members on relevant break-outs of gold, HUI and our Discovery TOP 10 stocks.

 

 

Eric Hommelberg

 

The Gold  Discovery Letter,

The Gold Drivers Report

 

www.golddrivers.com

 

 

Readers interested in receiving our break-out alerts can join us today as of little as $15 a month.

Technical break-out alerts are one of the main features of the Gold Discovery Letter which has furthermore a strong focus on tracking down major discovery cases. The TGDL Discovery portfolio has gained already +400% this year. Subscription info can be found HERE


-- Posted Wednesday, 13 September 2006 | Digg This Article





 



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