When Gold reached a new high in October ($740) gold investors were bombed with TOP calls and urged to sell their gold positions due to the record high open interest and overbought conditions. In my piece 'The Party Ain't Over Yet' I urged our members not to pay attention to these calls, see excerpt below:

Excerpt Gold Drivers Report
The Party Ain't Over Yet - 2007 edition - October 11, 2007

We find ourselves in interesting/exciting times when it comes to gold and its shares. The sudden spike in gold and the skyrocketing rise in gold's open interest lined up the traditional TOP callers once again urging you to sell your precious gold. The TOP callers have been brain washed over the years by our beloved gold cartel and in fact they (the gold cartel) did a good job in doing so since most gold analayst do refer to the commercial traders as being 'smart money' which you better follow since they ought to be right most the time. And yes, in fact the commercial traders managed to flush out the long speculators over and over again indeed (except for Dec 2005, more on that below). The most common misstake analysts make however is twofold. First they argue that the time should have arrived for a correction since the open interest reaches record highs  Second they assume that a record high open interest could only be solved by the long speculators liquidating their gold positions.

First of all I want to stress that record high open interests don't say that much since no-one really knows how much newbies buyers will enter the gold market in the weeks to come driving up the OI to even higher levels. The simple fact is that a top in gold can only be recognised AFTER the top has been reached, not based on OI and/or over-bought conditions.

Second I want to stress that a record high open interest could be solved as well by the commercial traders running for the hills. In other words, If they are forced to cover their short positions the open interest will drop as well. Can't happen you think? Well, it did happen in 2005 and gold made its biggest up-move from $430 till $730 within a year. It's what we call a commercial signal failure.

Sure enough the TOP callers were all lined up in December 2005 urging you to sell your gold positions. I really hope you didn't listen back then and I really hope you're not paying attention to the TOP callers now! The thing is that gold is characterized by long consolidation periods followed by sudden sharp up-moves. During these sharp up-moves you want to be in it and not watching gold taking off from the side lines. During this entire up-move gold could be very well in over-bought territory.

In January 2006 I wrote an article 'The Party Ain't Over Yet' in which I made a case for an extended move upwards after a long consolidation period despite the bearish sentiment among the TOP callers. We had a commercial signal failure then and we could be very well on our way for a commercial signal failure now.

END.

OK fine you'll say, so the October TOP calls were a bit too early then but what about current levels? Gold was certainly overbought lately and  therefore bound for a correction right?

Well, altough the gold shares found themselves in overbought territories as of late it's not the time for gold and its shares to enter a long consolidation period again. As mentioned above gold's recent up-move only lasted for about 3 months while the previous break-out after a long consolidation period lasted about 8 months. Again, the current correction is very similar to the one of December 2005, the chart below tells it all:

Current correction similar to the one of December 2005
 

You get it?

Gold has been in a consolidation period for more than 16 months and is on its way towards new highs. Gold's recent up move which lasted only 3 months is not over yet. Gold's recent move is very similar to gold's break-out in 2005 indeed and current correction is expected to find support at the 38% FIB retracement at $773 and the fast rising 50 dma currently at $763.

When we take a peek at the gold shares we see a similar pattern. A pattern of long consolidation periods followed by multi-months up moves. Such up-moves aren't terminated that easy and are characterized by 50 dma support. When the HUI broke out from its long-term resistance at 250 in December 2005 many analysts were calling for a correction due to the gold price collapsing from $540 to $500. I remember well many of the analysts remaining on the side lines watching the HUI rocketing higher towards 350. Then a correction came which caused the HUI to drop from 350 to 300. Despite the bearish sentiment back then we argued it was only a temporary pull back on its way to 400+. I wrote:

Excerpt 'HUI - Too Young to Die' - February 2006

Now when it comes to the current correction I think it could be close to an end. Why? Because the current HUI run is just too young to die imo. Just think about it. The HUI has been in a consolidation pattern for almost two years before breaking out of its two year resistance at 250.. The previous time the HUI broke out of a long consolidation pattern was in 2003. Then the HUI broke out of its long-term resistance at 150 and rocketed higher by 66% in a five months time frame.. A similar move today would launch the HUI just above 400 pts…

The idea of the HUI topping out now doesn't make much sense since this is the first serious down-turn of the HUI since it broke out of its long-term resistance of 250. History tells us that a powerful bull-run isn't being terminated that easy. The current drop reminds me of the HUI drop in October 2003 when the HUI dropped 30 pts before gaining another 70 pts.

The current HUI run is very similar to the one of 2003. If 2003 could be of any guidance we still have a long way to go since we're just witnessing the very first major attack on the HUI's 50 dma during this run..

The chart below tells it all, the HUI is too young to die yet!
 

END.

Well, sounds familiar right? I wrote this piece in February 2006 when the HUI hit its 50 dma for the very first time since breaking out after a long consolidation period. It's simple, the most powerful bull runs do emerge from a long consolidation period. The odds are that bull runs like these will test their 50 dma several times before they get terminated. History books will show you our guess was right at that time (Feb 2006) and the HUI rocketed higher indeed towards the 400 mark during the next couple of months!

The reason why I came up with this example is quite obvious since we find ourselves at exactly such a juncture again.

After a 16 months consolidation period the HUI finally managed to break out again and clocked a new high recently at 464. The correction of last week pushed it back towards the 400 mark thereby panicking many gold investors out of their gold positions. It's the first time the HUI seriously challenges its 50 dma since breaking out after a long consolidation period therefore it ain't likely the beginning of a new long correction/consolidation period, see chart below:
 

The relative HUI is clocking 1.16 right now which is just above its long-term average of 1.13. In order to reach previous major sell territories the relative HUI should be clocking values exceeding 1.50 which would translate itself in HUI values exceeding the 500 mark!

 

Now what about gold? Did it hit major sell territories lately?

 

Well, if we take a peek at the relative  gold chart we'll see that gold has touched the major sell area briefly indeed but what is more stunning is the similarity with the correction of December 2005!

relative Gold chart:

The r-Gold chart is gold divided by its own 200 dma.It has proven to be a reliable indicator in spotting major bottoms for gold in the past 5 years.

This chart shows striking similarities between the current correction and the one of December 2005. We already noticed that in the firts gold chart of this article but is confirmed by the relative gold chart as well. Furthermore of importance is to notice that in order for gold to reach its May 2006 over bought territory the relative gold value should clock values exceeding the 1.35 level which translates itself into gold prices exceeding the $900 mark!!

 

So Gold prices exceeding the $900 mark and HUI levels exceeding the 500 mark, but in what timeframe?

Gold's price objective exceeds $900+ in Q1 2008

 

Well, sa said earlier each bull run that emerged after a long consolidation period lasted for about 5 - 8 months. Gold's most recent bull run only lasted for about 3 months so the current drop is most likely a temporary one before gold and its shares will resume their recent bull run towards new all time highs. If previous bull runs are any indication of what lies ahead of us (60% up moves after a long consolidation period) then we could expect gold prices exceeding the $900 mark (and HUI exceeding 500) in Q1 2008.

 

Unrealistic projections?

 

Not according to RBC which stated that the current correction should be short lived and that we could expect $900 gold by early next year!

 

Also Barrick CEO Greg Wilkins is banging the bull drum for gold, he stated this week that gold could move up sharply towards $900, $1000 or beyond very quickly. He cited a fast decline in world mine supply as the main driver but sure enough that's only a single driver pushing gold. Needless to say that a sharp increase of global gold demand (up +19% in Q3), a crashing dollar and covering open short positions will do good for gold as well.

 

In a next essay we will shine a light on the supply/demand fundamentals, crashing dollar etc...

 

Highlights:

• Current correction similar to the one of December 2005 (short lived)
• Gold and HUI only had a 3 months bull run so far after a 16 months conslidation period
• Previous bull runs emerging from a long consolidation period lasted at least 5 - 8 months.
• Previous bull runs emerging from a long consolidation period clocked impressive gains of up to 60+%
• A similar bull run these days would translate itself into gold prices exceeding $900and HUI 500+  in Q1 2008!

Final Note:

 

Although it's far beyond the scope of this article to discuss the critical drivers for gold such as global gold demand, declining gold supply and a crashing dollar etc. I do want to bring to your attention a detailed report recently issued by Redburn Partners titled 'Gold War' which endorses GATA's research and says gold could spike up to $5000 shortly after the beginning of next decade. Knowing what GATA knows is a must imo for every gold investor. The simple truth is that GATA has nailed the entire gold move better than (almost) anyone else. GATA was called being nuts for predicting gold prices of  $800 back in 1999 but here we are, $800 gold and the end is nowhere in sight. Fortunately GATA is gaining credibility fast and many heavyweight gold experts such as John Embry, James Turk, Frank Veneroso, Peter Grandich and Doug Casey already joined the GATA bandwagon and institutional backing is now emerging here as well.

 

Please do yourself a favour and read the Redburn Partners report which can be downloaded from GATA's website at: http://www.gata.org/node/5725

Now where to go from here?

Well, if you are a believer in gold's future then these are the times to increase your gold share positions since the gold shares are still selling at fire sale prices. In other words, downside risk is low. Higher gold prices in the years ahead will lift the entire gold share sector but the most exciting rewards will come from junior mining companies making new discoveries.

Here at golddrivers.com we track promising junior companies which we believe could be huge winners before this decade is out. If you would like to participate you could opt for a free trial subscription

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Please don't hesitate to fire your questions/remarks to:
ehommelberg@golddrivers.com

 

Best regards,

Eric Hommelberg

The Gold Discovery Letter/
The Gold Drivers Report

www.golddrivers.com

-- Posted Monday, 19 November 2007 | Digg This Article | Source: GoldSeek.com

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