Chart 1

Between 1996 and 1999 the Gold market was in a downside trend. The two red dots in the above chart are marking a trend-change (with the help of a double-bottom-formation – also called "W-formation"). In November 1999 the Gold price was testing the $250-zone, bounced to the upside to signal a strong future resistance point: $330. According to Cycles-Theory, a new upside trend is being established not until this resistance-zone has been taken successfully to the upside. At the end of 2002 Gold eventually succeeded with the help of an 8-month symmetrical triangle to cut across this resistance zone and become sustainable. Gold took off from its new support-zone explosively by dint of a 125% thrust to more than $375. After that, Gold confirmed the $330 support and said farewell to it by building another symmetrical triangle to break the technical resistance at $380 (and therefore the psychological resistance at $400 as well) akin impulsively.

Since Gold was trading at $415, the seldom trend-change-formation "saucer" had been completed after eight years. In general, a "saucer-formation" ("rounding bottom") shows a very slow and gradual change from downside to sideways and then to the upside. Such reversal-patterns can mostly be found in long-term charts. They are per definition relatively "drawn-out and flat," but mark a decisive change in trend at which a bottom is being built over several years. "Flat"? There lay $165 between $250 and $415! A first indication of the above-mentioned "relativity" and how much potential there is still left.

Test-Phase Completed in 2003

Although the end of the 20-year downside trend can be related ex-post to January 2001, the new (upside) trend needed to get confirmed a first time by breaking the superior downside-trend-line to the upside at $275 (see green line in above Chart 1; compare (red) symmetrical triangle in Chart 2 below, which used a alternative downside-trendline as the superior leg). After that Gold took the $300 resistance relatively fast and was forming another (8 months) symmetrical triangle (based on two strong triangle-leg-lines – see chart 2 & 3 – to overcome the strong resistance zone at $330.

Chart 2

Chart 3

From the above "Fibonacci M/A" Chart one can see when the new upside-trend was establishing over the exponentially smoothed out price-curve (black) and how important this was. (Since 1999, this curve was tested and marked five times via price-jumps). Not until the beginning of 2002 was the Gold price able to hold above – coincidentally at the same time Gold was going over $300 – which event(s) changed the market sustainable.

Since 2001 Gold is moving within an "intact" upside-trend, which was tested, confirmed and encircled various times. Until the break above the 1999/2000 "Confirmation Point" at $330, Gold required 23 months and it was scanning the lowest (dark green) support-trendline (see chart below). The last time Gold was testing this supporting line was in April 2003. Since then Gold took one higher trendline after another. I have been advising my readers that the above blue resistance trendline might turn out to be new strong support for the years to come.

Eminent is the question, what is the significance of what a trendline determines? The answer is two-fold: The longer it was intact and the more often it was tested, the more important it is. A trendline which was tested successfully eight times and thus signaled consecutively its validity is obviously more significant than one which was only tested two times. The more significant a trendline is, the more affiance it infuses and the more important is the new, superior trend. Not until the $330 zone was breached to the upside was the upswing trend confirmed for the first time. The reaction of the Gold price shows this impressively. Gold surged rapidly more than $50 in only eight weeks and touched the highest trendline. Subsequently a last, successful re-test of the $330 support followed (simultaneously touching exactly the lowest trendline). And ever since, Gold took a higher trendline after another. Whereas the (blue) middle line was acting as strong resistance until exactly(!) $400. Since Gold managed to close above $400, it is situated above this multiple-times-tested but scarcely over-jumped withstanding middle line. Gold is testing it at the moment to take it sustainable and for the long-term. Should this happen in the beginning of 2004, Gold would strive to the two higher trendlines with peace of conscience since the lower ones were tested and confirmed sufficiently.

Therefore one could argue: The Gold price required three years to level off in between certain boundaries to allege and confirm the (new) trend-direction. The lowest trendline turned out to be the most tested and thus the most significant one. This one now signals if the upside trend is still intact. The middle (blue) trendline acted as strong resistance since the beginning of the bull market and Gold could not hold sustainable above. 2004 could be the first year in which a "role reversal" takes place: Gold is trading firmly above this prominent resistance line which henceforth serves as strong support.

Course aim for Gold at the end of 2004 is about $500 according to above chart. Therefore Gold would have risen already by $100 within one year. In 2003 Gold rose by $75 ($325 to $400), in 2002 gold rose by $50 ($275 to $325 (=$50), and in 2001 it rose $25 ($250 to $275). If this $25-yearly-rise was to be maintained, this would result in a Gold price of $625 at the end of 2005, $775 in 2006 and $950 in 2008. If the Gold market rises 10 years, the extrapolation goes to $1625.

If one expects Gold to persist in a 20-year upswing (similar to its prior downside-trend), this naïve fallacy projects a Gold price of $5500 per ounce. That such a price distribution takes place is rather implausible, but shows as well how much potential there is left. Any such a scenario does not include "unexpected" (and therefore not priced in) internal and external effects, like for example:

• The "Gold-Derivative-Monster",
• Investment & Hedge-Funds worldwide elevate their exposure to Gold by "only" 1%,
• More and more countries are backing their currencies to Gold like Malaysia,
• Asia buys more and more Euro-bonds and Golds instead of U.S.-obligations,
• European Momentum-Funds buy physical Gold for the first time, since (finally) the Euro-Gold price rises

Any of these would bring about a price "explosion." [Many think that a "bubble" might occur in Golds. In my judgment this cannot occur in a hard-asset-market – in opposition to soft-assets (everything based on paper and (hot) air; including Gold-shares, -derivatives, etc.]

The chart above shows the important trespass of the $400 and the resultant Buy-&-Sell Signals thanks to the valid (and profitable) trendlines since the birth of this new bull market. Although we are situated in a "Sell-Zone" at the moment, it is important to also take into consideration that Gold has successfully broken the significant middle-resistance-line and could take it as long-term support. As long as Gold is trading above $400, this support-line holds until approximately March 2004.

Many Gold investors are receiving a sell-signal right now because they assume that the Gold price will move in direction of the lowest trendline, since in the (young) past this always occurred. It is possible that this new support-line needs to be tested quite some time to retune those investors. Alternatively this could be made by a price-jump to $423, $430 and maybe further to next resistances at $445 and $480. Whatever will be the case: Should this middle-line become support, the Gold price would not be in the sell-zone, but in the buy-zone.

The above chart shows Gold arriving in between a resistance zone which is derived from the price actions from 1990 until 1997. The red line which used to be support in the 1990s is now acting as resistance, while the red line which used to be resistance is now support. If Gold should make it above the red resistance line, then this would set of a new era in Golds. Until now, Gold has only tried to break out and confirm old resistances. I am curious how Gold will be breaking the red resistance line to the upside in the days to come. Either this will be quite fast or with the help of another powerful triangle-formation.

According to the next chart, the HUI Index looks like it is wanting to test the 200 points again to be able to strongly overcome the above lying (pink) resistance line.

The following chart shows the HUI Index more closely. The current resistances might be blown up with the help of another triangle which might have been in formation since closing above 200 index-points.

The next chart shows how cheap the HUI is at the moment and that there lies a great chance of picking up oversold HUI shares. If the physical Gold price should manage its way above its strong middle line, then the HUI takes off to do the same.

The long-term picture of the XAU Index shows how much potential there is left in its shares and how important the recent 95 index-points are. If the XAU holds above 95 points and takes this zone as support, then 150 points will be touched in the weeks to come.

Dollar vs. Gold: “Let`s get ready to rumble!”

Because the value of Gold is numerated in U.S. Dollars, this money-substitute influences the Gold price (and vice versa). By the end of 2003 the USD Index was quoting at 88 index-points and lost 26.666% since its high at 120. Gold rose by circa 60%. Therefore, Gold was rising exactly 2¼ faster than the Dollar fell. This is due to the fact that Gold ended its upside-trend earlier as the USD began its. Since the beginning of 2002 (USD still at 120) the USD Index/Gold price could not close above $370 and remained in a sideway-trend ("rectangle") with $330 as the lower boundary. Above shows as well, that the Gold price multiplied with the USD Index is moving within a symmetrical triangle since about a year. This indicates that Gold could (soon) rise faster (again) as the USD falls – if the triangle completes with a thrust to the upside.

The U.S. Dollar rose by 50% from 80 index-points to 120, which highpoint was built with the help of a massive head and shoulder formation. In general, a H&S formation is the most reliable chart-pattern. It shows a change of a long-term trend. The "head" of USD Index helped itself with a "triple-top-formation" and peaked in end 2000, middle 2001 and beginning 2002.

At the same time the USD was marking its third top, Gold was standing right before $300. The Dollar slipped to 105 points and between middle and end of 2003 hung on its right shoulder above 105 points – while Gold was trading firmly above $300 and building a symmetrical triangle which ended at the same time as the USD sacked below 100. After that, the Dollar was sliding down to its neckline at 93 points and made a pullback to the (blue) 500-day-Moving Average (Gold re-tested $330 after it was trading for more than $375). After that, the Dollar went under its neckline-support at 93 and made a classical pullback to the neckline, which could not hold. This now means for the USD Index: "Good-Bye 90s and Welcome to the 80s." The H&S formation is not finished yet. The USD just signaled a "Sell" because the decisive pullback to the neckline could not hold. A H&S formation also gives the possibility to roughly calculate a minimum price aim by carrying forward the distance from the "head" to the neckline. Therefore we can calculate with a minimum USD Index of 66 points (120-93=27; 93-27=66). In general this minimum price objective is reached "relatively fast."

While Gold succeeded recently to take its middle-trendline as support, the USD fell from its 2½-year supporting (blue) middle-trendline. Should the Dollar not make it above this line in the weeks to come, the USD sinkage would accelerate for the first time since its commencement in 2002. Chart-technically, there is potential for the USD of 66 index-points by the end of 2004. This point may turn out to be significant during the dominant downside trend of the USD.

-- Posted Wednesday, 11 February 2004 | Digg This Article