November 18, 2002 – Long time readers of these letters know that I am not shy about making my views known. In other words, when it comes to markets, I call ‘them’ as I see them, which is something I am going to do again now.
Every once in a while, a market will reach an important turning point. The gold market is now at one of those moments. Either we move up and climb over $325 within the next few weeks, or we go back and test support below the $310 area. Or perhaps worse.
How much worse? Well, no one knows the future, but I want to tell you about one thing that has been bothering me for some time. It’s Bob Prechter’s call that gold will make a new low. The following is from his latest newsletter (Elliott Wave Financial Forecast, P.O. Box 1618, Gainesville, Georgia 30503): “The wave pattern is unchanged. It calls for an eventual move below $200 prior to end the 22-year bear market.“
I first met Bob back in the mid-1980’s, but even before then I was following his work. I must admit though, I really don’t have a clear understanding of how to use Elliott Wave. I read Bob’s letter to let him interpret Elliott Wave for me. But even though I don’t understand how ‘waves’ work, I have witnessed over the years that markets move in cycles – from asset undervaluation to asset overvaluation and back again – and further, that this cyclical pattern somehow almost seems to be pre-determined.
Anyway, Bob and I have spoken about gold several times over the years. I respect his view a lot. Consequently, I feel more comfortable when we see eye-to-eye and our views coincide. But since I first met Bob, he and I have been on opposite sides of the table with regard to his call for an eventual low in gold below $200 per ounce.
Over the fifteen years that I have been writing this letter, readers have seen several big moves in gold, and we’ve participated in them. I didn’t call these moves ‘bull markets’ because even though some of them lasted for quite awhile, none of them climbed above $500. A break above that level is necessary to give them a true bull market label. Consequently, it has been somewhat disappointing that none of these moves have been the ‘big one’ that so many of us are looking for.
Further, while I recognize that anything is possible when it comes to markets, years ago I assigned a low probability (10%) that the $280 area (which is the July 1982 low formed after the 1980 top) would ever be broken, but it was. I now believe that it is no more than 10% probable that the July 1999 $252 low will ever be broken, but could I be wrong? And could Bob Prechter be right? Well, only time will tell, but I think we’ll find out soon.
Gold is at a critical juncture. Gold needs to break above $325, and do it within the next few weeks. If not, I expect that a lot of the longs who have climbed aboard since gold’s July 1999 bottom will become stale, and choose to bail out of their position. That selling pressure could lead to a retracement of the 3-year bull move that we have been enjoying, and could I suppose in time even send gold down to Bob Prechter’s target.
Again, I don’t think so because a gold price below $200 per ounce seems so outlandish. But we’ll see because after all, anything is possible when it comes to markets.
In the meantime, the bullish case for gold seems clear, so for now, we have to continue to do what we have been doing ever since that July 1999 low – give gold the benefit of the doubt. The gold price has been rising for more than three years, so stay with the trend by assuming that the trend will continue to rise.
I’ve included above the chart of the Fear Index, which is my most important long-term model. I use it to determine gold’s relative value, and it’s recent lows show that gold has never before been such good valu
I also use the Fear Index as a timing model. There have been four previous buy signals since the dollar’s fixed link to gold was broken. Each signal is marked on this chart (when both the Fear Index crosses above its 21-month moving average and this average is also rising, a buy signal is given). A sell signal occurs when the Fear Index crosses back below its 21-month moving average.
On May 31st, 2002, the Fear Index gave its fifth buy signal, which remains in effect. Will this latest buy signal last for several years like the previous four signals, or will it prove to be a head-fake, reversing back below its 21-month moving average in the next month or two?
Again, only time will tell, but we can get some insight into what might happen from this chart. If the Fear Index does not move above its May 2002 level by the end of this month, the action of the past few months will begin looking ‘heavy’ on this chart, which is a condition that suggests the Fear Index will break down back below its 21-month moving average.
To prevent this breakdown, gold needs to close – I am estimating here because the Fear Index depends on several variables – above $338 by the end of November. Given the number of times that gold has been thrown back by resistance above $325, a move above $338 by the end of November seems to be a Herculean task. But don’t underestimate the strength that gold has been demonstrating over the past few months, and indeed, the strength is has shown these past three years since it reached its selling climax low in July 1999 after the Bank of England announcement that it would dishoard one-half of its gold reserve.
It is important to note, that not only have those BoE gold sales finished, but they took place in an environment when the gold price has been rising. It is therefore fair to ask, how much higher would the gold price now be if the Bank of England (and other central banks who have been selling) not dumped their gold? In short, this performance in gold over the past three years demonstrates that bull markets in the end are more powerful than government actions.
Maybe I’m just naturally cautious. I surely do not like to worry, much less to seek out things to worry about. But I am worried right now about gold and by implication, the gold mining stocks because they will fall too if gold doesn’t break above $325 in the next few weeks.
The time has come for the $325 resistance level to be hurdled. If gold doesn’t achieve this objective, keep your mind open for possible outcomes that could surprise all of us, except Bob Prechter.