Its been two months since our last article and what a wild and interesting two months it's been!

For starters, the New York gold conference was filled with excitement and enthusiasm last month, especially since gold was hitting a new bull market high. It then went on to close at a 7½ year high on September 24. But on October 3, gold fell sharply, marking the end of the intermediate rise we call C.

Gold: Correcting in a bull market

Based on average historical timing, the rise was due to end in mid-October with gold near the $415 level. But even though it was a couple of weeks short and gold didn't reach $415, it was a good, normal C rise and it fulfilled its primary objectives based on timing and by hitting a new bull market high. So all is well.

Most important, gold's been in a solid bull market since reaching its lows in 2001, almost three years ago, and it's been performing like it usually does in a bull market. For now, gold will likely correct downward in what we call an intermediate D decline, which is normal in any market following a strong rise, and it'll then head higher, probably until at least next year and possibly longer.

The bottom line is, gold is hot, and gold and silver shares have been even hotter this year, reaching a six year high. This alone is impressive for a bull market that's barely gaining notoriety and we're planning to stay invested in gold and gold shares as long as that's the case.

Fundamentals are Solid

Newmont Mining is the world's largest gold mining company and it moves closely to the XAU and HUI gold share indexes. Its president, Pierre Lassonde, believes gold is re bounding from a 20 year bear market that began with a war on inflation in 1980, and ended with a war on terrorism and a loose fiscal policy that is flooding the world with dollars. Plus, the 20 year bear market weeded out marginal gold producers and cut down production.

On the demand side, we have China and India who are prospering and understand the power of gold. India, home to a billion people, is increasingly buying gold. He adds, China by itself could become 40% of the entire gold market, which is the most important thing that's happened to gold in the last five years.

China has been deregulating gold. A year ago, the Shanghai Gold Exchange opened and started free trade in gold for the first time in China's history. More recently, China's allowing its 1.3 billion citizens to buy gold. Considering the high savings rate in China, gold is a logical investment and it's estimated that a $36 billion equivalent in Chinese private money could move into gold. Plus, the Chinese government is moving to increase its low 2% gold reserves. And it certainly makes sense when you consider the huge dollar reserves that're piling up.

Gold demand looks very bright and we believe a golden era is starting, which in many ways is similar to the early 1970s. In other words, gold is still cheap.

GOLD: Step by step bull market also technically solid

For now, gold's steps are solidly in place and as long as they continue, the bull market will provide us with ongoing profits. Chart 1 shows the big picture steps since 1981. As you can see, the gold price moves in a major 1 through 4 cyclical pattern. Briefly, the #1 rises are the best bull market rises and gold's been rising in a #1 bull market rise for 2¾ years now. It formed a #4 low in February, 2001 and it was the first #4 low that didn't fall to a new low like the others did. This was the first step in the change.

Gold then rose above its 65-week moving average, its major trend identifier, in August, 2001 where it has stayed since then. This provides solid bull market support at $342. Last December, gold completed its next major step when it rose above its prior #3 peak at $330 for the first time in over 20 years. This was very important because gold moved into a higher level of the bull market.

Gold's current higher level is between $330 and $415, which was the prior #1 peak in 1996 and the #3 peak in 1999. With gold reaching a new high in September, the bull market is getting closer to the higher side of the band. As long as gold stays above $342, our next target is $415. A break above $415 means gold would be moving into an even higher level of the bull market, which would be very bullish.

Gold: C rise over

Gold also has intermediate cyclical moves, which are different from the major 1-4 steps, and each has a characteristic of its own. Chart 2 shows these A through D moves; the As and Cs identify intermediate rises, while the Bs and Ds identify intermediate declines.

C rises tend to be the strongest rise in a bull market. It's when gold rises to new bull market highs and it tends to last on average 10 weeks. The latest C rise fit the description. Gold's C rise started in July, it reached a new bull market high in late-September and it ended with a bang on October 3rd.

A new D decline is now in process and it'll be important to watch it. Gold is under pressure? in the D decline by staying below $380, but bull market declines also tell us a lot about the overall health of the market.

D declines tend to be the steepest decline in the cycle, but in a bull market, the low is usually higher than the prior B low, which was the July low at $342. Interestingly, this is the same level as the 65-week moving average, which makes $342 a strong major support level.? But if gold stays above $362 during this weakness, it'll remain very firm, which would be a strong sign overall.

As for timing, D declines tend to last 9-12 weeks. This means we could see downward pressure on gold until Thanksgiving to mid-December.

But here's a possible twist... If the dollar clearly breaks down to new bear market lows, we could see a mild gold decline. If gold breaks up to new high, however, it could extend the C rise. In that case, the decline since October 3 would've been an aberration. The dollar is currently the wild card and we'll be watching this closely for the next best buying time.

Gold Shares: Taking a breather

Gold shares are generally taking a breather from their strong rise. But the bigger picture shows the potential for gold shares in this bull market (see Chart 3). Note the XAU index broke out of a massive head and shoulders bottom formation, which is very bullish (see LS, H, RS). The next step would be to pull back to the neckline, which means XAU could decline to 88 and possibly lower. In fact, the moving average is at 75, so even if it were to decline to that level, the major trend would remain up.

More important, once this weakness is over, the breakout rise is normally the same distance as the head, which means XAU could eventually rise to the 160 level before the bull market is over. And if it does, that would mean a 72% gain from current levels.