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Clif Droke

Clif Droke

Clif Droke is the editor of the two times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock…

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What Will the Next Two Months Unfold for Gold?

In my earlier article entitled, "Where is support likely to be found?" I made the case for gold finding support between $360-$370 after its steep early October plunge. To date, December gold has passed this important test of its strength and did find strong support between $365-$370, followed by a strong rally to its present $389 level. What can we now expect from gold and gold stocks in the remaining part of 2003?

I noted then that "The sharp 'pullback'...will likely serve its purpose of shaking out the weak hands, scaring away the public from getting involved in precious metals, and also of allowing the strong hands to accumulate more gold at lower levels. A sharp pullback such as [what occurred earlier this month] is the true test of a commodity's strength, because any commodity currently in the hands of the 'smart money' traders will not break the dominant upward trend on a pullback; rather, it will only serve as a temporary pause before the uptrend is resumed." This has proven itself to be true in gold's case as indeed the insiders used the pre-Halloween scare as an excuse to add to long positions at bargain prices. The quick pullback and equally quick recovery should be enough to convince the skeptics that gold is indeed in strong hands and is not as vulnerable to a major decline as some believe.

Would you like to see a picture of strength? Then take a look at the weekly chart for spot gold below. Those 30/60/90-week moving averages rising in unison at a good rate of change reflect underlying support, momentum, and a dominant interim and long-term cycle series that are still in the ascending phase.

Want to see another beautiful picture? Then look at this 1-year chart of the Rydex Precious Metals Fund (RYPMX) below. Note the bullish 10/20/30-week MA configuration, also reflective of strong support and continued upside momentum heading into 2004. All in all, I'd say these two charts do a good job of depicting in graphic terms what we can expect for the yellow metal heading into 2004, and it shows that the yellow metal's tide is still rising.

What about the gold stock market? Below is the 10-year monthly chart of the XAU index. You will note the presence of a well-defined parabolic bowl in this chart, with the mid-point (or "vertex") occurring around the early part of 2001. This suggests that next year should be an overall bullish one for gold stocks since the dynamic phase of the up-curve begins in 2004 based on the symmetry of this bowl. This bowl allows the XAU leeway for a pullback all the way down to around the 75 level before being violated, and not coincidentally the 75 area is where a number of chart pivots and moving averages intersect. This gives the XAU built-in "plunge protection" over the next 2-3 months in a worst-case scenario.

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