Gold is hot and gold shares have been even hotter. They soared this month as gold broke above the important $400 level and excitement is in the air. Gold's even attracting some attention in the mainstream financial world, and it's about time.

Gold's been bullish for almost three years and it's now risen 60%. Gold shares have skyrocketed 614% (HUI) and 167% (XAU) to average 391% gains over the past three years. HUI is up 123% in the past nine months and gold shares have been the best investment by far, strongly outperforming stocks, bonds and everything else.

Golden Times

Nevertheless, the general public remains skeptical or unaware of what's happening in the world of gold. They're still in the stock market, either trying to recoup their 2000-2002 losses or jumping into the latest hot sector. But since we're already in the hottest sector, our view is why bother. And with most investors still focused on the stock market, it's actually good for us because it means the bull market in gold and gold shares has a lot further to go, and it will once mainstream investors catch on and jump on board, which will drive prices even higher.

We've been recommending a very large position between 40% to 60% of your total portfolio in gold related investments for nearly two years now. But if you haven't bought yet, it's not too late.

Gold is in a major uptrend, it's solid and the overall environment couldn't be more positive. We feel strongly all investors should have some gold and plan to hold it for as long as this bull market lasts, which could be several more years. Sure, there will be ups and downs along the way, like there are in all markets, and some could be volatile, but the idea is to buy and hold for the long-term.

As time goes on, it seems more likely that this could end up being the mother of all bull markets, perhaps exceeding the 1980 high at $850, at least that's the way things are shaping up.

Time for a rest

But we also know, gold has risen far and fast over the past few months and this intermediate rise, which we call C, could end at any time and gold is due for a breather. In other words, it could cool down and correct for a while, which would be normal, and if it does that'll provide a good buying opportunity if you haven't bought yet, or want to add to your positions.

What if we don't get a downward correction? We think we will because markets simply don't go straight up or straight down. But anything is possible and if you're worried about missing the boat and haven't bought yet, then average in by buying some now and some later, ideally during a downward correction at better prices.

Some say these markets are risky and you should beware. But a 78% drop in Nasdaq within two years compared to double and triple-digit gains in gold, and gold shares seems a lot more risky. Yes, stocks have rebounded this year but the gains in the strongest stock indices haven't come close to the gains in the HUI gold share index over the past two years (see Chart 1). So despite what you hear, go with these major trends and you'll continue to maximize your investment returns.

Is the Economy Really Solid?

Listening to CNBC and other stock market commentators, you'll hear how great the economy's doing, sales are up, stocks are going higher and so on. Most of this is true. The U.S. economy is surging at an over 8% growth rate and consumers are shopping like mad, which should keep the economy strong for now since consumer spending accounts for 70% of GDP.

All this shopping and economic growth, however, doesn't necessarily mean the stock market's headed higher. Remember, the markets look ahead. The rise in stocks over the past year was anticipating what we're now seeing, not the other way around.

The economy is booming because the Fed had the money spigots wide open for a long time. The government has been borrowing and spending like mad to finance military and other expenses, taxes have been cut and we're now looking at the biggest budget deficit in U.S. history. Interest rates have stayed low and consumers have been enticed to spend. The end result, we now also have the largest trade deficit in history.

As we've mentioned before, if Wal Mart were a country it would be among China's top importers. So as we keep shopping, we're boosting the economy but we're also making the trade deficit larger, which now nearly guaranties a much weaker dollar.

Inflation: Coming back

This seems to be okay with the U.S. because as long as stocks and real estate go up due to massive Fed liquidity, who cares if the dollar goes down. Plus, it'll help reduce the trade deficit. But the weak dollar and all the monetary fuel will eventually lead to inflation, which we're now beginning to see.

We all know inflation is very bullish for gold. So as the Fed pumps, consumers shop, the dollar falls, the spending and war on terrorism continue, and inflation begins to surface, gold will surge. It may not happen right away, but all signs tell us this time really is different than anything we've seen since gold's bull market in the 1970s.

But as we previously mentioned, don't be surprised if we see gold go lower first before it heads higher. In fact, that would be normal bull market behavior.

Technicals: A normal correction is due

Our favorite gold timing indicator on Chart 2B helps us identify the intermediate moves in the gold price. This tells us when an intermediate rise or decline is due, when it's likely over, and the strength or weakness tells us a lot about the overall bull market.

The A's & C's coincide with the intermediate gold rises while the Bs and Ds correspond to intermediate gold declines.

A "C" rise has been underway for five months now (see Chart 2A). C rises tend to be the best rise in the A-D pattern. In a bull market, C rises tend to reach new highs and it's the rise that reinforces the bull market. The current rise has been a fully expressed C rise in both time and price. It reached our $400- $415 target and it's lasted longer than most C rises of the past two decades. This is great bull market action.

Note the indicator (Chart 2B) has stayed above the D-B uptrend during the current rise. This means the C rise won't be over until this uptrend is broken and/or if gold closes and stays below $390. Once this happens, which could be soon because it looks like the C rise is topping, a D decline will begin and it could last 9 to 12 weeks, on average.

D declines tend to be the worst decline in the A-D pattern. So we'll likely see gold, and especially gold shares, under pressure for a couple of months, but gold's major bull market will remain in force as long as gold stays above $355. Also be prepared that we may not see a steep decline if the dollar stays weak, but some sideways action instead while the overbought situation is worked off.

If you want to take some good profits in gold or silver shares, now's the time to do it. If you do, keep your gold and silver, and at least half of your gold and silver shares because the major trend is up. If you want to ride through the correction, that's okay too and then add to, or buy new positions once the D decline is over.

Meanwhile, we look forward to another good year in 2004 and we wish you all a happy holiday season.