The new year started off with a bang as gold hit a 15 year high.
The rise of the last six months has been the best advance in the three year bull market and gold had its best rise last year since 1996. The metals markets were clearly the top performers and it was the same story in 2002 with gold and gold shares the big winners then too. This alone shows the power growing in the bull market.
What About the Year Ahead?
As we enter 2004, gold remains bullish, the U.S. dollar's at an eight year low, commodities and currencies are the most bullish in 10 years, stocks are near two year highs and interest rates remain near 45 year lows.
We believe most of these trends will continue, probably throughout the year and beyond, but we'll let the markets do the talking and we'll invest based on what they're telling us. Remember, this is also an election year, so anything is possible.
Go With The Major Trends
Plus, it's never a good idea to have a strong opinion about what the markets are going to do. It's far better to go with the major trends but stay flexible and open minded.
Everyone has an opinion, but the charts will tell us the real story as the year unfolds since everything everyone knows is reflected in the price action.
That's why we put so much emphasis on the charts and our leading indicators. Over the years, they've kept us on the right side of the major trends, which are always the most profitable, and in the right percentages to take advantage of the strongest markets in order to maximize profits. And that's the whole idea, isn't it?
The markets always have the final word. They'll tell us what's happening and what's coming. At times, some things won't make sense as they're happening but the reasons why will always become obvious in time. Remember, the markets themselves are leading indicators.
Gold Up, Dollar Down
Currently, the biggest mega trends are up for gold and down for the U.S. dollar. Now that doesn't mean these markets will go straight up or down. There will be normal corrections along the way, like in any market, but as long as these mega trends continue, we'll stay with them.
Over the holidays we spent time at one of our favorite, beautiful Costa Rican beaches. While watching our kids surf, we realized surfing is very similar to investing. You want to catch the big waves, be experienced enough to know how to handle them and not get wiped out. You have to understand the wave sets and know when to jump on or when to wait for the worthwhile one.
For now, gold and the dollar represent the big waves and we'll ride these mega trends as they unfold and until they end. Based on these mega trends, we can also make some assumptions.
Interest Rates to Stay Low
We know, for instance, Bush wants to win the election, so he's going to do all he can to make sure that happens. This means interest rates will likely stay low to keep the economy growing, the housing boom intact, stocks rising and the voters happy.
It also means the dollar's going to stay weak since it's already resulted in a strong turnaround in manufacturing and it's helping exporters, many of which are the largest U.S. corporations. Plus, the massive debt load can be repaid in cheaper dollars.
Government officials have spoken out in favor of these two vitally important trends, which in turn means gold will keep rising as interest rates stay low and the dollar falls further.
It's also obvious Bush will continue with his "guns and butter" policy. Even though a lot of money has already been spent in Iraq and Afghanistan, the real threat is still out there as we saw last month in Osama's latest taped threats and the travel scares over the holidays. This ongoing spending is also going to keep the dollar weak and gold strong. And if another U.S. terrorist attack occurs, which remains a possibility, gold would soar and the dollar would drop sharply.
Unfortunately, we're not living in peaceful times and that's a wild card that could send all the markets reeling.
The China Factor
What's happening in China will also play an important role. China is booming and its citizens can now buy gold. Considering the renminbi is tied to the U.S. dollar, that makes gold very attractive. And as the China boom continues, Chinese demand for gold and all commodities will likely keep upward pressure on these markets. That in turn suggests inflation is coming, especially considering the excessive money growth around the world. Again, that would be good for gold and bad for the dollar.
What to Watch
We'll see what happens. But whatever the outcome, it should prove to be an interesting and very profitable year. For now, gold is taking a rest following its steep rise. This is normal and gold could decline further over the next month or so as the dollar temporarily bounces up.
If gold can hold above the $397-400 level during this downward correction, it'll remain very strong. Below $397, a steeper decline will be starting and gold could fall to the $370-$390 level. That would be the time to load up if you haven't bought yet, or you want to add to your positions.
Regardless of what happens in the near-term, however, gold will stay bullish above $360 (see chart ). This is gold's 65-week moving average and it's been the best major trend identifier for gold over the past 35 years. And as long as gold stays above $360, the major trend will be up and it'll be signaling even higher prices ahead as this new year unfolds.