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Adam Hamilton

Mr. Hamilton, a private investor and contrarian analyst, publishes Zeal Intelligence, an in-depth monthly strategic and tactical analysis of markets, geopolitics, economics, finance, and investing…

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Tactical Gold Trends 2

Last week we took a look at the current tactical, or short-term, trends affecting silver. The white metal is certainly languishing near its major support lines these days, but thankfully both its bull market and its current tactical uptrend remain very much intact.

This week I would like to return our analytical focus to gold. While our subscription newsletters continue to monitor and evaluate the tactical gold trends as they unfold, it has been a couple months now since the original Tactical Gold Trends essay was published. With the exciting autumn trading season dawning, an update is in order.

Gold really is the ultimate precious metal and its behavior is certainly the single most important driver of investment performance in everything precious-metals related. As long as gold's secular bull market remains intact and healthy, investors and speculators can overlook technical weakness in other arenas like silver or precious-metals equities. Gold truly is the PM key.

As in my original tactical gold trends essay, there are three charts that we need to consider when discussing gold trends. First, obviously, the gold chart itself is absolutely crucial. No surprise here! Second, since gold still trades like it's in a Stage One currency bull, it is important to consider the behavior of gold's arch nemesis in the fiat-paper world, the mighty US dollar. Finally, since leveraged gold stocks continue to be the most popular gold investments and speculations, we will examine the HUI gold-stock index trends.

Charts are so important to prudent investing and speculation because they place recent price movements within their proper context. Whether gold rises or falls tomorrow, this move in isolation is probably meaningless. But when series of price moves are considered in trends, clear patterns emerge that help us view the markets objectively and short-circuit our emotions that are so hyper-sensitive to the immediate. Perspective is everything.

And the technical perspective on gold remains outstanding. There is no more important tactical chart for PM investors and speculators to monitor than that of the current gold scene.

Even after gold's necessary, healthy, and expected bull-market correction earlier this year, gold's key 200-day moving average continues to march northwards. Rising 200dmas are one of the most foundational bull-market technical signatures for two reasons. First, 200dmas tend to run parallel with the primary strategic trend, which in gold's case is indisputably higher.

Second, 200dmas usually form the strongest bull-market support zones from which corrections tend to end and bounce higher. The early 2004 gold correction ended up slicing through its 200dma support initially, but gold has since made a strong comeback. The metal is now clawing relentlessly higher and soon its 200dma will be under it and acting as major support once again.

And, while not evident in this tactical chart, back in May gold really didn't break materially below its 200dma when considered in the context of its entire secular bull. It merely traded down to its bull-to-date linear support line before bouncing higher and recovering in early May. Last year gold also traded slightly below its 200dma in its early 2003 correction before a powerful upleg, so temporary sub-200dma readings are nothing to fear.

The red line tied to the left axis of this graph, Relative Gold (rGold), normalizes this important relationship between gold and its 200dma so it is easier to compare over time. Calculated by dividing gold by its 200dma, it shows gold as a constant multiple of its major 200dma support. When gold bottomed in May, rGold traded down to 0.953, or 95.3% of gold's 200dma. The preceding April 2003 major interim bottom was similar when rGold bounced at 0.978, again slightly under gold's 200dma.

As the red support line drawn above shows, rGold is now climbing in a definite uptrend. It is spending more and more time above the crucial 1.00 level, where the gold price equals its 200dma. Whenever an asset's price is consistently gaining ground relative to its 200dma it is a very bullish sign and provides strong evidence that its bull market remains strong.

From a tactical perspective, gold's new uptrend, which I believe will ultimately blossom into a full-blown upleg, looks absolutely fantastic since its correction ended in May. The rising blue support and resistance lines on the right side of this graph frame this current tactical gold trend perfectly. There are all kinds of interesting developments in the gold price in the past four months that ought to excite gold investors and speculators. Things are looking good!

We will start our tactical gold analysis from the bottom, its current support line. Note above that gold has made three consecutive higher interim lows since May. These bounces in June, July, and earlier this month are numbered above. Collectively a best-fit line drawn through these three higher lows and the May correction forms a rock-solid tactical support zone. This current support is slightly shallower than gold initially indicated in June and July, but it is nevertheless quite bullish.

It is also exciting to note that this support line is due to intersect gold's 200dma in the coming weeks. Thus, if gold remains in its current uptrend, it should be trading back above its 200dma for good, at least until the next major correction after dazzling new bull-to-date highs are achieved. Gold's investment appeal will definitely rise for technically-oriented players worldwide once it leaves its 200dma in the dust to clearly signal its re-emergence in strong bull-market mode. I can't wait.

And it is not only the bottom half of gold's new tactical uptrend channel that is technically gorgeous. Its top resistance line is also very well defined and continuously ramping higher than gold's 200dma. There have already been three consecutive higher interim highs since May, numbered above, in June, July, and August. A best-fit line drawn through these highs runs parallel with the lower support line and forms a textbook-perfect uptrend channel.

Technical analysis is simple, but elegant. It allows the prices, considered in context, to do the talking rather than our own volatile emotions. The message of this tactical gold chart is very positive and bodes well for gold in the months ahead as this upleg starts to accelerate.

Since its correction ended in May, gold has carved a flawless series of higher interim lows and higher interim highs. These new higher lows and highs form a crystal-clear uptrend channel, which is rock solid with several intercepts each on gold's lower support and upper resistance. We couldn't ask for a more persuasive and bullish tactical technical chart.

This is great news friends! If you are like me, perhaps this past summer just felt slow and lethargic to you in gold terms. It certainly did for me at times. Gold hasn't yet rechallenged its January and April bull-to-date highs, it hasn't seemed to have a lot of staying power above $400, and we certainly haven't seen any real fireworks since 2003.

But as this chart reveals, all is well in spite of the perceptions of slow times for gold. Our capricious emotions, driven almost solely by random day-to-day market noise, led many PM players to conclude that gold was struggling over the summer. But this dazzling technical picture shows anything but struggle. Rather we have a very methodical, determined, and potentially powerful new gold upleg systematically materializing.

Of course gold uplegs don't develop in a currency vacuum, at least not in Stage One. Until gold breaks into Stage Two, its near-term fortunes are heavily dependent on dollar weakness. This current US Dollar Index tactical chart provides a fascinating study in contrasts. While gold's chart is technically as unambiguous as a chart can be, the dollar's latest trend has grown muddled and unclear. As technical confusion often portends, the dollar may be on the verge of a serious move.

Not coincidentally, the US Dollar Index reached its latest interim highs in early May on the very day that gold was hitting its own interim lows. Gold and the dollar are ultimately competing currencies, six-millennia-old real money with timeless intrinsic value versus three-decade-old 100% fiat money ultimately worth nothing more than the paper on which it is printed. There is no doubt that gold will win this titanic battle in the end, as no fully-paper currency backed by nothing but faith has ever lasted long in the grand scheme of things.

Nevertheless, over the short-term there are some epic battles waged between sound money and Washington's hollow IOUs. Right now one of them seems to be raging just below the surface, not readily apparent to the world as a whole yet but quite evident to those willing to pay attention. I think this struggle is contributing to the dollar's extreme technical indecisiveness of the past couple months.

Following its May interim top after a normal and expected bear-market rally, the dollar's downtrend resumed in what will probably ultimately prove to be the fifth major downleg of its secular bear market. In June and the first half of July the dollar fell right on schedule, probing new lower interim lows marked by the blue numbers above. These established a solid downtrend support line.

In late July the dollar surged, rocketing from the bottom to the top of its downtrend channel. As I discussed last week in regards to silver though, full swings through tactical trend channels are not at all uncommon and nothing to get excited about. While the dollar tried to surge above its 200dma primary bear-market resistance, it couldn't hold these lofty levels for long and soon failed lower. This failure helped define the parallel top resistance line that enclosed the dollar's new tactical downtrend. So far so good.

Then the dollar bounced again in mid-August, but this time starting well above its tactical support at the light-blue point 1 drawn above. This bounce was nothing exciting technically either, as prices tend to oscillate more or less randomly all over the place within their tactical trend channels. The dollar frenetically surged higher again and broke tentatively above its resistance line in late August, although the breakout was not decisive or material. Since then the dollar has continued its technical flirting with breaking out of its downtrend, albeit without much success.

Now typically there would be no reason even to discuss this non-breakout, but Wall Street technical analysts have been making a big deal out of the dollar's "new uptrend" and frightening some PM players. This supposed uptrend is marked in light blue above, a new multi-month support line with two higher lows. Obviously this new-dollar-uptrend thesis is of great interest to the gold community since gold is so dependent on dollar weakness during the early years of its bull market. If the dollar rallies strongly, gold will probably take a serious hit.

While we could indeed be witnessing the advent of a new dollar uptrend, as the markets are just a study in probabilities and anything can happen, for a variety of reasons I remain skeptical and continue to read this dollar technical ambiguity as bearish. I'll start with the least important and conclude with the most important dollar bearish arguments.

Check out the latest dollar highs above, which are numbered. The US Dollar Index hit 92.01 in May before rolling over and heading south. In June it rallied up to its 200dma and closed briefly at 90.01. In July it rallied again, streaked up through its entire downtrend channel, but only managed to close at 89.95. Then, in August, its attempt to break out of its downtrend ended unceremoniously at a closing level of 89.84. So what does the series 92.01, 90.01, 89.95, and 89.84 reveal? Lower highs!

While this is subtle, any series of lower highs is certainly not a bullish omen. This bearishness is reinforced by the dollar's major moving averages. The dollar's shorter 50dma has been decaying lower all summer, betraying a tactical downtrend once the random market noise is distilled away by the moving average. Even more importantly, the dollar's key 200dma, its primary bear-market resistance, remains in its long descent. This has bear market written all over it.

If the dollar was to rally significantly higher from here, near both its tactical and long-term resistance, then it would put the dollar's secular bear in jeopardy. Yet, relative to historical precedent, our current dollar bear remains relatively young and unlikely to end so soon. Since the early 1970s when our current totally-unbacked fiat dollar was born, major secular dollar trends have tended to run for 5 to 7 years or so before giving up their ghosts. Our current dollar bear, however, is barely 3 years old now so it is highly unlikely that it has already fully run its course.

And dollar fundamentals are certainly not improving, with the States running record deficits, staggering levels of debt completely unprecedented in world history, and trivially low interest rates designed to ruthlessly punish international dollar investors. The dollar bear lives!

I believe that these three factors, the dollar's lower highs, its descending 200dma, and its relative youngness as far as dollar bears typically go far more than outweigh any dollar bullish arguments based on the short light-blue trend line above. The dollar has been challenging its upper resistance zone, but so far it has failed to break out decisively after multiple attempts. And if the dollar can't break out in the light summer season when trading in the northern hemisphere evaporates, then I doubt it can do it in the winter either when global currency traders are paying attention and ready to short the primary dollar bear.

Instead, the dollar's recent apparent strength in terms of support has crunched it into one tight wedge. The light-blue support line and the blue downtrend resistance line are compressing the dollar price. This zone of compression, or indecision, will probably break out sharply one way or the other in the next month or two. My guess is the highest probability outcome is a break lower, potentially down to the dollar's lower support now running around 85ish. Naturally such an event would unleash gold to soar.

In this scenario where gold catapults higher as the dollar cascades through its downtrend channel, unsurprisingly the primary beneficiaries would be the elite unhedged gold stocks. Our final chart of interest this week examines the HUI unhedged gold-stock index. Like gold, gold stocks have remained bullish even through what felt like a slow summer psychologically.

This HUI chart is pretty interesting, especially since the expected and healthy correction ended in early May. The HUI's current tactical uptrend is not as precise as gold's nor as messy as the dollar's, but kind of in between. Nevertheless, we are witnessing a series of higher lows and higher highs in the HUI just as we ought to when gold is strengthening.

At the moment the HUI is in a fascinating place technically, tightly meandering at the convergence of several major zones. First, the HUI is challenging its latest tactical resistance line, the ascending blue line on the right. Second, it is also challenging its old downtrend resistance line that arose from its correction in early 2004. Finally and most importantly, it is also challenging its key 200dma, which has been its major support for most of its bull to date.

Once this consolidation period is over and the HUI breaks out of this triple-technical zone in which it is mired at the moment, I suspect it will head higher. And it won't have to rally much to claw back above its 200dma once again. Once the HUI trades decisively back above its major 200dma support, it will put a lot of nervous PM investors at ease and the capital chasing gold stocks ought to grow significantly and bid up their prices.

While this HUI chart is generally bullish and there is an uptrend, there are a couple bearish developments of note. It is interesting that the dollar strength and gold weakness in July was scary enough to PM-stock investors and speculators to cause them to sell the HUI down below its earlier interim low in June. July's lower low is certainly not a bullish sign when considered in isolation, but the HUI has recovered nicely from it and has already surged back up to the top of its trend channel. Hence the late July weakness is nothing to fear.

A bit more disturbing however is the HUI's 200dma. 200dmas tend to run parallel with the long-term trend in a market, and the HUI's has been nosing lower all summer. While this could be construed as an early technical warning that the HUI is on the verge lapsing into bear-market mode, I suspect it is just a peculiar technical anomaly. I have been pondering this odd development all summer and finally think I understand the reason why it happened.

The massive 2003 gold-stock upleg, which witnessed a stellar 125% gain in the HUI in only 8 months or so last year, had a curious non-gold component that contributed to it ... copper! The third largest HUI component is a copper miner for some silly reason, and copper prices soared in their biggest rally in at least a decade last year. Naturally this copper stock rocketed higher skewing the HUI upward. If this copper miner hadn't been included in the HUI, its 2003 rally would not have been skewed as high and its 200dma wouldn't have been dragged high enough to roll over this summer.

The current September issue of our acclaimed Zeal Intelligence monthly newsletter discusses this copper skewing of the HUI's 200dma in more depth, as well as digs deeper into the tactical gold trends. In addition, all of our actual PM-stock and options trades carefully researched and chosen to ride the probable accelerating gold upleg are detailed inside. Please consider subscribing today to learn how to apply all of this research to earning real-world profits in your own portfolio!

The bottom line, as always, is gold. Gold's tactical uptrend looks gorgeous regardless of the dollar's ambiguity or the technical blemishes on the HUI. If gold is due to head higher, gold stocks will absolutely follow sooner or later. The higher gold goes the higher the earnings of the unhedged miners multiply. As their earnings rise their valuations fall and pretty soon even conventional investors will break down the doors to rush into the gold miners. Gold is the key!

And with the US dollar poised right on the verge of probably breaking lower and plummeting through its downtrend channel after failing three consecutive times to reach new higher highs, gold may indeed be preparing to soar to fresh new bull-to-date highs itself. Contrarians need to be ready and positioned to leverage this exciting potential event.

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