On Friday, gold closed at 432.90 and the $XAU closed at 106.86. Friday marked the highest one day close for gold in 16 years and marks the defeat of the 430 14-year resistance level for gold. 106 was also a key level for the $XAU, because it has been a cap for gold stocks since April. This was a key breakout for the stocks.

This is the start of wave two of the gold bull market. Bull markets usually move in 3 waves. The first wave is dominated by insiders and professional investors - people who understand the sector and know that there is true fundamental value in the stocks that make it up. In stage two mainstream investors begin to realize that the fundamentals for the sector are changing and that stock prices are likely to go up. Stage three is characterized as a mania in which people believe that stock prices are going to go higher forever and engage in furious speculative behavior.

Friday's move was amazing. The Dollar fell to a new record low against the Euro, a move that surprised people because it happened after the Labor Department released surprisingly good employment numbers. The dollar initially bounced up on the news and then suddenly reversed to make a new 52-week low. Support got smashed.

The Washington Post quoted Shaun Osborne, the chief currency strategist at Scotia Capital as saying, "we've seen a shift from cyclical to structural issues such as the twin deficits. Although it was a pretty good payrolls report ... I'm not too surprised that we had a sell-off. I think people are looking for levels to get short dollars again, and they used the initial reaction to the jobs numbers to load up again...It looks like we are on the cusp of another pretty decent move lower (for the dollar) over the course of the next few weeks."

As I commented a few weeks ago, the current account deficit is reaching a crisis level. It has grown so large that the foreign investment coming into the United States is no longer creating economic growth. Although the United States is taking in 80% of the world's surplus savings, it is all being used to finance the deficits.

According to Stephen Roach, the head economist of Morgan Stanley, the deficits are growing so large that, by the end of the year, America's indebtedness to other countries will reach 28% of GDP. That would bring US indebtedness to a level of 300% of exports. Argentina and Brazil were at 400% right before they collapsed in the 1990's.

US Treasury data shows that the net capital inflows from the rest of the world into the United States fell for the 6th month in a row. Private investment from abroad fell to $34.7 billion in August from $72.9 billion in July. Asian central banks made up for the shortfall. If they hadn't, the dollar would have crashed.

The NY Times quoted Ashraf Laidi, a currency analyst at MG Financial Group, as saying, "foreign central banks saved the dollar from disaster. The stability of the bond market is at the mercy of Asian purchases of US Treasuries."

The problem is, China and Asia are not going to support the dollar forever. They do so now because they depend on the US as their main export market. Eventually though they will turn away from focusing solely on export-led growth to focusing their monetary policy on managing internal demand and trade with other Asian countries. When China raised interest rates last week it may have been a sign that they are starting to do this.

China's central bank also dropped a bombshell over the weekend when it announced that it would "create a more flexible exchange-rate mechanism" that would allow allow its currency to float more. Right now China has the yuan pegged at 8.30 per dollar. If they allow it to fluctuate the yuan will gain against the dollar.

As the dollar continues to decline, it is likely that mainstream investors will begin to recognize gold as a real store of value, especially if a falling dollar brings a dose of inflation along with it. The next year is going to be about the mainstreaming of gold. This is what wave two is about. And as someone reading this you are already well ahead of the curve.

One factor that will bring gold to the general public is the upcoming launch of an exchange-traded gold fund, backed by the World Council. In the US this fund will provide people direct exposure to gold without having to go into the futures market. It will be as easy as buying the QQQ's when you want to buy the Nasdaq. The fund will bring a lot of money into the gold market. Although it is expected to launch before the end of the year, its approval by the SEC could come as soon as next week.

The Gold Miners Index is a new index of the American Stock Exchange under the symbol GDM. It includes stocks of mining companies with market caps greater than $100 million that have an average daily volume greater than 50,000 shares a day.

It includes companies that are miners and explorers. It is different than the $XAU, which is focused on large-cap gold stocks and includes several copper producers, and the $HUI, which has restrictions on hedging, because it is open to all sorts of gold companies.

The creation of this index is also an interesting political move by the American Stock Exchange. It sends a clear signal to the gold mining industry that the AMEX is friendly to them. The Index will only draw more interest and liquidity to gold stocks.

Gold making a new 16 year high and breaking out of such a key resistance level is a statement in itself. When a market or a sector makes new highs people take notice. They might hesitate to jump in and buy at first, but going forward each time they see gold go higher they'll consider doing so again and again. That's what fuels bull runs and why they usually end with some sort of climatic buying panic. The people who buy at the end do so because they are afraid they'll get left out. We saw this happen with gold and the Nasdaq back in January.

The good thing about wave two is it usually the longest lasting of the three waves that make up a bull market. Everything is lined up for a monster 'end of the year' rally in gold. The time to buy is now. Fortunes will be made.

To find out what gold stocks Mike Swanson holds and plans on buying subscribe to his free Weekly Gold Report at http://wallstreetwindow.com/weeklygold.htm