The recent rise in gold and gold shares has confirmed that a strong, renewed rise is underway. This means that over the coming months, gold has a good chance of rising to new bull market highs. And considering the U.S. dollar is declining at a time when the strongest intermediate rise in gold is due, reinforces the likelihood of a decent run in both gold and gold shares.
The Decade of Tangibles
Looking at the big picture, a strong mega upmove in tangibles is also taking place and it could last another decade or so. This will cause price inflation to rise and it usually means the dollar will lose more value over time.
One main reason is China's ferocious appetite for raw materials as it continues to grow into a world power. Its entrance into the global economy has been fast and it'll continue to affect the Western economies for years to come.
China's impact is coinciding with the 200 year cycle in commodities. Chart 1 shows that commodities are starting a major wave up for the first time since the 1960s and 1970s. That is, the start of the sixth major upmove since early 1800, which is not casual.
As you can see, each major upmove of the past also coincided with a major war. And the current one is no exception. The war on terror will drag on for years with oil in the middle of the tension while supplies decline and world consumption jumps up.
This is the biggest problem the world faces today. We recently saw some of this with the death of King Fahd (supply uncertainty) and the latest terror threat in Saudi Arabia, which caused the U.S. embassy to close. This put more upward pressure on oil and over the long-term, rising oil will also help push up other commodity prices.
Gold: Onset of renewed rise
India is the largest consumer of gold and China's demand is growing more as each year passes, which is providing a solid base for gold.
Gold's major trend remains solidly up above $420 but it's been declining and consolidating this year since its peak last December. Gold's decline we call D is the worst decline in the recurring intermediate cycle and it tends to take some life out of the gold bulls. The most recent decline was no exception because gold formed a double D bottom in February and early June, which frustrated the bulls.
But it looks like the worst is over as a renewed gold rise we call C is now starting (see Chart 2 which shows the intermediate A through D moves in gold and its leading indicator). The C rises are the best rise in a bull market when gold tends to rise to new highs. This means if gold's bull market stays on track we should see gold rise above the December highs before year end while the indicator rises up to the C peak highs.
Keep an eye on $428 because gold will remain in a C rise above this level. Gold had three stepping stones to overcome before a strong bull market C rise was underway, which were $444, the June high, $447, the March high and $456, the December high. Gold recently broke above the first two resistance levels, which is good action. But once the December high is surpassed, gold has a good chance of reaching $500. On the downside, major support is at $420, the 65-week moving average.
Gold Shares: On the rise
Gold shares bottomed well before gold did, which is usually the case. Chart 3A shows that the XAU held at its 2004 low, the prior D low, and it's been rising, recently reaching a five month high.
Gold shares have further to go on the upside as the leading (medium-term) indicator is now rising from a low area and it has plenty of room to rise further before it's too high (see Chart 3B). Gold shares are also stronger than gold and this rise could be strong for gold shares like it was in 2002 and 2003. We recommend buying and keeping your gold shares.
Silver Looks Good Too
Silver has formed an over one year triangle since reaching a peak in April 2004 (see Chart 4). The 65-week moving average provides major support at $6.81 while the topside of the triangle is at $7.40. A break either way will clearly tell the next trend direction. We suspect it will be on the upside because silver's leading (medium-term) indicator is basing near a low area (not shown).
Once $7.40 is broken on a close, $7.60 and $8.00 will be the next stepping stones to overcome. Strong resistance will come in at $8.20, the 2004 high. Buy and keep silver and silver share positions as well.