Gold moved higher this month. The weaker dollar helped provide a boost for gold but gold's actually been on the rise for 4½ years. And even though it's risen 78% in that time, most people don't realize that a bull market is underway.
That's good because it means this bull market is still in its earlier stages. And if high oil pushes inflation higher it would give gold an extra boost. The same is true of uncertainty and these have indeed been uncertain times.
Gold shares are more volatile than gold and they've risen even more. They're currently up on average 490% in the past five years and they're on the bullish track.
The falling dollar has so far been a major factor pushing gold up but it's down 30% since 2001, which means gold has risen more than the dollar has fallen. You see this when comparing gold in another currency as it rose to a new high in euros a few months ago.
Still, the gold rise has been clouded. One distraction has been the soaring oil price, base metals and natural resources like copper and uranium. The fast economic growth in China has been a key factor in the base metal rise by adding to demand with their ferocious needs to build infrastructure, and this will continue to affect the markets in the years ahead.
GOLD'S TURN TO RISE
But for now, it looks like the pendulum has swung too far. Oil has gone to an extreme compared to gold and if you look at copper compared to gold you see the same.
Chart 1 shows that the ratio of gold to copper has now reached a major low seen only twice in 1979 and 1988, and each time it coincided with a major high in copper. This is telling us that, like oil, copper is at extremes compared to gold and it's time for gold to outperform.
The 65-week moving average identifies gold's bull market and gold has remained above it since 2001. As long as gold stays above it, now at $423, gold's major trend will remain up (see Chart 2A).
Gold also moves in a major 1-4 pattern and this #1 bull market since 2001 has been the strongest one since the 1970s. It's higher than the prior #3 and #1 peaks in 1990 and 1996, which is something gold was unable to do in the 1980s and 1990s during #1 rises.
It also completed the second step last December when gold rose into the third step. And while gold has been uneventful this year, it's still holding above the lower side of the third step, which are the 1990 and 1996 highs near $420 and $415. This means if gold stays above these levels, it's poised to rise to the upper side of the third step near $500. Plus, gold's leading long-term indicator remains bullish above its 2-4 uptrend and above the zero line (see Chart 2B).
BULL MARKET VS MEGA TREND
Interestingly, gold has reached a major low about every eight years since its 1969 low, and in each case the lows were followed by a three to five year rise (see Chart 2A). The last eight year low was in February 2001, which means gold's 4½ year rise since then has gone beyond the three year mark and if it carries on for five years, we could see a peak by February 2006.
When we say peak, however, we're not referring to the mega trend. Gold can have bull and bear markets within a mega uptrend, similar to the 1970s when two strong bull market rises had a 1½ year bear market in between. Plus, the 1993-96 bull rise was barely worthwhile. So you could argue that gold's last decent rise was in 1987 and it then fell for 14 years before it reached bottom in 2001. But mega trends start from this type of environment (remember stocks in the late 70s- early 80s) and we believe gold still has years to rise substantially, so this bull market could last longer.
And with the dollar set to weaken further, especially if the Fed stops raising rates due to the pressures of a slowing economy and the repercussions of Hurricane Katrina, we could see gold a lot higher.
GOLD'S C RISE: Key to bull market
But for now, we'll focus on the current 4½ year bull market. The intermediate C rise that started in July is especially important to see the overall strength of the bull market. If, for example, gold reaches a new high above $456 (last December's high), then the bull market will be super strong and gold could then reach $500. On the other hand, if it fails to hit a new high, it will be a sign that the bull market has changed.
Most of you know that gold's intermediate rises we call C are the best rises in a bull market when gold reaches a new high for the rise. This has been going on since 2001 as Chart 3A shows. The current C rise already rose to an eight month high in August and the rise remains solid above $434 basis October. The leading indicator has room to rise further before it reaches the C high area, which means gold still has further upside potential and the C rise will continue as long as the D-B uptrend stays intact (see Chart 3B).
GOLD SHARES: On the rise
Gold shares have been rising since May and they still have room to rise further. Some gold shares are very strong and at or near new highs. Gold shares have also been outperforming gold during the last three months but as you can see on Chart 4C, the almost two year trend favors gold. The major trend, however, still favors gold shares.
Meanwhile, the HUI Gold Bugs index remains solid in a 4½ year uptrend and channel (see Chart 4A). The medium-term indicator still has room to rise further before it's overbought (B), which means HUI could rise to test the old highs. If the strong-weak C rise pattern continues in gold shares like it did in 2002-04, gold shares could rise sharply to new highs. Keep your gold and gold share positions.