It's been an exciting month. Gold took off, hitting a 17 year new bull market high and this is strong bullish action.
The rise in gold was reinforced by the gold shares, with the XAU index reaching an eight year high. The other metals and commodities joined the bandwagon with copper, platinum and the CRB commodity index hitting new record or near record highs.
Also important, gold soared while the dollar rose. This means gold is now rising on its own. This was reinforced by gold breaking out to multi-year highs against most of the other currencies as well (see Chart 1). Over the years we've been saying that when gold rises against all paper currencies, you'll know the bull market is real because it's not just a currency reaction. And this is now happening.
What's Driving Gold
Gold's been in a major uptrend for over four years. And since gold is a leader, it's been signaling that things aren't right in the world and it doesn't like what it sees ahead. Gold doesn't tell us what that is, but it's not hard to figure.
We could start with massive U.S. government spending and the largest debts and deficits the world has ever known. This is happening in a country that has no savings and also holds the world's reserve currency, which has dropped 70% over the past 30 years, putting the dollar under suspicion.
Then there's the war on terror, which guarantees more spending since terrorist attacks have tripled from year before levels. There's also record high oil prices, growing uncertainty, record high commodity prices, global warming, a world flooded with the most liquidity in 30 years, a real estate bubble, inflation pressures, and booming growth and growing demand for oil and commodities out of China and other emerging countries.
These factors are all positive for gold. While we don't know how this will unfold, we can assume that at least some of these factors will be with us for a long time and chances are, the outcome will not end well. As long as that's the case, this will continue to propel gold higher.
The Technicals are Bullish
Looking at gold's technical big picture on Chart 2, you can see it's in a strong 35 year uptrend. A couple of years ago it broke above its downtrend since 1980, it's now at a 17 year high and its next resistance is at $500. Once gold is able to rise above that level, it's off to the races as there will be no further resistance until gold reaches the 1980 top area at $850.
While this level would put a big spotlight on gold, as our dear friend Chris Weber points out, a 1980 dollar is not the same as a 2005 dollar. In real terms, a gold price closer to $2000 today would be the same as $850 was in 1980, and this level is not an unrealistic target once the mega trend blossoms in the years ahead.
A New Investment Era
If this seems extreme, it's important to remember that a new investment era began in 1999. This marked a mega shift out of financial assets like stocks into tangible assets like gold. These shifts don't happen often but when they do, the trend tends to last for years. That was certainly the case in the 1980s and 1990s when stocks were stronger than gold, but that's now changed.
Gold has been stronger than stocks for six years now. The percentage gains have been greater and this will likely continue in the years ahead. We've also seen this in other tangibles like commodities, real estate and oil. So gold is where you want to be as long as this mega shift continues.
Gold: Extreme Low vs Oil
Oil has risen much more than gold this year. It's up 60% compared to gold's 11% rise. You can see this extreme on Chart 3. It recently took only six barrels of oil to buy one ounce of gold, for example, when the ratio fell to a new extreme low. To give you an idea of the other side of this extreme, in the early 1980s when oil fell much more than gold, it took almost 50 barrels of oil to buy one ounce of gold.
But gold is now starting to catch up. The ratio is beginning to rise from the extreme lows as gold is now rising faster than oil, and this will likely continue as the ratio normalizes.
Let's say the ratio just rises to the 1999 downtrend near 10-12 barrels of oil for one ounce of gold, which is still low, while oil stays near $60... this would translate into a gold price near $600-$720. Even if oil falls to say its $52 support, at 10 to 12 times it would mean $520-$624 gold and this is conservative. The point is, gold is also poised to go higher just based on this extreme gold to oil relationship.
A Strong Bullish C Rise
Meanwhile, the run up we've had in gold since mid-July is a strong intermediate rise we call C and it reinforces the bull market is solid. Based on the timing of normal C rises, the current one could end at any time. But it could also last on the longer side, like it did in 2003, and if so it could continue until Thanksgiving. If the current rise ends up being a long one, then we could see $500 gold before this intermediate rise is over. Gold could then decline in a downward correction to test its major 65-week moving average now at $427, but the major trend would remain up.
For now though, the bull market is alive and well and it looks like there are many good years ahead for this special metal. Based on the mega trend, this bull market is still young. Big money has been moving in but the public hasn't come into the market yet. Once that happens, the bull market will pick up steam and you'll clearly want to be on board.