Adam Hamilton    July 27, 2001    3331 Words


With gold prices continuing to languish in the “Central Bank Approved” $260s levels, from external appearances it appears that nothing really exciting is happening in the slumbering gold market at the moment.  Gold is acting like it has been officially banished to a constricted trading range reminiscent of the Twilight Zone-like November 2000 anomaly where the besieged yellow metal traded within $1 of $266 per ounce for four excruciating weeks.  The event was so patently absurd and out of character for free markets that we felt compelled to publish an essay on it at the time, titled “November Gold”.


As is typical in any human endeavor, and especially in the global investment arenas, when gold limps along with all the vigor and enthusiasm of a bull in a coma, gold investors tend to become discouraged and sentiment plunges to dismal depths.  With the old “November Gold” trading rules appearing to be back in force to hold gold’s head underwater, gold investors are once again growing weary and fainting near the end of their long grueling march through the parched investment desert through which they have bravely trekked for many years.


Between digesting other analysts’ writings, stopping by to visit Internet gold forums, and monitoring our own e-mail flows, it is becoming more and more obvious that once again bullish gold sentiment is waning significantly.  Since we human beings are hardwired to be emotional creatures, it is not hard to understand why we began to fear and doubt when markets in which we have capital at risk are not moving the way we hope.  These emotional responses to financial stimuli are natural and expected.


For gold investors, it is much easier to step back and comprehend this psychological phenomenon by observing traders and investors in other market arenas.  For instance, call one of your NASDAQ trading friends some evening after a massive up day in the mighty NASDAQ casino.  Chances are he will be ecstatic about a 4% index gain on some news that some tech company reported better than expected earnings or some prominent Wall Street analyst claims to see the end of the dark tech-wreck tunnel.  Your friend will probably be convinced the bull is back and all is well, as he will be on a short-term trading high.


Conversely, if you call your same NASDAQ trading friend after a big down day, for whatever reason, he will likely be depressed and have a negative opinion on his market of choice.  He may even mentally extrapolate the down day into the future and lapse into a sort of despair as he imagines his stocks will never recover.  We humans, in addition to being emotional creatures, tend to make linear assumptions and usually assume the status quo is indefinite.  Observing other investors and hearing about their ups and downs is a great reflection into our own psyches as gold investors.


When gold runs up $5+ in a day, the contrarian Internet is buzzing with joy and excitement.  Modern gold prophets come out of the woodwork proclaiming the birth of a new gold bull with messianic zeal.  On the other hand, when gold meanders sideways or drops a few bucks, the mood turns somber and echoes of despair fill the message boards.  Wails about the futility of fighting central banks float eerily through the ethereal streets of cyberspace.


With psychological hills and valleys, victories and defeats, an inevitable part of investing, the important factor is not the emotions of elation or despair, but how a trader or investor reacts to those emotions.  Is he whipsawed by the tides of short-term circumstance?  Or is she a trading Rock of Gibraltar that always keeps the macro strategic picture in sight?  Fundamentals are the bottom line, not emotions, in successful investing and trading.


Price action goes a long way towards setting and reinforcing investor psychology, regardless of whether one traffics in gold investments or technology equities.  With gold lazily drifting along in the summer doldrums like a rubber ducky floating on a river, gold investors are waxing negative again and some are losing sight of the big picture.  In this short essay we zoom out and take a strategic look at gold and gold stocks from longer-term technical perspectives as well as discuss exciting fundamental foundations.  While gold itself may look lackluster and forlorn on a daily basis in recent weeks, the technical strategic “GoldTrends” remain very encouraging.


Our first graph is a simple chart of daily closing gold prices from 1996 to July 25, 2001.  As is no surprise to any gold investor, the 5+ year trend for gold is decisively down.  When some technical support and resistance lines are drawn in, however, the picture painted takes on a different light and becomes enticing to a contrarian thinker.



To begin, we will focus on the red lines and numbers in the graph.  The two dashed red lines mark the formation in which the gold price has been floundering since 1996.  The bottom line is the support line, or the level which the gold price has not broken below.  Even with the current poor sentiment in the gold arena, the lows of late summer 1999 have not since been crashed into. 


With heavy physical gold demand in Asia ramping up dramatically the lower the price of gold swoons, many analysts believe that there is a high probability that the September 1999 gold lows right above $250 may indeed prove to be the bottom of the brutal multi-decade bear mauling in gold. 


The remote possibility of one further panic selloff low certainly exists, but that probability is small and the news would have to be pretty extraordinary to force gold below $250.  For instance, if the US government publicly announced it was liquidating our giant gold hoard, a gold bloodbath could temporarily ensue.  Provocatively, the Clintonista socialists may have already secretly sold a substantial portion of our gold under Bill Clinton and Robert Rubin, making a mockery of the rule of law in the United States and making an end-run around required Congressional approval.  If this indeed proves to be the case, then a big US announcement of gold sales would only have a short-term psychological warfare type of shock effect on the gold markets.  Gold could also swoon if the International Monetary Fund heralded with much fanfare the sales of its entire gold hoard, initiating a panic selloff in the ancient metal of kings.


Even if the red lower support line in the graph is shattered by some wacky low-probability gold hydrogen bomb such as these examples, we expect any panic spike below support to be short-lived and fleeting.  There are over a billion people in China who would love to convert a small portion of their savings into gold, as well as another billion in India for whom gold is the ultimate status symbol and classical cultural store of wealth.  There are also billions more hard-working ordinary folks around the globe who exclusively trust the timeless security of gold for their savings.  While many of these people are trapped in third world countries and are nowhere close to being affluent by Western standards, billions of people each spending a small part of the fruits of their labors on gold can multiply rapidly.  The global gold markets are very thin.


When the very pro-gold Eastern Hemisphere popular cultural and its historical affinity for gold are considered, it seems to us like all the physical gold the Western central banks could ever possibly dream of scrounging up to dump on the markets will be rapidly and voraciously snatched up by the Asian populace.  Any additional trading lows in gold, while possible, are not probable and are only likely to last days or weeks as Eastern demand rapidly absorbs Western official gold sales in a news-driven panic gold liquidation.  Any gold spike below $250 will be repelled with heavy, heavy physical buying worldwide.  The bottom support line in the graph seems sound and fundamentally secure.


The top red dashed line in the graph represents the resistance line for gold.  It is drawn from the early 1996 gold highs above $400 right before gold began its slide to the latest mini-gold spike in May 2001. 


The three most exciting and dramatic gold rallies of the last two years all met their untimely doom as they tried to assault this resistance line and break out to new highs.  Rally “1” was the spectacular near-gamma spike of gold on the news of the Washington Agreement in late September 1999 by European central banks to slightly abate the flooding of physical gold from their coffers onto the global markets.  Rally “2” was spawned by a major gold producer making a public anti-hedging announcement in February 2000 when it proclaimed it was planning on slashing hedges in 2000.  Hedging by gold miners has had a tremendously detrimental impact on the price of gold as gold producers sell their gold years before they produce it by borrowing gold from central banks via bullion banks and cashing out the gold loans immediately to send a torrent of physical metal cascading into the global gold markets.


Rally “3” was a super intriguing gold event in May that transpired soon after the Gold Anti-Trust Action Committee held a landmark summit in South Africa to lay out its comprehensive case for official sector involvement in the gold market and the carefully orchestrated suppression of the global gold price.  We discussed this rally in much more detail in our “Gold Prepares to Erupt” essay and discussed the preceding summit in “The GATA African Gold Summit”.


When the bottom support line and the top resistance line in the graph are viewed in tandem, a very bullish technical formation known as a descending wedge (or descending triangle) is defined.  When a price bursts out of a descending wedge, the move tends to be rapid and violent, full of fury and force.  Interestingly, we have a perfect example of this phenomenon shown above in this very graph.


The solid blue line and blue arrow mark the top and breakout of an earlier descending wedge in gold.  The solid blue line marks the top resistance of the old wedge, which was not violated for over three and a half years.  Finally, following the announcement of the Washington Agreement on European central bank gold sales, gold smashed through that blue resistance line like an artillery shell through a sheet of plywood, marked with the blue arrow.  For another example of a commodity leaping out of a descending wedge, please see our “Gold Boiling in Oil” essay from last year which shows the same type of event in crude oil prices in recent years.


With stellar gold fundamentals to back up the technical picture, we fully expect the gold breakout from this current red descending wedge to materialize into a violent rally as well. 


Well over 4,000 metric tonnes of gold are demanded around the world each year, but only 2,500 metric tonnes of the precious metal are wrested from the bowels of the earth by miners annually.   The supply/demand deficit is offset mostly by Western central banks selling or lending out their physical gold into the market.  The central bank gold supplies have been tapped for many years, however, and are rapidly dwindling.  In addition, it is becoming much more politically dangerous for central banks to give away their citizens’ gold that forms the ultimate backing for their fiat currencies, so the central bank desire to lend and sell gold is likely to continue to taper off.


The US financial markets are imploding, as we have discussed in a myriad of essays in the past year.  Traditionally, when conventional markets keel over, gold investment demand rises dramatically.  Also, US money supplies are being carelessly ballooned at astronomical rates by the Fed which implies much higher inflation in the near future, very bullish for gold.  The massive bond market shares this perspective, as the critical long bonds remain at high yields and have hardly budged in response to Greenspan’s overtures.


In addition, the current Greenspan Gambit of betting everything on a desperate last-ditch attempt to bailout US stock speculators has effectively eviscerated the lucrative incentives for the gold carry trade, which we described in detail in “R.I.P. Gold Carry Trade”.  On the home front, US citizens are becoming outraged at the prospect of our national gold being illegally sold under Clinton and Rubin so a letter-writing campaign to our elected representatives has begun in earnest, lighting fires under the US officials who refuse to answer simple questions about US gold that a child could understand and answer with ease.


In recent weeks the gold lionhearts of GATA have uncovered further amazing evidence of official sector US gold manipulation and are radically turning up the heat on the politicians, bureaucrats, and bankers responsible for the illegal suppression of the global gold market.  For our valued clients, we will discuss the latest GATA developments in detail in the upcoming August issue of our private newsletter Zeal Intelligence.  GATA, once ignored by both the pro-gold and anti-gold worlds alike, has grown up from a little poodle nuisance yapping at the heels of the gold shorts into a stalwart pro-gold wolf, a lean, mean killing machine with wicked razor-sharp fangs.  GATA is ripping bits and pieces of skin off the tender backsides of the gold shorts and will yet get far more than its pound of flesh when it moves in for the kill. 


Every gold investor on the planet should be financially supporting the fearless freedom fighters at GATA ( who are moving ever closer to blowing the great gold scam of the late 1990s wide open.  GATA’s critical counter-terrorism operations to thwart the lawless official gold suppression schemes could expand dramatically with more capital contributed to the melee!


One further comment about the huge descending wedge formation on the gold chart is in order.  With a descending wedge, the passage of time lowers the bar for a major technical breakout.  Right now, the level of an upside breakout is marked by the red triangle on the left axis of the graph around $285-$290.  As time passes, however, that hurdle inexorably migrates lower and lower.  This is a critical concern for those short significant amounts of gold.  Since legions and legions of big trading houses around the world employ technical analysis, everyone is watching this same top resistance line drawn in the graph.  Once that is broken, and it could happen any day, chances are that substantial buy orders will begin to clamor for scarce physical gold around the world simultaneously, bidding the gold price up dramatically in a short period of time.  The gold shorts have to be terrified when they see this line and realize we are probably rapidly approaching the inevitable breakout.


While the technical and fundamental pictures for gold look excellent, how are the gold stocks holding up?  While we don’t particularly like the XAU for a lot of reasons (please see our discussion on the inherent problems of the XAU in our essay “Mining the XAU for Gold”), we still use it in our analysis because it is what everyone else in and out of the gold world is eagerly watching.  Unfortunately, for the financial world at large the XAU is considered the definition of gold stocks, so until that misguided perception changes far superior gold indices like the unhedged HUI continue to be overlooked by most market participants. 


The data in this XAU graph is also daily closing data from November 2000 up until July 25th, 2001. 



If gold is preparing to rally for technical and fundamental reasons, we would expect to see an anticipatory rally in gold stocks.  Financial markets around the world are always trying to divine tomorrow’s action, trying to anticipate where the next big gains will bloom.  As a general rule, rallies in commodity stocks often precede the rallies in the underlying commodities themselves.  This is because some market participants always read the writing on the wall, study the fundamentals, and pre-position their capital accordingly before the information is widely known and accepted and the commodity price is bid up.


As the above graph shows, the XAU in the last nine months has formed a very definite bullish trading channel, apparently anticipating some gold fireworks.  This is a wonderful omen for the price of gold!


The lower red dashed line forms the bottom support of the channel, while the top red dashed line defines the general resistance, although both lines have been temporarily violated in recent months.  The red triangle on the left axis corresponds to the current Y-intercept of the lower support line, marked by the red dot on the right side of the graph.


For the most part, the XAU has been undulating nicely up this bullish trend channel since its November low.  The index has bounced off each the bottom and top of the trend channel several times since those lows, outlining a really well-defined short-term trading trend.  Market technicians like to see this sort of action as it shows increasing price strength in the XAU.  Market fundamentalists look at the graph and conclude that savvy investors around the world are anticipating a rally in gold on a fundamental basis so they are pre-positioning capital in the gold stocks and waiting for the gold rally to reap a bountiful harvest. 


From its November trough to its most recent May peak, the XAU has witnessed spectacular 50%+ gains.  These levels of returns would even no doubt please those ultra-aggressive NASDAQ speculators.  The gold stocks as represented by the XAU appear to be auguring a coming rally in gold.  This distinct ascending trend channel is a very encouraging development for gold investors worldwide.


With gold nearing the vertex of a gigantic descending wedge from which it will be forced to burst free, stellar gold fundamentals on a variety of fronts, and gold stocks taking off on an upward trajectory in apparent anticipation of some yet unknown approaching gold event, gold investors should be rejoicing at the possibilities.  Even in the midst of the slow summer trading season while gold seems to drift aimlessly in the doldrums, the probability of a major gold rally continues to rise.  Much is brewing right below the deceptively placid surface of the global gold cauldron.


While the old “November Gold” rule of prices in the mid $260s does appear to be temporarily back in force, the government officials and private bankers playing chicken with the enormous free market forces building beneath the surface in gold are taking tremendous risks.  Every time in history governments or central bankers have foolishly tried to kneecap or hobble gold to prevent it from vetoing fiat currency inflation, gold has ultimately cast asunder its chains and overwhelmingly annihilated the feeble efforts of those command-and-control minions who have vainly tried to capture and break it. 


There is absolutely zero reason to think that this time will be any different.  The central banks and governments experiencing fiat currency trouble or potential problems will probably keep trying to fight gold.  It will ultimately be to no avail, however.  The anti-gold forces may be able to stall or delay the inevitable slightly, but they are ultimately doomed.  Gold has been around for six millennia of commerce and trade, a rock of financial stability in a fragile and fleeting financial world.  Virtually every debased fiat currency that has ever existed has already been smashed on the rocky reefs of gold.


While many believe the powerful anti-gold forces appear to be winning the epic battle, we believe the tables are about to turn.  Market forces can be bent for a little while, influenced for a season, but ultimately the iron laws of supply and demand crush all opposition and easily prevail.  Adam Smith’s invisible hand of free markets is a frightfully powerful force and throughout history it has always exacted its merciless vengeance against those who have brazenly tried to shackle it.


Adam Hamilton, CPA     July 27, 2001     Subscribe