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DOW THEORY
ANALYSIS SAC
Gold is a fascinating study. There is absolutely nothing like it and
nothing to compare it to. Most investments move up on greed and fall on fear,
but not gold. It moves up on greed but can either rise or fall on fear. Some
might say that the same can be said for oil. Oil can rise on the fear that
someone may blow up a pipeline, but it won’t rise on fear that North Korea
will launch a missile tomorrow morning. It’s a common mistake to think
of gold as a “commodity” but nothing could be further from the
truth. Gold is much more than a commodity. It is money, the only real money
in existence, and it is a store of wealth. What’s more, it is the
world’s barometer! When everything is on the right track, the price
goes dormant like the trees in winter, but when problems exist, it boils like
a witches brew. Quite often the pot begins to boil long before the problem is
visible to the naked eye. Usually some not so well meaning government
official will come out and tell the masses that it’s all a
misunderstanding and there is no credible reason for the price rise, but given
time gold almost always proves him wrong. Gold is probably best known as an
inflation gauge but I believe that is a gross understatement and way too
limited of a definition. Besides, if you believe government statistics, there
is no inflation. If that is the case, why has gold risen from $252.00/ounce
to trade as high as $733.00/once? I’ll tell you why; it’s because
we have inflation! Markets don’t lie, at least not over the long run.
Why is all of this so important? Well, if you can’t grasp what
gold is, and what it does, you’ll never be able to understand and
project its price movement. And speaking of price movement, I would like you
to take a look at the following historical chart for gold. It is the
Rembrandt of historical charts, and with the possible exception of the CRB
Index, it doesn’t get any better than this. In it you’ll see a
prolonged upward movement that has continued almost without interruption
since May of 2001, and then shifted gears in August of 2005. There have been
corrections along the way and they have hurt, and not because the bull market
has come to an end, but because investors, and I use that word loosely, try
to ‘time’ gold. Either that or don’t know how to manage
margin. Most bull markets have three phases to them and all three phases
involve accumulation:
- The first phase is where the so-called smart money takes great
pains to build a position. They do so quietly trying always not to call
attention to themselves.
- The second phase is where the institutional investors enter the
market, and
- The third stage is where the general public, your neighbor for
instance, jumps on the bandwagon.
Where are we now? Well, I’ll tell you where
we are not. We are still a long way from the third and
 
what is normally the final stage. How do I know this? It’s quite simple
really. Every time I travel someone sitting next to me will ask me what I do.
I usually answer that I am an analyst and specialize in gold and gold stocks.
No one is impressed and they don’t have a clue as to what gold stocks
are all about. Back in the early 1990’s I was heavily involved in the
emerging Latin markets and it got so bad that I use to tell people I was a
shoe salesman when I traveled. I couldn’t mention the words
“Latin stocks” without half the people on the plane surrounding my
seat. We are still a very long ways away from that type of feeding frenzy.
Back to gold! In the above chart, you’ll see a period of
consolidation that really lasted from late 2004 to mid 2005. It is my opinion
that the end of the consolidation marked the end of the first phase and the
beginning of the second phase of gold’s bull market. That means that
the first phase lasted from mid 1999 until June of 2005. That’s a long
time, especially if you measure it in dog years! In case you are interested,
the second phase in a bull market is usually the longest of the three phases,
and if that rule holds true, will run into 2010 before the real buying
euphoria begins. You see, the third phase is where prices really go
ballistic, and that is something to think about given everything we’ve
seen over the last twelve months. When I originally projected the time
and price targets for the bull market in gold, I thought we’d top in
2010 at US $3,000/ounce and I have held firm to that belief to date, although
I now suspect that both the time and price targets will be exceeded. The
question is by how much?
Since gold has begun its rise to the stars, nothing has changed. Better
yet, nothing has improved. Way back in the year 2000, I decided to take the
plunge in gold and I did so gold for two reasons:
- I was concerned the US had embarked on a path
toward fiscal irresponsibility to say the very least, and
- Demand was exceeding supply by some 5% per year. Supply had
decreased through out the 1990’s do to the poor price of gold,
money for exploration had all but disappeared, and the time to develop
and open a new major mine would be five to seven years.
Since then, a host of other good reasons for
buying gold have cropped up including but not limited to the war in Afghanistan,
the war in Iraq, horrendous trade deficits, problems with Iran, problems with
North Korea, surging prices of raw materials (oil and copper are two such
examples), and the list goes on. At the risk of receiving hate mail, I would
mention that I would put the political ineptness of the present
administration at the top of the list. Given all of the above, and a modicum
of time, there is no place for the price of gold to go but up. Way up!
Historical information is nice, but what about today and tomorrow? I
want you to take a look at the weekly chart of gold below and focus on a
couple of things:
Gold topped on May 11th at just above
my projected price target of $728.00 and then proceeded to correct 25.7%
meeting my original estimate for a correction. That correction bottomed one month later at $542.27,
immediately reversed course, and has not looked back. In a June 15th
article, I identified that bottom for you and stated that my initial thinking
was that gold would trade in a $50.00 range and eventually test the $542.27
bottom. In short, we would consolidate for a period of weeks before taking
off to the upside. So much for thinking! Gold bottomed, stayed in my range
for all of two weeks, and then took off just like the previous rally. On
Friday we closed at $664.11 and well above what should have been significant
resistance at $644.70. For the week, the yellow metal rallied $33.73 and
did so in the face of a dollar rally. So much for those “Gold
Rallies on Declining Dollar” headlines that pop up every day. Stupid
comments by stupid people, for an audience too lazy to search out the truth!
In conclusion, I believe that gold is ready to explode to the upside
with a test of $728.00 at the very least and maybe even a test of the
all-time high of $887.00. There will be no test of the bottom and the
countless investors waiting for a lower low before they jump back in are
slowly coming to the realization that they were left at the station. This is
the time to buy gold, now, today, tomorrow, this week! Gold is going higher,
a lot higher, and it will be volatile. Eventually you will see $100 ranges in
a trading day, so buy intelligently. But buy! Buy little by little every
month. Don’t try to get the best price, just buy! By the year 2010 you
will be very happy that you did.
Enrico Orlandini
July 15, 2006
Dow Theory Analysis SAC
Lima, Peru
For those of you interested in receiving
information on the Gold, CRB, and Dow Short-Sellers Funds we manage, please
feel free to e-mail us at ebo@dowtheoryanalysis.com and we will respond as soon as
possible.
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