The first investment I ever made was in silver way back in 1980 and it was off of a "tip". An old gentleman nicknamed "China" who hung around the golf course I played at told me to buy silver; that's all he said "buy silver". Why he told me I have no idea, and I sure as hell can't tell you why I bought it. As I recall it was trading around US $9/ounce as I threw my life savings of US $5,000 into the pot. Later on that year he came up to me and told me to "sell silver", and again no explanations were offered. I put the order in a couple of days later and it was filled around US $34 an ounce, multiplying my initial investment like rabbits hard at work. Out of curiosity, or maybe dreams of more easy money, I followed the price of silver after the sale as it soared to over US $50/ounce and then fell off of a cliff as the Hunt Brothers were squeezed into poverty. That top in silver represented the end of a bull market that had begun a decade earlier.

Even though it would be almost twenty-two years before I invested in gold or silver again, I followed the price movements religiously. Commodities and gold dragged themselves through a twenty year bear market before finally hitting bottom way back in 2001. To give you an idea of the strength of the bear market, gold had fallen from US $850 all the way down to US $252.50 over two decades. Silver fell from US $50 all the way down to $3.50 an ounce. Many miners were forced to close down. Once the prices finally hit bottom, there was a period of sideways movement as the so called "smart money" quietly accumulated gold, as prices moved through a consolidation period with the normal fits and starts. This accumulation phase came to an end when the price of the

broke out above the US $447.57 range. From there we moved into the second phase whereby gold was being discovered and accumulated by financial institutions. The second phase will come to an end when gold breaks out above the crucial US $999.37 resistance that has turned two rallies back to date.

It is now my belief that gold is consolidating in a range that is basically between good support at 924.68 and good resistance at 999.37 in preparation for a break out above this resistance. I have highlighted the range for you on the daily chart below:

For more than two months the price of gold has moved sideways as it prepares for a break out. Aside from good Fibonacci resistance the US $1,000 level will have quite a bit of psychological appeal to the man on the street and it will finally pull him into the market. To date relatively very few people invest in gold and that has allowed for manipulation of the price. The reasons for the manipulation are not relevant as no amount of manipulation can change the primary trend of a market.

I know these consolidation periods are difficult to handle in any bull market and a gold bull market is the worst of the worst. I also know it will come to a good end and gold will move up beyond US $1,000 for the third time and then it will explode just as it did two years ago when it ran from US $640 all the way up to US $1,033.00. This time around I'm convinced the price of gold will move well beyond good resistance at $1,148.75, close to the Point & Figure bullish price target above, and it would not surprise me to see gold test resistance all the way up at 1,372.81.

Everybody wants to talk about seasonality, Elliot-Wave, and a hundred other reasons why it won't happen this time, but they are simply wrong. The world is having a fiat currency printing frenzy and, at the same time it is swamped with all kinds of debt. Meanwhile the supply of gold is finite and that adds up to a price explosion. I see confirmation of my beliefs in the movements of gold stocks as highlighted in the following daily chart of the HUI:

When the price of gold gets ready to make a move we see a creeping pattern develop while gold stocks jump into the lead. This is what is happening as the HUI in now trading above what was strong resistance at 321.68 and is now ready to break through resistance at 334.97. The recent break through has given the HUI a bullish price target of 464 as you can see in the following Point & Figure chart:

Everybody is worried about gold, almost no one is on board, and you have intervention trying to avoid the unavoidable. It is a perfect recipe for a significant move up and it will happen. I should mention that the US dollar has topped and its decline will also add strength to gold's move to the upside. Finally, there is one more factor and that involves the discovery that the United States is grossly mismanaging the crisis, whether by design or stupidity, and as it becomes more apparent they have no solution, gold will move higher. The problem is that we all get caught up in the minute by minute movements of gold, and we lose sight of what is important. Gold is in a bull market, gold has already hit new all-time highs in a number of major currencies, gold is consolidating, and gold stocks are now in the lead. Patience is a virtue and it is a necessity when investing in gold.

info@dtanalysis.com
Dow Theory Analysis SAC
March 26, 2009