Gold Price Action:
What Comes Next
Chip Hanlon
Euro Pacific Capital
November 8, 2004
The title of this article supposes that last week's move in the
metal through $430 did indeed constitute a technical breakout
that will allow for a big move to the upside. Even having an
article titled "Gold Breakout Imminent?" recently,
I'd actually still like to see a little more carry-through into
the high $430's as evidence that this isn't just a head-fake,
but for now we'll suppose that gold is starting what will end
up as a run toward $500/ounce.
Should that rally occur, what should gold investors then expect?
For a possible answer, below is a 2-year chart of gold over the
course of 2002-2003; I highlight it for a look at the action
that surrounded gold's first important breakout in its current
bull market at $325-$330. As can clearly be seen in the graph
below, the breakout in December of 2002 led to a furious rally
to approximately $390/ounce:
What I suspect many investors
have by now forgotten is the sharp pullback that followed; as
can also be seen, the metal retraced that entire advance, retreating
back into the mid-$320's.
This is classic technical action -- classic. Those who have read
more than a few of my commentaries know that I'm a technical
analyst first (even my fundamental conclusions are driven by
what I see in the charts) and I can't tell you how many times
I have seen such action. Did that pullback change the long-term
bullish trend for gold? Not in the least -- it merely served
to shakeout short-term speculators and weak holders of the metal...
the area that had loomed for so long as resistance then acted
as support.
So, you may be asking: is Hanlon suggesting we're going to see
a quick spurt toward the $500 level, then a pullback all the
way back here to $430 or so? My answer is that the advice in
my last essay still stands, that investors who don't yet own
gold, but want to, shouldn't get cute in trying to save a few
dollars by picking some clever pullback. Those investors need
to take action and simply get in.
However, so long-term holders might have a better chance of holding
through the volatility that could very well be seen during this
precious metals bull market, here are some thoughts as to why
we may indeed see a sharp breakout and pullback in gold much
like we did a couple of years ago.
What most makes me continue to think a big run in gold is nigh
is the breakdown we saw last week in the dollar (see chart below):
The break to a new short-term
low below 85 on the U.S. Dollar Index is clear to see, but I
think investors need to keep one more chart in mind:
A long-term chart of the dollar
shows something very important: there is huge, I mean HUGE, dollar
support near 80 on that same index, an area where a massive triple-bottom
was built over the course of 5 years on the early 1990's.
If I'm right, the dollar's breakdown will lead it to push down
toward the 80 level, but I do not believe for a second that this
support zone will go down without a fight. A near-term dollar
breakdown concurrent with a big spurt higher in gold is likely.
But a technical pullback in gold like the one we saw two years
ago, a surprisingly large retrenchment back to the $430 level,
could also easily occur as the dollar mounts a counter-rally
off that 80 level.
Now, I know it's hard to imagine what could allow the dollar
to mount a meaningful rally from here; heck, we're even seeing
some of the mainstream Wall Street firms warn that the dollar
might be due for a fall... they're 3 years and a 30% decline
late to the party, of course, but thanks for the warning, guys.
Indeed, this is precisely what makes me suspect we will see a
powerful, unforeseen counter-rally in our currency as it reaches
that 80 level -- there are a few too many people joining the
weak dollar party. If I don't like such sentiment when I see
it in the stock market, then even as a long-term dollar bear
I have to approach the developing situation honestly, remind
myself that no market moves in a straight line and acknowledge
that a few too many folks are promising a dollar meltdown at
present.
Again, let me state clearly: it should not be at all comforting
to gold bulls (dollar bears) that mainstream Wall Street analysts
are noticing the trend; aside from the thought-provoking Stephen
Roach, I am not aware of a single mainstream "strategist"
that has an ounce of credibility on the subject. This sudden
awareness suggests that it's getting late in the dollar's current
down-leg and that Wall Street's analysts should, as usual, be
utilized by investors as the reliable contrary indicators they
tend to be. They probably need to be shaken out by a counter-rally
before the next big dollar down-leg materializes; how this may
play out is simply a little too far out to predict... we'll have
to analyze that situation as it approaches.
For now, though, back to the implications for gold: we're certainly
dealing with less chart resistance in the metal from here on
up than it has had to face in the last couple of years, so maybe
my thesis will prove incorrect and it'll just keep running. This
thought, in fact, is precisely why my point from last week still
holds. I repeat: don't get cute, get at least some exposure to
gold NOW.
Keep in mind, however, that this article is being written largely
in an effort to help those that want to hold gold as a long-term
investment stick with it in coming months by preparing them for
the volatility we will almost certainly face.
Chip Hanlon
 C.O.O./Chief Domestic
Strategist
Euro Pacific Capital, Inc.
email: CHanlon@europac.net
www.europac.net
Chip Hanlon: A renowned technical
analyst, Mr. Hanlon oversees Euro Pac's entire advisory staff
in addition to driving the firm's domestic research. He was the
president of Unfunds, Inc., a registered investment advisory
firm in Huntington Beach, California, prior to its acquisition
by Euro Pacific Capital in January 2003.
Copyright
©2004 Euro Pacific Capital, Inc. All Rights Reserved.
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