The McClellan Market Report
Gold In Frightening Blowoff Rise

McClellan Financial Publications, Inc
Posted Dec 13, 2005

excerpt from The McClellan Market Report of Dec 9, 2005

It appears that everyone is bullish on gold right now, and we keep hearing higher price objectives being tossed around by various analysts on CNBC. It is funny how we don't hear any lower price objectives, and that tells us a lot.

The current rally in gold prices is going too far too fast, and this sort of behavior in gold prices always ends violently. Gold has a tendency to make very pointy spike price tops, as opposed to the quieter and more rounded tops you see in the stock market indices. This is because of the nature of panic in the gold market, wherein traders tend to panic into gold as it rises like this. They don't tend to panic out at the bottoms, like we see in stock market declines.

The chart above shows the 50-day range in closing prices for cash gold. That's simply the highest close minus the lowest close of the past 50 trading days. Very high readings like this are seen at important turning points for gold, usually at price tops, and tend to illustrate just how far the rubber band can get stretched before the ball comes back and gets smacked by the paddle. The key, here, is for us not to be the ball.

2nd chart

A similar condition can be seen in the second chart, where we take a really long term look at the Price Oscillator for gold futures. Only the September 1999 spike exceeds the current one in this chart, but the current one is still rising. That September 1999 spike came on an announcement by Wim Duisenberg, president of the European Central Bank, that his and other central banks throughout Europe had agreed to limit sales of their gold reserves, and also to limit gold leasing. This set off the mother of all short squeezes (which conspiracy theorists would say was the objective). It is important to notice that all of the gains in that pop got erased eventually.

The current pop was started by a similar story, about worldwide central bankers deciding to put more of their reserves into gold rather than dollars or euros. We suspect that a similar erasure of the gains will occur this time.

Overbought conditions like this can go on for longer than one's stomach lining can survive it, but the piper must eventually get paid. Our Timing Models say that a good time to look for the top is Dec. 13-14. And the full moon is due Dec. 15, which can also make things interesting.

Bottom Line: Don't chase this rally, and don't bet against it until it turns. A drop of at least $30/oz should unfold once the spike top is in.

Oil Getting Back on Track After Storms

3rd chart

3rd chart

The 3rd chart updates our comparison between gold prices and oil prices, with gold providing a leading indication by about 11 months for what oil prices should do. This relationship works pretty well, provided that no major geopolitical or other event intervenes to put its thumb on the scale.

In this chart, we have labeled a few of these events that have served to skew the relationship. The important point to take note of is that when an exogenous event comes along and throws oil prices out of whack, then once the event is passed oil will work extra hard to get back on track, sometimes even overdoing it. In 2003, the Iraq War sent oil to $40/barrel well ahead of when gold said it should get there, and the resulting collapse took oil back down farther than it should have gone in an overreaction.

We are now in the midst of the downside overreaction following the big upward spike related to hurricanes Katrina and Rita. There was supposed to be a big top in oil prices due Oct. 30, 2005 according to gold, but our view is that the hurricanes caused that top to arrive early, and now oil prices are struggling to get back on schedule. Part of that struggle has been an overreaction to the downside, which is just now being readjusted.

The point here is that as oil prices continue to get back on track, we should get ourselves comfortable with $60+ oil prices. And those will seem really nostalgic 11 months from now, when oil prices really start rising to match the current blowoff in gold prices.

Lots more follows for subscribers...

McClellan Financial Publications, Inc
email: tom@mcoscillator.com
website: www.mcoscillator.com

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