Gold Stock Bull

For the next few weeks or months, analysts will likely refer to the latest rise in the gold price, which started today, as the GATA RALLY. As some of you know, this Thursday, the Wall Street Journal will carry a full-page advertisement paid for by GATA. The headline of the article will read: “Anybody Seen Our Gold?”

The inference is that some of the gold that is supposed to be stored at Fort Knox may not be there, or may belong to foreign governments. The last time this gold was officially audited was 1953.

GATA has maintained for years, as originally reported by Frank Veneroso, and recently documented by John Embry, that the gold price has been manipulated by Central Banks and privileged bullion banks, along with some gold miners. (Barrick comes to mind). It is hoped that this advertising campaign by GATA will finally focus the light of truth on this dark issue.

The question now before us is: How high can the gold price fly? The vast majority of investors are still being influenced by the Wall St. guru’s who have for the most part ignored the fact that gold has outperformed main stream investments since 2001. Therefore there remains a lot of money that has not yet come into play.

Charts courtesy www.stockcharts.com

Featured is the seven year history of the gold price compared to the S&P 500. Except for periods of consolidation, the trend has favored gold since 2001, and we may be looking here at a ‘moon shot’. This is probably one of the most important charts you can have in your arsenal. As long as this trend is up, gold will outperform mainstream stocks.

In this next chart we will examine the comparison between the stocks of the Dow, and the stocks that comprise the HUI Gold Stocks Index.

During the past seven years, since gold bottomed in 2001, gold stocks have consistently outperformed the DOW. “A trend in motion remains in motion until it is stopped.” Until we see evidence that the trend is reversing, it behooves us to ‘trade the trend’.

Next let’s examine the price of gold itself.

Featured is the seven year bar chart for gold bullion. The breakout from the recent pennant (thin blue lines), sets up a target of $1,000.00 for this GATA rally. Emotional trading and frantic short-covering by some of the manipulators could send gold even higher, but $1,000.00 gold is the target.

DISCLAIMER:
Please do your own due diligence. I am NOT responsible for your trading decisions.

Happy trading!
PM January 28th 2008

Peter Degraaf is an on-line stock trader with 50 years of investing experience. He sends out a weekly Email alert to his subscribers. For a 60 day free trial, contact him at itiswell@cogeco.net or visit his website www.pdegraaf.com

After reaching a record nominal high of $913, gold has since retreated $33 to around $880. This quick drop was enough to sway sentiment and have many analysts talking about a correction in the gold market. This view is understandable, as the gold price has added $250 since September and roughly $100 in the last three weeks alone. But let’s take a closer look at this latest upleg and compare it to the last upleg in order to get some perspective on what to expect from gold in the coming weeks and months.

The chart below analyzes the gold price over the past three years and includes the last major upleg that occurred during the same season two years ago.

While the past is not always a good indicator of the future and technical analysis is never reliable in isolation, the above chart is dense with insights and lends some interesting observations about gold and which way it might head from here.

First off, the current upleg has closely mirrored the previous upleg of 2005/2006. They both started around September and grew out of a 9-month consolidation period. They both consisted of two impressive advances separated by a short “breather” period in between.

The most revealing part of this analysis is that, assuming this upleg continues to mirror the previous upleg, it is nowhere near the top. The previous upleg put in a gain of 60% of 8 months and the current upleg, despite being quite impressive, has only advanced 33% in just over 4 months. For this upleg to run its course, we would see another few months of strong advances that could push the gold price towards $1,080. To add to the argument for further upside, momentum indicators show that gold is not nearly as overbought as it was at the peak of the last upleg and has room to run.

But just because the last advance was around 60% does not mean the current advance will necessarily follow suit. Market psychology, recession overhang, an election year, political instability, slowing jewelry demand and Bush’s magical stimulus package could all help to paint a different story this time around. And the downside risk is substantial, as gold could easily correct to light support at $800 or all the way down to heavy support around $720. My personal viewpoint is that gold will continue higher and if it does correct, support at $800 will hold. I took some profits when gold broke $900 and have cash on hand for a move in either direction. I will look to buy on a breakout above $913 or a correction towards $800. In the meantime, as my readers know, I have and will continue to maintain a core position that rides this long-term bull market through the ups and downs. This gold bull has many years left and I fully expect gold to take out the inflation-adjusted high of $2,200 before the bull is over. And even after breaking $2,200, I will not be selling my holdings until the average investor is talking about gold the same way they were talking about tech stocks in 2000.

I can’t help but to think that I am setting myself up here. There are so many variables that could throw a wrench into my predictions and tarnish my flawless reputation (cough). Nevertheless, I can’t help but to jump into the 2008 forecasting game and give my readers some ideas for what I believe is in store for 2008. Without further adieu, here are my 10 predictions for 2008:

1) Economic conditions in the U.S. will deteriorate further and we will finally get consensus that the dreaded “R” word is a reality. The fed will intervene and do everything possible to avert it, but it has been delayed for so long that the any fed plans to prop up the economy will ultimately fail.

2) The sub-prime crisis will intensify with additional write-downs and massive quarterly losses for the financial giants. Bailouts will never seem to be enough and any relief will be short-term with announcements of additional cash infusions being necessary. At least one major bank or financial institution will go under and cease to exist by the end of Q2.

3) Real estate prices will continue to fall in 2008. A new round of rate resets will usher in a second and larger wave of foreclosures. The worst of the financial and real estates crisis is definitely ahead of us, not behind us.

4) The fed will continue to lower rates (below 3%) and flood the market with dollars in an attempt to prop up the economy, but it will be too little too late. There will be rallies, but the muted and fading effect of fed intervention will create a panic in the markets that will cause a massive selloff, albeit prolonged.

5) The dollar will suffer tremendous losses as the printing presses kick into high gear and foreign central banks and commercial institutions rush to the door even faster than they did in 2007. China will continue to diversify their reserves out of dollars, creating additional downside pressure and pushing the Euro closer towards becoming the world’s new reserve currency. The unwinding of the yen carry trade will be another factor pushing the dollar to new lows in 2008. There will be several mini-rallies along the way that will convince people that the dollar is going to rebound, but it will end the year losing another 10-15% in value.

6) Oil will dip towards $80 per barrel due to the slowing economy and release of additional supplies. However, continued inflation and war in the Middle East will push oil back above $100 and could see the price spike towards $150 in the event of war with Iran.

7) Gold will post its highest gain yet during 2008, outpacing the 31% gain of 2007. Investors will start to take more interest in gold as it becomes hard to ignore the massive advances from lower rates, the lower dollar and higher oil. Gold equities will catch up to the metal and return to offering impressive leverage. Junior miners will outpace the majors and silver will outpace gold by a small margin. Prices will become much more volatile with $50 days in either direction and a trading range between $770 - $1,120 during 2008. Gold will suffer a major correction at some point, but it will be shorter than previous corrections and any dips will prove to be excellent buying opportunities.

8) Political unrest will increase with major events taking place in Iran, Pakistan and beyond. The U.S. will enter another country and start another war, despite being spread thin already. Tensions will increase with Russia and China, who see U.S. moves as a power grab and threat to their interests in the region.

9) I won’t offer a prediction as to who wins the U.S. presidential election, but I will forecast high voter turnout, plenty of controversy and a focus on voter fraud from the use of electronic voting machines. Recounts, lawsuits, protests and a very divided America, especially as the economic slowdown hits consumers in the pocketbook.

10) Alternative energy stocks will continue to do well in 2008, led by the solar sector. Global warming will continue to be a hot topic (pun intended). Government subsidies will increase, especially if the Dems win the white house. New technologies will continue to make alternative energy more efficient and viable.

2008 will be a difficult year for many investors, but I don’t intend to be one of them. There are opportunities in the markets at all times. I will continue to be long gold and silver, picking up quality juniors along the way. I am also long on clean energy stocks, including solar, wind and uranium. On the short side of things, I am positioned to gain from further declines in real estate and financials by owning the Ultrashort ETFs (SRS) and (SKF). Peace and prosperity to all in 2008!