Prepare for the Meltup

Gold's impressive breakout in December provided the final confirmation, if any were needed, that it is in a bull market. After such a move the price is entitled to rest and consolidate, perhaps react some, which is what it is now doing. Despite many technical indicators showing an overbought condition, I believe that the vigorous uptrend now in train will not relent and gold will remain overbought and will continue upwards, perhaps with brief pauses, until the overbought condition becomes extreme. Quite a lot of people missed this move, having been kept out of gold and gold shares by listening to Elliott Wave nonsense about gold dropping to $200 or scared off by the large commercial short position. As James Sinclair pointed out a while back, the commercials goofed up handsomely in the 70's, and they may be doing the same now. Just because people are "professionals" and move large amounts of money, doesn't mean that they always get it right.

Many readers of my articles know that I track market volume. Volume is the "lifeblood" of the market and, as an indicator, stands "head-and-shoulders" (no pun intended) above any other indicator or system in its ability to predict stock or market moves. The volume patterns on countless gold stock charts were screaming "buy!" well before the breakout. Examination of volume patterns enabled me to predict major breakouts in Bema Gold and Silverado hours before they happened, and in Vista Gold a few days prior to a major breakout and in Caledonia Resources to position my readers in the stock at $0.15 a few weeks ago - it spiked up to $0.30 last week.

Gold's December breakout was, in my opinion, its most bullish development for well over 20 years. This breakout, which was the culmination of several years of preparatory price action, was of tremendous psychological importance. This move signalled completion of the huge "Cup and Handle" or "Double-Bottom" base area that has been forming for several years - the British government famously highlighting the low by selling half the UK gold reserves right at the bottom, to the considerable amusement of the Chinese and others - if they can't even run a railway network, how can you expect them to understand TA? Maybe they sold the gold to pay for the noble British contribution to Gulf War 2. Everyone concerned with the gold market, whether bulls or bears, and whether they like it or not is now put on notice that this is a bull market which has just entered the dynamic advancing stage. All gold bears, all with a net short position, have two choices. They either cover their short positions now, or very soon on minor dips, or they can bury their heads in the sand and cover later at a higher price and greater loss. I believe this realization is slowly percolating in their skulls right now.

The two primary emotional states that generate market trends are fear and greed. Of the two, fear is the more primal and urgent as it relates to avoiding loss, to survival. Market panics caused by fear are normally associated with a falling market, however, they can just as easily occur in a rising market. A "Meltup" is an upside panic, generated by fear on the part of holders of short positions, who stand to lose more and more the higher the market goes, and therefore scramble to cover short positions as the market rises. This short covering drives prices higher and further pressures remaining shorts who are then forced to cover, propelling prices higher still in a vicious circle (virtuous if you're a bull) and resulting in a vertical price spike.

I have several times in the past expressed the view that should the critical resistance at $320 - $340 be breached, then all those short the market would find themselves in a precarious situation, exposed to potentially huge losses should the price continue to rise. This resistance has now been breached and the remaining shorts, faced with the imminent prospect of runaway losses, are likely to generate a self-feeding Meltup. I believe the shorts are now at the point of "throwing in the towel", if so, any further advance in gold is likely to lead to a steep vertical spike towards the next significant resistance in the $420 price area. Such a move will result in the price spiking through the upper channel boundary I have drawn on the accompanying chart and result in an extremely overbought condition, which will probably be followed by the price dropping back into the channel. In any event it will be a period of extreme volatility and during this period gold shares should go crazy. I view this as a strong possibility, say 60%, no more, as I do not have stats for the amount of short positions and I do not know what their "pain threshold" is. Even if this does not occur, I believe that the least we can expect is a steady advance. A short-term reaction by gold back into the $330's, which would be rendered more likely if the threat of war with Iraq soon turns out to be a massively orchestrated bluff, will not negate my bullish outlook. I do not see it going lower than the mid $330's because of the psychological impact of the recent breakout and the fact that the direction of the dollar is far more important than the Iraq factor. I believe that having cleared the resistance at $340 by a significant margin, it is likely to remain above $340.

Many gold stock charts look extremely positive and promise huge rises; Bema Gold (BGO) has embarked on a new major upleg, Caledonia Resources (CALVF) has entered vertical rocket mode, Cusac Gold (CUSIF), having recently made a new high, should power higher, Desert Sun (CA:DSM) recently rose 60% in a few days and should continue higher, McWatters Mining (MWA.TO), a possible 25 bagger over time, is turning and breaking out for a huge advance, Silverado Gold is resting before an attack on the $1 level, Vista Gold (VGZ), having wisely made a 1 for 20 reverse split last May, has immensely positive volume indications and is poised for a rocket move, and as it goes higher and higher it can split, split, split.

The primary driving force for the gold bull market is, of course, the dollar bear market. I therefore include a three-year chart for the dollar below, which clearly shows the recent support failure and the currency entering freefall.

The American financial authorities are far more frightened of deflation, with which they have had experience, than they are of hyperinflation, with which they have none. They recently made it clear that they will fight deflation with everything they've got, including ramping up the money supply even more. Perhaps they reason that hyperinflation, followed by a deflationary implosion, will at least buy them some more time as compared to a straight deflationary scenario. They also made it clear that they are happy to see the dollar fall substantially from current levels, which will improve the trade deficit and, quite legally, annul a sizeable slice of their foreign obligations. When things are looking really rough for the dollar, the plan is, as I understand it, to jump in and rescue it with some new fangled gold standard. Whichever way you cut it, this is all good news for gold. A reader raised the point that the US government may attempt at some point to nationalize mines on its soil. I certainly wouldn't put it past them. We must watch the smoke signals and at the first sign of such action migrate funds to mining stocks in other countries.

A recent issue of Fortune Magazine had a feature devoted to what it considered to be good sectors and stocks for 2003. Gold was conspicuous by its absence, except for full-page photos of "drop dead gorgeous" gold bars, including one on the front cover - thinly veiled message perhaps? -

Clive Maund, Diploma Technical Analysis, no responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

I also think gold is still cheap, but if it goes down, the miners will really suffer.

Especially since so many miners have been scrambling to unhedge their books.

That's my opinion. It's always better to spread your buys around a bit, because any one company can have problems, and different companies may make their moves at somewhat different times.

I would just avoid getting carried away. I have put small amounts in a few junior companies, but I wouldn't put everything into one of them. Still, on the whole it does look like a once-in-twenty-years opportunity. The Fed has been playing games for decades, and has generally gotten away with it, but it may be that Robert Rubin went too far and now things are starting to pop.

I've been riding this thing for a year now, trying-trying-trying to get relatives and close friends to jump on while it's still a minor business news story. No takers. Everyone is content to watch their freaking net worth grind southward, "because my financial advisor says he's seen this before and the market will come back soon."

Well, in that case you got in at the bottom. But prices of most stocks are still very reasonable, and I think a year or two from now they will look very reasonable indeed.

If the world comes to an end, then you may want to own gold bars or coins buried in your back yard. But short of that, gold stocks are the sensible way to go--or options, if you know how to play risky games. If you use a good discount broker like Charles Schwab, stocks are much more liquid than physical gold, easier to get in and out of at small commissions.

Just IMHO: Harmony Gold, Golden Star Resources, Caledonia Mining, Durban Roodepoort Deep, Randgold, Samex, Glamis, among others.

Check out Ashanti - an African mine without the South African political risk - impeccably straightforward management.
Also check out Kinross - agressively acquiring valuable juniors.

But the real cause is weakness in the dollar and other fiat currencies ...

Absolutely! The Central Banks have been selling their gold in recent years for $320 - $250. They'll be re-acquiring that gold for $2000.

actually, I missed the whole first leg up. I believe it started in early 2001. those guys were getting in for pennies on the dollar. literally. Those that had the foresight, cash, and guts have already made their money back many times over. Gold's looking strong tonight.

Yeah, I understand the technical aspect but the trend lines are on phony manipulated points.

They may be but they are important to you whether you believe them or not. A great many traders watch for a breakout of an upward trend line and jump in when it does. More demand means higher prices. These people aren't interested in buying low and selling higher. They buy high and sell higher.

Everyone is content to watch their freaking net worth grind southward, "because my financial advisor says he's seen this before and the market will come back soon."

There is a good flip side to this. When all the financial advisors start telling their clients to buy we will have a signal to seriously considering selling part of our holdings. As one poster on Gold-Eagle said "I'll know when to sell when CNBC says to buy!" Haha!

CDE is the only stock I own now except for a couple of insurance stocks that were issued to me when they switched from mutual to stockholder companies. The problem with CDE is 70% of it's production is silver. It is up nicely in the last 10 days.

BTW...those inssurance stocks are paying nice dividends

Hey JW. Haven't chatted for a while. I've been catching you now and then but didn't have anything to add.

I was adding the point to the discussion that there is a distinct possibility that there will be no consolidation or if there is one it may be many many months down the road. A stampede doesn't wait for anything or anybody. Not saying there will be one but the price is so far into a false hole it may look like a stampede just to get to where it should be, not to mention the shorts possibly bailing..

hey now, not too soon! When CNBC starts getting on the band wagon, that's when mega bucks will start chasing these precious few shares. "Express elevator" time.

what, me greedy?

I have some CDE. I was interested in a recommendation of MMNM which I just saw a couple of days ago, but the price doubled in the past few weeks, before I became aware of it. I hesitate to buy with the chart looking as it does, unless it corrects, because it seems to be thinly traded in the U.S. and it would be easy to get burned.

If the price of silver skyrockets, then the best stocks will be the more speculative ones, with heavy debt and high-price mines. Of course if it tanks, they will be in greatest trouble.

So far, we have had just one single-day bounce in silver last Friday. The heavy resistance at 5 and 5.50 has yet to be tested or broken, unlike gold. That could mean that it's a better opportunity, because it's still time to get in on the ground floor; or it could mean that it is still detached from gold in its actions.

I own some CDE too. It seems like silver's breakout has been just around the corner for more than a year. I remember last year about this time people were calling for a breakout by March. The leverage is nice as long as they stay in the game until pay day. I prefer SSRI for silver. I heard about MNMM recently, but looked at the chart and decided to pass for now, not to mention the fact that I am already pretty fully loaded up on PM stocks. Seems like you have done your homework.

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