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.

This is just another list of gold stocks, some good, some not-so-good. There are a lot of good juniors--dozens, at least. It all depends what you're looking for. Do some research on the web; it's not that difficult.

I'm shocked to see the hyper-promotional CUSIF, but then again I'm not. ;^)

For the cautious investor, don't overlook the AEM convertible bond--it's a honey.

As it says at the orginal site from which I extracted it, it's a preliminary list, prepared at the beginnning of December. There's also a list of juniors given there. Smart people have been away from the precious metals market for the past 20 years or so and are only now coming back. The ones who remained gold bugs over that stretch of time have become pretty soured, like old Mrs. Havisham waiting for the bridegroom to turn up. It looks as if the final bottom was reached last summer, but that wasn't certain until the recent breakout above 330.

The way I read the list, it provides an assortment of ripe possibilities, and gave you the preliminary informtion you need to look at the charts or do other investigation yourself. I wasn't especially interested in CUSIF, and no doubt if it's not solid he will drop it in due course. Even if it's a con job, you could have done worse than put your money in it last month. Here's the current 6-month CUSIF chart:

I confess I'm one of those who thought that gold should have recovered sooner, but there's no use trying to hurry the markets.

not to mention the shorts possibly bailing..

Same here ima. Your reply helped me to understand what you were really saying in your earlier post. I agree with you.

I would think that the shorts that haven't bailed by now are the ones that can't even though it will only get worse for them. There is also program triggers set for when gold closes over 354 in NY which will add to your stampede. Either way it will happen and I think sooner than later.

For those interested in taking a flyer, Maund has a new column today on Vista Gold, with some interesting charts. It's at:

http://www.321gold.com/editorials/maund/maund010603_vista.html

Today, AEM and GG are off slightly, probably because they are better known stocks and the amateur gold bugs who bought them are getting nervous. The other stocks I'm watching are all still up a bit, even after last Friday's orgy.

Recently gold has often been weak on Tuesday and Wednesday and strong on Thursday and Friday (a good sign that people are confident enough to hold stocks over the weekend) so there may be a dip and a buying opportunity tomorrow.

For those interested in taking a flyer

Good article and thanks for linking it.

Intesting battle going on for 354 with the major assault happening in the East and dropping in NY. The last time I tapped out my resources when I saw this buying in the East and even though the charts were all saying overbought I bought on Dec 19 and it has turned out to be a good buy.

From your posts I have gained respect for your thinking on gold the SM etc. Always appreciate what I perceive as an knowledgable investor.

I bought gold shares back in the 1970s, but I was too stupid then to sell in time and held on a month or two too long. Still, it was a great ride. Gold has been dead ever since, with just a few occasional twitches.

But I think we're seeing it come alive now. I think. . . . Certainly the charts haven't looked like this for 20 years.

Just looking at the long term chart of gold futures there was some gyrations around the 350 area back in early 97. But it looks to me as your favorite indicator, the god-awful upper trendline, will be a breakout point for gold. This figure of 354 has been mentioned by a number of those TA people.

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