Gold Hangs Tough, but Future Uncertain

The gold market last week did not disappoint goldbugs and investors who are keeping close watch for a possible turnaround. Yet it still has not yet provided us with the decisive penetration above $304/oz. that is needed in order to confirm the start of a new bullish move.

To be sure, gold has given us undeniable signs of bullish intent over the past three weeks. December gold futures on the Comex on Friday (Oct. 16) opened by gapping up nearly $2/oz. from its previous day's close. Gold finished the day on the Comex at $301.7/oz., two dollars higher than Thursday's close and the highest closing price since Oct. 8. Anytime gold closes above $300/oz. at this point should be viewed as a potentially bullish sign.

Gold obviously has been testing the critical $300/oz. resistance for some time, and, much to the chagrin of many gold investors, it has failed in several recent tries to hold firmly above this level, choosing instead to hover slightly below it. Nevertheless, the very fact that gold is "hanging tough" at or near this important mark should be viewed as an indication that gold is looking for a move to higher levels. If nothing else, it definitely signals that gold has gained significant strength in recent weeks and may have found an intermediate-term support level. In the recent past, whenever gold has failed to penetrate a higher resistance level it has usually fallen immediately to lower levels with no further effort at retesting overhead resistance. Now gold is showing uncharacteristic tenacity and determination to press higher regardless of the ubiquitous bearish sentiment that surrounds it—a positive sign.

Technically, gold's futures chart has traced out a bullish "flag" formation, a pattern that usually implies higher prices ahead. Certainly, gold has given us no reason to expect a reversal to lower levels anytime soon. Gold's relative strength is still bullish and its MACD has given what would appear to be a bullish signal. The MACD for gold recently made a higher low while gold recently made a lower low, thus creating a positive divergence. Gold's MACD is on the verge of registering a clear buy signal and should be watched closely in the coming days. Gold's price trend has been consolidating within a narrow range and we feel this portends a breakout to at least the $310-$320/oz. level over the next few weeks.

On the candlesticks chart, gold futures are showing several small candlestick patterns known as "spinning tops," which represent trader indecision but also usually mean an eventual continuation of the previous trend (up). So we expect to see a gradual move to higher levels in the coming days/weeks.

Momentum indicators and volume trends have been very bullish of late. Gold has also crossed above its 10- and 30-day moving averages, another bullish sign. In short, all systems seem to be saying "go," but we'll still need to await further confirmation from the market itself before jumping in head over heels. Our official stance is neutral but our inclinations are becoming more bullish by the day.

At this point, we'd like to make a few comments on the major gold mining stocks and update their progress since our last report. Gold stocks often serve as leading indicators of the trend in gold itself, so we should be alert at all times of the latest trends in this sector.

One of the mining stocks we looked at last time was Hecla Mining (NYSE:HL, recent price $4/share). This stock has continued to perform fairly bullishly since our last report but it has recently fallen back below its six-month downward trend line (though only by a small fraction). Still, Hecla's stock must stay firmly above this line in the coming weeks in order to convince us of a turnaround in this stock. A decisive penetration of the $5/share level would make us more comfortable and convince us that Hecla is indeed seeing a bullish turnaround. A break above its two-year high of $7/share would, of course, be even better. Hold off on buying this stock until its price trend can give us a better idea of where it is heading.

Another stock we've examined is Homestake Mining (NYSE:HM, recent price $12 9/16/share). When last we analyzed its chart, it was showing the beginnings of what we (correctly) called a bullish "half mast" pattern. True to form, this technical pattern proved a harbinger of higher prices and Hecla is trading several dollars above its level when we last analyzed it. The pattern still looks bullish, though it has recently dropped back a bit in a consolidation move. Investors should hold this stock and sell if prices fall below $11/share.

TVX Gold Inc. (NYSE:TVX, recent price $2 1/16/share) has registered what could be a "V-bottom" in late September. Since that time prices have rallied nearly 200 percent before correcting somewhat to their present level. As long as TVX holds above $2/share we rate this stock a "hold" for investors who already have it and a potential buy candidate if prices rally above $3/share, which would technically confirm a bull trend in this stock.

Barrick Gold (NYSE:ABX, recent price $21 3/16/share), a "blue chip" mining stock, is by far the most bullish-looking of the stocks we analyzed in the last report. Barrick, like TVX, registered an apparent "V-bottom" in late September and has been trending higher ever since. A close above $24/share would all but confirm a bull market in this stock. Otherwise, a bearish head and shoulders pattern could be emerging with the right "shoulder" currently being formed. We do not favor this interpretation, however, as volume for this stock has been extremely bullish of late and, from a technical perspective, goes a long way in making the "H&S" interpretation improbable. And considering the many "in the know" luminaries who sit on the board of directors for this stock (George Bush, Vernon Jordan, et al) we rather suspect these persons know something positive about this stock (and perhaps the gold market in general) that we do not.

Finally, one stock that deserves commentary—if only for the immense amount of attention give it recently—is Durban Deep (Nasdaq:DROOY, recent price $3 9/16/share). This stock has been favorably reviewed in a recent issue of Jim Blanchard's excellent Gold Newsletter, as well as many other newsletters, and has also captured the imagination of a large number of gold stock investors. Its chart has traced out a very bullish pattern that portends even higher prices ahead. Trading volume for this stock has never been better, and this is a positive sign. As long as Durban Deep holds above $3.50/share, we rate this stock a definite buy.

In closing, we would like to comment on a recent editorial in Forbes magazine sponsored by Commerzbank. Running under the headline "Central bank gold sales likely to continue," the writer(s) of this editorial (through "propaganda" would be a more appropriate word to describe it) go on to assure us that the central banks of the world will continue to dump their collective gold reserves in preparation for the coming EMU. The authors conclude: "In the medium to long term, the price of gold is unlikely to rise significantly. Industrial states and most developing countries seem committed to a policy of low inflation. And the massive depreciation of several emerging-market currencies will produce only a temporary change in this respect. As a result, the use of gold as a store of value will probably seem increasingly anachronistic." (emphasis added).

This blatant attempt at denigrating gold's inherent value (which has survived through 6,000 years of world history as the superior store of wealth) would be outrageous if it weren't so patently ridiculous. Here we see, in black and white, the unbounded arrogance and ignorance of the world's central bankers who believe that by fiat they can create an artificial, paper-based store of wealth. What's more, they believe they can effectively relegate gold the dust bin of history, branding it as "anachronistic" as a new, man-made form of money emerges in its place. Gold, as we all know, is the only asset that is not simultaneously someone else's liability. It is debt-free and represents intrinsic, unchanging and unquestionably value in every known culture around the world. It is the undisputed king of all currencies and stands head and shoulders above all forms of fiat paper "money."

In time, the fallacy of the international central bankers will be exposed for all the world to see. And when it is, it will be paper money that will ultimately become "anachronistic."