Gold about to Break Out Again

The gold market appears ready for another high volume lift- off within the next few days. Moreover, the accumulation pattern we have witness over the last few years is coming to completion, and the mark-up stage is about to begin.

It is quite obvious that, from a tape reading perspective, COMEX gold futures are being accumulated at around $286/oz. Beginning in January, the gold contract began showing heavy trading activity between $285.3-$286.6. For instance, note the following print of gold's tape within a ten-day period in late January: $2.86.6 on volume of 25,726; $286.5 on volume of 32,140; $286.8 on volume of 36,122; $286 on volume of 19,276; $286 on volume of 39,718; $286.1 on volume of 15,193; and $286.5 on volume of 13,450. From here, gold headed higher into March before pulling back to the $285-$286 range. On March 17, gold touched $286.5 on an intraday basis on volume of 39,830. On March 24, gold saw an intraday price of $286.1 on volume of 36,661. On April 5-the next time this range was visited-gold touched $286.2 intraday on volume of 44,068.

The next time this range was seen was in June, where gold touched $286.5 on very high volume of 65,969, then $286.8 on volume of 33,366; then $286.9 on volume of 39,835; then $286.8 on volume of 33,066; followed by $286.4 on volume of 34,158. Once again, on July 6, gold saw its biggest monthly trading volume day as gold touched $286.3 on an intraday basis. Obviously, the inside traders have are campaigning around the $286 level, so the question becomes "is this accumulation or distribution?" Judging by how the gold price has behaved so far after fluctuating on heavy trading around this area, we surmise that $285-$286 represents an area of accumulation. If this assumption is correct, the near-to-intermediate-term outlook for gold is quite bullish indeed.

From a longer-term point of view, the continuous gold futures contract extending back to 1995 displays a bullish five-year bowl pattern, also representing accumulation. Within this broader bowl pattern is a smaller, but equally defined, bowl extending back to 1997. This smaller, inner bowl is acting to guide the gold price to higher levels. From a chart pattern perspective, one can see a distinctive head and shoulders bottom pattern within the bowl, which only confirms the bullish outlook.

The outlook for gold stocks-which tend to follow closely (and often lead) the physical gold market-is just as bullish in our view. The XAU index is tracing out a textbook 9-month bowl pattern, which strongly indicates accumulation of the mining stocks is presently underway. The XAU, a leading indicator for gold stocks, right now appears to have completed the bottoming phase of the bowl and should begin is ascending phase shortly. Similarly, the CBOE Gold Index displays a similar parabolic pattern taking shape.

One very perspicuous feature common to the charts of several actively-traded gold stocks is a high-volume spike last month. This large increase in trading volume occurred within the same day for most of these stocks, with many of them closing to the upside of their daily trading ranges. This bespeaks of accumulation. That, coupled with the fact that most gold stocks-in tandem with the XAU chart-are tracing out bullish bowl patterns, points to a rise in gold and gold stock prices within the next couple of weeks. In fact, the breakout could occur at any time. A diminution of volatility and trading volume in recent days is a further presage of the breakout to come.

On a stock-by-stock basis, we note the following gold stocks as conforming to the parameters of a bullish parabolic pattern, and therefore ripe candidates for accumulation: Iamgold [IAM:TO], Agnico-Eagle [AEM:NYSE], Aur Resources [AUR:TO], Placer Dome [PDG:NYSE], Battle Mountain [BMG:NYSE,which appears to be accumulated at around $2.06], Geomaque Exploration [GEO:TO], Lihir Gold ADR [LIHRY:OTC, a big breakout candidate], and Cambior Inc. [CBJ:AMEX].

Among golds to avoid: El Dorado Gold [ELD:TO], which appears to be undergoing a distribution campaign around $0.70/share (where trading volume tends to be highest), and Campbell Resources [CCH:NYSE], which saw a huge runup in share price last week on extremely low volume-obviously a bull trap.

Another factor that bears watching is the U.S. Dollar index. It is no secret the dollar tends to trade in inverse correlation to the price of gold. And this should not be surprising since gold's price is nothing more than a reflection of the soundness and exchange value of the nation's currency at any given moment. Many observers have noted a topped-out look to the dollar's chart, an assessment that could be correct (but still too early to tell). However, looking at the "tape" of the dollar's trading patterns in recent months shows a possible area of distribution around the $108 area. This is where most of the high volume has occurred in recent months, and it can only mean one of two things: accumulation or distribution. We lean strongly toward the latter, especially in light of the factors outlined above.

What are the economic/monetary policy implications of gold's latest bull signal? We know that the price of gold is the ultimate barometer of inflation/deflation, as well as a gauge as to the soundness of the nation's currency and financial system. With gold apparently having been accumulated for the past three to five years by insiders, what could this possibly portend? To us, the only logical answer is that gold is sending out a vote of "no confidence" in the financial system as well as the soundness of the currency. This proposition is born out by the fact that of all actively-traded "blue chip" stocks, the ones with the most bearish chart patterns are the stocks of major regional banks. Nor incidentally, many of these banking stocks are tracing out bearish five-year dome patterns-the exact inverse of the five-year bowl pattern seen in the gold chart-which obviously speaks volumes about the insiders' lack of confidence in the present state of the financial system.

As we have pointed out in recent months, the monetary base is contracting, as is the M3 money supply rate of change (as opposed to M3, per se). Bank credit-after having increased enormously for the better part of the last three years, is finally slowing down and is starting to fluctuate violently, which indicates a concentrated attempt among banking institutions at maintaining control over this obviously over-heated economy. The question is, how long will they be able to maintain the superficial stability?

We will have our answer shortly, and if gold's recent behavior is any indication, it won't be pleasant.

[Note: Clif Droke may be heard on the daily one-hour financial talk show "Genesis Money Watch," broadcast Monday through Friday, 3-4 CST (4-5 p.m. EST), on the Genesis Communications Network. Visit their Web site atwww.gcnlive.com for a station listing or to listen live online.]