by Sean Brodrick
Dear Subscriber,
Gold bulls have been having a tough couple of weeks. The yellow metal has taken it on the chin as the U.S. dollar rallied hard. Many market analysts are rushing to say this shows that gold just can't get above $1,000 an ounce. Some prominent gold watchers are giving up in disgust.
Hold the phone! While I have been predicting gold would go lower recently — and that call turned out to be correct — I'm NOT bearish on gold longer-term. In fact, I think gold's recent action is a set-up for a move to close to $1,300 an ounce — a move that could start very soon.
And it's a move that could be very profitable for you!
Take a look at this weekly chart of gold ...
This weekly chart of gold shows us that gold has hammered out a chart pattern called an "inverse head-and-shoulders". It's an imperfect pattern, but this is a messy market, so don't hold that against it. You can see a left shoulder, head and right shoulder. That blue line is the "neckline," or area of overhead resistance.
Measure the distance from the head to the neckline, and add that to the neckline again to get a price target. What this chart tells us is that on the next push up through $1,000, gold could be on its way to $1,300 an ounce.
The problem is, gold prices are stair-stepping lower right now. That's because gold is priced in dollars, and the U.S. dollar is strengthening. I think the greenback could go higher — but I also think that's a short-term move.
This daily chart of the U.S. dollar shows why ...
The U.S. dollar index looks like it may be forming its own inverse head-and-shoulders pattern. A break out to the upside would give us a target of 84.
So, sure, the dollar is trending higher. Bad news for the dollar — this is a daily chart.
Weekly charts trump daily charts, and the weekly chart of the dollar looks downright awful ...
So, in sum, I expect the U.S. dollar index to rally to about 84.
But the weekly chart of the dollar still points down, just as the weekly chart of gold points up. That means this dollar rally is a great time to get long gold stocks and gold ETFs, as long as you buy near the dollar top.
The market certainly doesn't have to play out the way I expect, and new developments could throw us for a loop. The dollar rally could fall apart, or gold could continue lower for some other reason. But looking at these charts now, I think a hot summer is shaping up for gold.
But What About The Fundamentals?
That's an excellent question. Fundamentally speaking, the U.S. government is issuing far too many dollars, eating away at their value. The fiscal deficit could top $2 trillion in 2009 — a whopping 15 percent of gross domestic product. That would increase by one-third the total stock of federal government debt outstanding.
You know who's getting sick of this? The Chinese. China holds $1.7 trillion in U.S. Treasuries and GSE paper, according to data from the Brookings Institution. If China stops buying, it could push both Treasuries and the U.S. dollar off a cliff.
In my May 22nd column, Profit opportunities for the quick and bold, I told you how China was shifting out of long-term U.S. Treasuries as part of a move away from the dollar. Well, the latest news shows that China's dollar aversion is increasing!
Warning sign #1: First, Chinese Premier Wen Jiabao called for more surveillance of countries that issue major reserve currencies. Well, Uncle Sam didn't have to look around the room long to see who that description fit — US!
Wen said China would seek to expand currency swap agreements that are seen as a step toward eventually making the yuan more of a global reserve asset. China's central bank has signed six such swap deals since late 2008, totaling 650 billion yuan ($95 billion).
Talk about putting Uncle Sam on notice!
Warning sign #2: Then on Monday, the Treasury Department said that net purchases of stocks, notes and bonds obtained by foreigners fell to $11.2 billion in April, from $55.4 billion in March. What a plunge! The data seemed to imply a $4 billion plus fall in China's Treasury holdings.
Warning sign #3: On Tuesday, Russia said that the International Monetary Fund (IMF) should expand the basket of Special Drawing Rights (SDR) to include the Chinese yuan, commodity currencies and gold.
The SDR is an international reserve asset allocated to member countries with its exchange rate determined by a basket of currencies, at the moment including dollar, euro, yen and sterling.
The announcement by Kremlin economy aide Arkady Dvorkovich came at a special meeting, a first summit of Brazil, Russia, India and China, a meeting to which the U.S. was pointedly not invited.
I think these nations have had enough of propping up us "imperialist yankees," and they know our Achilles heel — the dollar.
You can ignore the warning — God knows the Good-Time Charlies in Washington want to ignore it. And the short-term rally in the dollar will probably make them complacent.
That's exactly when things can go spectacularly wrong for the greenback.
Me, I want my subscribers to hide out in hot commodities, including gold. The fundamentals on gold are quite good.
Sure, jewelry demand is down, due to a brutal global recession. But investment demand is soaring. The rising price of gold has not deterred investors from adding it to their portfolios.
In fact, the SPDR Gold Shares (GLD), the world's largest gold-holding ETF, saw its April cash inflows soar to $11.8 billion.
The GLD isn't the only one. Take a look at this chart showing the holdings of gold ETFs around the world over the past five years ...
Source: Sharelynx.com
Just look at that chart — it looks like a rocket taking off. Gold ETFs now hold 64.7 million ounces. That's almost as much as the entire gold mine production in 2008, which was 77.9 million ounces!
And according to the World Gold Council, retail investors around the world bought 131 tonnes (4,211,747.8 troy ounces) of gold in the first three months of this year — an increase of 33 percent over the year-earlier period.
What do all these investors know? They can see the problems in the U.S. dollar with their own eyes. They know that gold is a store of real value and won't go to zero. They want to own as much gold as possible!
But What About Gold Mining Stocks?
Another question on a lot of investors' minds is, if we're in a Great Depression-type scenario, will gold stocks hold their value, or will they be dragged down with the broad market?
It's difficult to get clarity on these things because, as Mark Twain said, "history doesn't repeat" but it sometimes rhymes.
We may indeed be facing a Great Depression-type scenario. However, unlike the Great Depression, this time around, central banks around the world are flooding the market with liquidity in a bid to stave off deflation. You'd think that the subsequent inflation, when it comes, would send assets like stocks higher.
And here's one important fact: In the Great Depression, most stocks went lower. A big exception was gold mining stocks. The good ones, like Homestake Mining, Alaska Juneau, and McIntyre Porcupine — all big names of the day — trended higher.
They did zig and zag a lot — it was the Great Depression for Pete's sake. But if you wanted to make money, gold stocks were a good place to be.
As for me, I think the U.S. dollar has major long-term problems, problems that were worsened by developments in the past week. I think the dollar's current rally may be its last hurrah. The coming dollar train wreck should be very good for gold. And I'll give you three more good reasons why ...
1. It is not too late to profit from rising gold prices
2. You will want to have gold and the right gold stocks in your portfolio over the next year
3. Gold could move farther and faster than many people on Wall Street believe possible.
So I'll be sending subscribers to my Red-Hot Global Small-Caps and Red-Hot Commodity ETFs a new, special report: "Gold Fever — to $1,300 and Beyond."
In it, I'm going to go into detail on the forces I see driving gold and silver — and I'm going to offer my best picks — a bushel of big-cap names, undiscovered small, foreign miners with moon-shot potential, and red-hot funds to get the most out of gold's coming rally to $1,300 and higher.
Climb Aboard the Profit Train
Gold's next profit train is at the station. The whistle is blowing. It's time to get onboard or be left in the dust.
I want to make sure to get the timing right on the dollar's next peak and gold's next bottom.
Yours for trading profits,
Sean
© 2009 by Weiss Research, Inc. All rights reserved. 15430 Endeavour Drive, Jupiter, FL 33478
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