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Gold Commentary - August 15, 2003


A Tale Of Two Charts

(Gold $US 5 x 3 point and figure chart
Chart appeared here in original analysis)

The first chart here is a long-term $US Gold point and figure chart. The "scale" is $US 5 times 3 and classically, point and figure charts are plotted on CLOSING prices. This chart goes back to Gold's 1982 bottom at $US 296. If the price trend is rising, you have a row of "X"s. If it is falling, you have a row of "O"s. The chart is a "three point reversal" chart which means that the price must rise or fall a total of three "points" for the chart to change direction - to turn up or turn down. Since a "point" (an "X" or an "O") on this chart is $US 5, Gold must close at least $US 15 below a previous high or $US 15 above a previous low for a change in direction to take place.

As you can plainly see, this makes for a chart which can compress many years of trading into a quite small area. The great utility of point and figure charts is their ability to isolate trends, since there is no fixed "time" axis on them. A "three point reversal" can literally take anything from one day to three months - or even more - to occur.

On this chart. you can see a downtrend drawn through the Gold bull market tops in 1987 and 1996. The anchor points on this trendline are almost a decade apart, the trendline itself is nearly sixteen years old. Clearly, it is a formidable technical barrier.

How formidable a barrier it is shows very clearly on this chart. You can plainly see that Gold has been beating its head against this trendline ever since it leaped from $US 320 to $US 380 in December 2002/January 2003. The chart tried to blow through the barrier in February 2003, in May 2003, and now it is trying again in August 2003.

We have this same chart going all the way back to Gold's $US 102 low in August 1976. On that chart, we have the SENIOR downtrend line which is anchored on Gold's all time high of $US 850 (closing basis) set back in January 1980. The chart is simply too big to reproduce here. On that chart, the downtrend line is now ever so slightly below the 1987-96 downtrend line shown on the chart above.

In essence, Gold has spent almost the whole of this year so far trying to get above those two trendlines. Although a bull market in Gold has been established for well over a year now, the FINAL technical barrier standing in the way of a Gold surge has yet to be breached. You are looking at that barrier on this chart. A breaching of this final downtrend would clear the LAST technical barrier out of the way of Gold, paving the way for a BIG rise which could well take place in a comparatively short period of time.

By way of comparison, here's how Gold went in the last BIG bull market - the one in 1976-80

If you want to know where the phrase - "There ain't no rush like a Gold rush" - comes from, check out Gold's doubling in the three months between October 1979 and January 1980.

Now, here's the second chart we want you to look at.

(Monthly bar chart of The Privateer's Australian Gold Stock index (XGO)
Chart appeared here in original analysis)

"What has REALLY got the attention of the "gold bugs", and even the non "gold bugs", is the performance of Gold stocks over the past three weeks. Gold stocks have prospered on Gold moving up while all but ignoring its sudden move down in the last week of July. And now, as already stated, US Gold stocks have climbed to heights last seen in 1997. Aussie Gold stocks are VERY close to those heady levels too."
(Gold Last Week - August 8)

The chart above is a monthly bar chart (semi-log scale) of the Australian Gold Stock Index (XGO). It is plotted from the inception of the index at the beginning of 1985. As you probably know, the XGO was discontinued by the Australian Stock Exchange in July 2002. Ever since then, The Privateer has compiled our own version of the XGO.

On this chart, you can see three BIG Aussie Gold stock bull markets. These were from mid-1986 to September 1987 (a month before the 1987 crash), from late 1992 to early 1994, and from mid 2001 TO DATE.

Now, take a look at the major downtrend line on this chart, the one connecting the XGO's all time high in September 1987 and the 1993-94 bull market high set in January 1994. Note that in the present bull market, this downtrend line has been penetrated three times, in May 2002, February 2003, and August 2003. Note that the latest penetration, in August 2003, has now reached a higher level than either of the two preceding it. It did that with a close of 1689.98 on August 11. Finally, note that for the past two months, the XGO has been trading ABOVE that senior downtrend line.

Unlike the $US 5x3 Gold point and figure chart above, the XGO chart HAS conclusively broken above its longest term downtrend. Unlike the Gold chart above, the XGO HAS confirmed the second leg of a BULL market for Aussie Gold stocks. Yep, that's right, Gold stocks are leading Gold.

Thus, Aussie Gold stocks (and the HUI in the US has reached six year highs too) are signalling the start of a SECOND leg in the $US Gold bull market. For the $US 5 x 3 Gold chart to confirm a second leg in its bull market, spot future Gold is going to have to close at $US 390 or higher.

Up until a week ago, neither the senior $US Gold chart nor the senior Aussie Gold Stock Index (XGO) chart had managed to climb above their previous 2003 highs. Now, both the HUI and the XGO have done just that. By ALL historical precedent, the $US Gold chart should follow in fairly short order.

No, we don't know whether it will be a week or a month or even longer. The main point is that it DOESN'T MATTER. BOTH Gold stocks and Gold are in bull markets. US and Aussie gold stocks have just confirmed the SECOND LEG of their bull market. Gold will follow. Historically, it ALWAYS has.

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©2003 The Privateer Market Letter

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