Gold Comes Alive

"It isn't enough for you to love money - it's also necessary that money should love you." ~ Baron Rothschild

This report will focus on one thing and one thing only, gold. It is the one and only market where I don't question if there's any value. Of course you wouldn't know that by listening to the mainstream media as they parade out one "expert" after another in an effort to convince the world the bull market in gold is over and done with. It happens every time we experience a correction. This is the same crowd that says every decline in the Dow is an opportunity to load up on cheap stocks, and yet they can't wait to through dirt on the gold bull's grave. Since most people know little or nothing about the yellow metal, it's easy for these analysts to gain a following. After all they are the experts!

On Friday it was more of the same as we experienced a bear raid early in the morning and the Bloomberg crowd warned that more pain was sure to come. When spot gold bounced back to close down 7.90 at 1,640.90, after a failed attempt to test strong support at 1622.20, they simply moved on to another whipping boy. Friday's intraday low was at 1,625.70 but price recovered to finish well above it and marginally below good resistance at 1,641.30. Below I have listed the important Fibonacci support/resistance levels:

When gold put in a lower low a couple of weeks ago, I came out and told clients right then and there that I thought the bottom was in. After watching gold's behavior following the big sell-off two weeks ago, I am now convinced that we've seen the bottom and the end of the correction.

With that thought in mind I want you to take a look at this chart showing the sharp move up to the August all-time closing high of 1,900.20, and the reaction that immediately followed:

You can see that the reaction can be divided up into three sections: an initial move down, a recovery to a much lower high at 1,804.40, and a final leg down with a low coming on the 90th day down. The fact that a low came at 90 days is important because the 90-cycle has dominated the markets for years. Furthermore both moves down are almost identical in percentage terms with the first move registering a 14.5% decline and the second move a 14.7% decline. This symmetry between the first and second leg down is often typical of what's found at a bottom. Also, the overall decline (using closing prices) equaled $364.00 or 19.2% and was middle of the pack when compared to previous reactions that checkered the eleven-year history of this bull market.

So we have a low coming after two symmetrical legs down, you have a Fibonacci connection, and you have a strict adherence to the 90-day cycle. When I add it all up I would say that you have an 80% chance that the bottom is in and the only piece missing is a close above the trend line that connects the all-time closing high with the lower high and currently comes in around 1,715.00. I believe this final condition will be met within a couple of weeks.

As some of you know by know I sit through reactions in the gold market and try to add on when I think the reaction has run its course. That's why I purchased gold at 1525.50 and I've added on along the way up with my most recent purchase coming at 1,642.00. Friday's early morning bear raid scared a lot of investors, but the reality is that it failed to test even the first level of good support at 1,622.20. It then went on to recover most of that decline by the time the spot market closed later that day. That's bullish behavior. Also, I would like you to note that gold's Point & Figure chart is once more sporting a bullish price target as you can see below:

Finally, it is worth mentioning that gold has exhibited a change in character. For the 90 days that it declined it moved inversely to the US dollar and in lock step with commodities. Now gold is rallying even though the dollar has made new highs and in spite of the fact that commodities are being sold off. That's an important change in behavior and such changes almost always accompany a bottom. Also, gold is not the only thing that's moving higher. Silver is on the rise as well after bouncing off of strong support at 26.48 two weeks ago. Gold's poor cousin closed out the week at 29.75 after trading as high as 30.67 on Thursday. If you look at the following chart you'll see that silver is actually much closer to breaking out than gold:

The key will be silver's ability to close first above the 50-dma at 31.32 and then to close above strong Fibonacci resistance at 31.91. If I am right and gold bottomed, you will see silver take the lead in a month or so and both metals will surge.

I would like to conclude this article by not telling you how ominous things look or how inept our current leadership is. Most of you don't want to hear it and all of that is cooked into the new leg up anyway. Instead I'm going to tell you how things will play out in the gold market from here on out, and I'll leave you to extrapolate how it will reverberate through other markets on your own. All bull markets move in phases and that's especially true with gold. The first phase was powered by the smart money and drove the price from $252.00 to $475.00 and ran from 2000 to late 2005. The catalyst for the second phase was institutional buying and ran from late 2005 until the December 2011 bottom. Assuming the bottom is in we are seeing the birth of the third phase and almost no one realizes it.

Surprisingly there are very few people who realize that this bull market in gold is an event of historical proportions. We are witnessing the demise of the one hundred year old fiat currency experiment designed to take wealth from the many and transfer it to the few. Gold is going to put a stop to it with the advent of the third phase. The general public finally becomes aware and rushes into the relatively tiny gold market in search of a true store of wealth, one that cannot be frittered away by prostitutes disguised as politicians. Can anything stop the third phase? Only a final volcano-like blow-off to the upside! Perhaps a better question is can anything impede it and the answer is only to a small degree. We have experienced manipulation in the paper gold market for two decades and it had an effect, but the third phase will turn out to be a completely different animal.

This third phase will turn out to be a mostly uninterrupted move run up to, and more than likely beyond, US $4,000 an ounce. When I say almost uninterrupted I mean no more than two or three reactions of 12% to 14% and of a relatively short duration. Manipulation will not be able to do much as people finally come to the realization that all fiat currencies are just a government-sponsored fraud. You will see that gold will rally against anything and everything including real estate, commodities, bonds, stocks, fiat currencies and Indian beads. It will be a real scorched earth policy. The third phase of the bull market will only run its course when you see extreme levels of greed and euphoria in the market place, and we're no where near that.

Now here's one last question, do you know what will make this all so interesting? The fact that 98% of the people in the world have absolutely no idea of what is about to occur. Imagine their reaction when the finally figure out that they've been completely defrauded by the very people they entrusted to manage the economy and their future. The final epiphany will come about when they recognize that judges, lawyers, bankers and politicians all colluded to steal the wealth of the many for the benefit of a very small group of individuals. That folks will be an interesting realization.

Author: Giuseppe Borrelli

Giuseppe L. Borrelli

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