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Major Gold Rally Coming …

Commodities / Gold and Silver 2010 Aug 30, 2010 - 07:45 AM GMT

By: Larry_Edelson

Commodities

Best Financial Markets Analysis ArticleI’m seeing unusual strength in the gold market. Strength that has reversed the very short-term negative trends in gold to positive, and even given me a new cycle projection on my software.

In fact, I believe gold’s recent action is so significant, it’s bearing important messages about the future. I’ll get to those in a minute, and how you should prepare your finances. First, more on the recent action in gold …


Consider gold’s daily cycle chart. As you can see, the daily cycle projection for gold (red line) is now showing a few more days of sideways trading action … then the potential for a very slight dip in mid-September, but then a powerful rally going into October 20.

U.S. GDP In Terms Of Gold Purchasing Power

How does one interpret this cycle chart for gold? What could be the underlying fundamentals emerging that are giving gold unusual late summer strength right now?

First, from a technical perspective, I believe the long-term bull market in gold is overpowering the short-term action, and instead of the usual weakness we should see in late summer, we are now seeing an early kick-off to the Autumn rally I spoke of in prior issues.

That’s not unusual when longer-term cycles are so powerfully bullish. They can often alter the shorter-term cycles, turning what should be a period of weakness, into unusual short-term strength.

Second, also from a technical point of view, gold has risen above important chart resistance at the $1,225 level, and it has consolidated that price support over the last several trading sessions. Put another way, the $1,225 level that was previously resistance, is now starting to act as support.

Third, from a fundamental point of view, we already know the demand/supply picture supports a long-term bull market in gold.

So, like the long-term cycles, the long-term fundamentals at this time seem to also be overpowering the short-term seasonal weakness we otherwise should be seeing now in the yellow metal.

Fourth, also from a fundamental point of view, I believe we need to interpret gold’s recent unusual strength as giving us a few important warning signs of what is to come. That’s often true of gold, as it, more than any market I know, has the uncanny ability to anticipate future developments in the economy and in the markets.

Here’s where I think it gets very interesting, and why we need to heed gold’s recent warnings. Right now, I believe gold’s recent strength could be foreshadowing the following …

A. That the Federal Reserve could very soon start printing money again. We already know the Fed is prepared to do this, from its last FOMC meeting, where they openly admitted the economy stinks and that the Fed stands ready to do whatever it deems necessary.

So perhaps Big Ben is going to start printing even sooner than most anticipate, given all the weakness we’ve seen in recent economic stats.

And contrary to what most analysts will tell you, the Fed is not out of bullets. The Fed can print up as much money as it wants, whenever it wants.

It can buy up more mortgages. It can buy up Treasury bonds, bills, notes and even corporate IOUs. It has far more power than anyone wants to believe.

That doesn’t make it right, nor does it guarantee any of these actions will fix the economy. You all know my view on the Fed’s actions: They’re largely designed to kick the can down the road … devalue the dollar … buy time … and eventually inflate away the economy’s problems by easing the burden of debts by raising overall price — and yes, asset — levels.

And as I’ve said many times before, it remains to be seen if it works.

But the fact of the matter is that gold’s recent action is likely warning you that the Fed is already getting ready to bring out some pretty big guns.

B. There could also be, right around the corner, another round of sovereign debt problems in Europe. That would not surprise me one bit. The sovereign European debt and euro currency crises are far from over; they could erupt again at any minute.

That may be another reason why we are seeing the U.S. Treasury bond markets showing recent death-defying strength, with yields plummeting to new lows, as investors begin to worry about Europe’s financial safety again.

Also coming into play …

C. China’s economy is far stronger than most expect. The media in the West, as I have pointed out in recent columns, is way too pessimistic on China’s economy, talking of a massive slow-down there, even an implosion.

Don’t buy into it. China’s economy, at worst, has already managed a soft-landing, so to speak. And given what I’m seeing here in Asia — growth throughout Asia is more likely to start accelerating again, exactly the opposite of what most in the West currently believe.

What’s more is that China is now actively liberalizing the gold market. The People’s Bank of China (PBOC), China’s central bank, recently announced that it would start encouraging private investment in gold — including developing new retail gold products for its citizens such as gold savings accounts and gold Exchange Traded Funds for domestic Chinese citizens.

This is a huge positive for the gold market, obviously, and China is likely to move very aggressively on this.

Also important: Beijing has recently started selling U.S. Treasury securities, and investing the proceeds in Japanese and South Korean government bonds.

This suggests China is moving out of the U.S. dollar. So in addition to selling U.S. Treasury notes and bonds and buying other Asian sovereign debt, it’s very likely that China is now actively building its gold reserves again.

Bottom line: Gold’s unusual short-term strength, which has turned the short-term cycles from negative to positive, is a very bullish sign for the gold market.

Gold's unusual short-term strength is a very bullish sign for the gold market.
Gold’s unusual short-term strength is a very bullish sign for the gold market.

The strong Autumn rally in gold that I’ve been telling you about? It may already have started.

One final note before I give you my suggestions on how to position yourself. As I’ve been warning you, the broad market U.S. stock indices are starting to roll over to the downside. I still fully expect to see Dow 9,000 soon, and more likely, 8,700.

If the Dow closes below 8,745.90 on any trading day, there is even the potential for the Dow to fall as low 7,870.

So if you’re not already out of the stock markets, then now’s the time to get out. Do not delay.

Exceptions: Natural resource stocks, my core Asian positions, and especially my core gold positions and mining shares.

Examples: iShares FTSE/Xinhua China 25 Index (FXI)SPDR Gold Trust (GLD)U.S. Global Investors China Region Fund (USCOX)Agnico-Eagle Mines (AEM) … and Goldcorp (GG). Those positions are showing gains of as much as 50.7% since first featured in this column. I suggest you consider holding or adding.

Best wishes, as always,

Larry

P.S. My August issue of Real Wealth Report is out! It’s a dynamite issue you should not miss. Click here now to become a member and to immediately download the issue.

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