I would love to call the HUI dip to 275 the bottom of this correction, but I am not convinced. As we detailed in a previous post, the HUI could correct down to 250 without the long-term uptrend being violated.
Seasonal demand from India and bargain buying have so far provided much-needed support for the gold price. Gold seems to be looking toward oil as an indicator and tracking with the movement of crude. We see higher oil prices on the horizon. There is still a fundamental supply/demand issue. Economics 101: Increasing demand and dwindling supply will always produce higher prices. This is still true, no matter what the government says about short-term increases to supply levels or how suddenly disinterested the media is with the reality of Peak Oil. OPEC’s recent announcement of plans to cut supply hasn’t done much to boost the oil price, but it does foreshadow the intent of OPEC and can only be viewed as bullish for oil.
The Dow making record highs, oil and gold dropping, the dollar holding strong, inflation concerns subdued: the timing is all a little too coincidental with the November elections rolling around. What happened to all of the analysts predicting a recession or even depression? Gone, vanished. Suddenly everything is rosy. If you don’t believe that incumbent administrations consistently manipulate the market to sway voter sentiment and hold onto power, remove head from sand. This isn’t an invention of the Bush administration. It has been going on for decades. But given the track record of deception , lies and cover-up, I have no doubt that the current administration would be willing to do absolutely anything to retain power. And with most polls predicting that the Democrats will take one or both houses and many hinting at impeachment hearings should the Democrats win control, the stakes are extremely high.
So how does this change the investment landscape? We expect to see gold and energy rangebound until after the elections. We also anticipate that the broader market will continue posting new highs, with the Dow testing 12,000. But the weight of the fundamentals, the skyrocketing debt, the outsourcing of jobs, the ongoing costs of the war and the increased tension with both Iran and North Korea, will eventually break through the patchwork. It is similar to suppressing deep-seeded emotional issues: at some point things will snap. Whatever short-term manipulation is being used to window-dress the economy will only exasperate the falling out that many astute economists have already predicted.
We expect a strong resumption of the gold and energy bull market by year’s end. This will be accompanied by a sharp decline in the broader market and continued weakness of the U.S. dollar. We are holding current positions and have cash ready for this next upleg. All evidence suggests we are going into Wave 3, which is traditionally the longest and strongest wave of any bull market. There will surely be corrections along the way, as we are currently witnessing, but you need only have the patience to weather the storm and you will be rewarded handsomely. We plan to be at least 90% invested before the November elections in anticipation of gold making a new high by the end of 2006 and breaching the $1,000 milestone in 2007.
Short-Term Play: One might consider going long some blue-chip stocks until the first week of November, and then immediately selling those positions and going short after the November elections. But make sure not to catch the sell-off. The Dow is looking extremely toppy at these levels and both the MACD and RSI indicators are signaling overbought conditions. Good luck and happy investing!