The Chart du Jour

4-Day Gold Coil

March 14, 2000

Perusing the Internet and uploading data this evening, we were literally kicked off of AOL five times without warning. This is not what a premium-priced service is supposed to provide, and if AOL continues to resort to such tactics, AOL is just that much closer to becoming the RCA chart of the 1930's -- a pattern that went from $100 to $3 despite RCA's leading-edge in the radio and television revolutions of that former era.

But instead of commenting on the chart of AOL, or on a broader equity market that continues to flail very much out of control (something that our previous Chart du Jours have already done in some detail, and upon which our vision remains very much unchanged at least until the S&P has reached the 1274-1280 range), we thought we would just mention the 4-day "coil" pattern that we spy in cash gold. A "coil" pattern is defined as a successive series of "inside days" with tighter and tighter ranges each fully contained within the last. The chart of Comex April gold is not as clean in this regard as the chart of the cash market below, and while we do not know which way this pattern will break, this market has clearly reached an important juncture. A break higher from this position would allow for a swift move up to $350, whereas a break lower will condemn gold to wallow in the mud of its $252-$295 range with a continued near-term negative bias.

Clues as to which way gold may break abound, but they are not definitive. The silver chart (not pictured) continues to look very defensive and negative, while the chart of Homestake Mining below looks nicely poised to come back from the dead (at least at some point soon).

Perhaps the biggest sign of potential stagflation, and insipient inflation, continues to be the chart of Japanese Government Bonds (JGBs). This market hasn't done much for the last few months, but the look of the chart below suggests to us another leg lower soon.

On Monday the Japanese authorities announced poor economic figures -- officially throwing their economy back under the label of "ongoing recession." Yet the JGB bounce was anemic. The Japanese simply have so much debt to issue that their government bond market is unable to rally. Instead that market hangs precariously on the edge of a cliff.

Now give us Japanese stocks, bonds, and maybe even their currency (someday over the rainbow) all going down together, and we will give you a healthier gold market -- at least to $350. The first clue to watch as this potential situation plays itself out is how we resolve the 4-day coil in gold above. Resolve it to the topside now, then the odds will sharply increase for an ongoing rally starting now and lasting into early May. Break to the downside now, then we will likely continue to experience gold purgatory at least until May. On a marginal basis, we favor the former path, but as disappointing as the gold market has tended to be for the last seventeen years, it is best to let this market speak for itself in lieu of anticipating too much. One thing we do know: if gold does break higher now, we wouldn't wait very long to pick up some Homestake. What's the definition of cheap?

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