Canary In The Silver Mine

May 16, 2017

The average gold market investor should be quite happy right now.  If that’s not the case, the investor has likely used price projection analysis as a reason to “chase price”, and needs to deploy a new set of market tactics.

This is the very nice looking daily gold chart.  Gold has been in an uptrend since December.  Note the consistent pattern of higher highs and higher lows on the chart.

I use the 14,7,7 series Stochastics oscillator on key daily charts instead of the popular 14,3,3 series, because it smooths out a lot of false signals.

As the oscillator reached the oversold area of about 10 in mid March, Indian dealer stocking for Akha Teej was ramping up, and the oscillator slowly became overbought in the 90 area.

It’s important for investors to look at major fundamental events like Chindian festivals and US central bank policy changes. 

When those events are in play with the 14,7,7 Stochastics oscillator in the oversold position at about 10, significant rallies can be expected to occur in the gold market.

When those events occur with the Stochastics oscillator in the overbought area at about 90, price declines that are large enough to demoralize investors can occur.

As Indian dealer stocking for Akha Teej peaked in mid April, the Stochastics oscillator was overbought and rolling over

A decline was expected, and it happened.

Now, the Stochastics oscillator has declined to about 10 and flashed a crossover buy signal.  A rally was expected and it’s now in play!  A mid June rate hike should be the catalyst that gives the big uptrend from the December lows a “booster shot”.

Regardless, from a tactical standpoint it’s very important for gold market investors to avoid placing large buy orders when the price of gold has already rallied significantly. 

That’s easier said than done, because gold is the world’s ultimate asset, and any rally may be the start of something much bigger. 

It takes a tremendous amount of intestinal fortitude for an investor to patiently wait for the market to decline while it rallies relentlessly higher.  Investors who feel they must get in on a big rally should consider the use of call options that don’t use up much of their capital.  These options offer large potential reward and very limited risk.

 

This is the GDX chart.  Gold stock enthusiasts need to remember that GDX surged from the December 2015 lows of about $13 to the $31 area in a very short time. 

It will take several more rate hikes to reverse money velocity and create enough institutional interest in gold stocks to drive GDX to a new all-time high, but it will happen. 

In the meantime, I’m an aggressive buyer of GDX on every ten cents decline in the entire $23 - $18 price zone.

I’m predicting that the next rate hike from the Fed will be the catalyst that ends the current consolidation and begins the next leg of the uptrend.

Janet Yellen has stated that her goal is to raise short-term rates while holding the line on long term rates.  The price action on this T-Bond chart suggests that she’s been successful, and will continue to be successful.  That’s very positive for gold!

Global oil markets are on course to reach a supply-demand balance in 2017, the IEA said, with supply deficits expected to pick up speed in the near term.” -CNBC News, May 16, 2017.

Oil is the biggest component of most commodity indexes.  If OPEC extends the production cuts for the rest of the year (and I think they will do that), oil should begin a new leg higher.  In turn, that would add significant pressure to inflation indexes.

Inflation in England is also starting to rise, and I expect that to happen across Europe very soon.

Silver bugs may have been disappointed by the recent decline. However, this is a key accumulation area for investors who want to be part of the next big rally in a profitable way. 

Many analysts are frustrated with the performance of silver relative to gold.  Those days of frustration will end as money velocity stages a dramatic reversal to the upside, but not before that happens. 

Fundamentals make charts, and fundamentals make ratios like the gold versus silver ratio.  An upturn in money velocity is imminent.  It’s not the canary in the gold mine, but the canary in the silver mine, and it will usher in the inflationary bull era for the entire precious metals sector!

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Gold prices fall by Rs 50 on low demand