Rotation Into Gold Stocks
Apr 1, 2014
- "Too many people know firsthand how devastating it is to lose a job at which you had succeeded and be unable to find another; to run through your savings and even lose your home." –Janet Yellen, March 31, 2014.
- I’ve predicted that quantitative easing will be replaced with actions taken by the Fed to force commercial banks to increase lending.
- Dr. Yellen could put downwards pressure on interest rates by charging banks a fee to keep reserves with the Fed.
- That policy would force banks to buy longer term Federal government bonds, and to take more risk by making loans to businesses.
- Please click here now . Double-click to enlarge. The technical indicators on this monthly T-bond chart suggest that bonds could soon have a sizable rally. That should create a decent rally in gold.
- At this point in time, Fed tapering clearly isn’t much of a concern to bond market participants. In the longer term, T-bonds are probably forming a large head & shoulders top pattern. What are the implications of that pattern for gold investors?
- Well, a large head and shoulders top pattern doesn’t necessarily mean that America is in a situation like 1979, where interest rates skyrocketed.
- T-bonds could simply decline to the 110 area on that monthly chart, or even towards par (100), without creating significantly higher rates.
- I’ve predicted an uptick in money supply velocity will occur over the next couple of years. That could put enough inflationary pressure on bonds to move the price down to that 100 – 110 target zone. If that happened, a significant stock market correction is likely, but I doubt it would halt the general trend of weak economic recovery.
- A modest uptick in US inflation that creates only modestly higher rates, combined with rising demand for gold in China and India, should produce a consistently higher gold price for years to come. There’s more good news: It’s likely to occur with much less volatility than most gold market participants are accustomed to.
- Please click here now . That’s a shorter term look at US interest rates, using the daily T-bond chart. Bonds are drifting sideways in a loose rectangle formation, against a general fundamental background of Fed tapering.
- In both the short and longer term, the US bond market appears to be quite solid, which is generally supportive for higher gold prices.
- Gold itself has drifted lower over the past couple of weeks, after rising steadily for about two and a half months. From both a technical and fundamental perspective, I see nothing that should be a major concern for precious metals investors.
- On that note, please click here now . That’s the daily chart for gold. Note the position of the Stokeillator (14,7,7 Stochastics series) at the bottom of the chart. The lead line is now at about 8. I’m a light buyer here in the $1285 area, and a bigger buyer near $1270.
- While I believe the gold market is becoming more stable, investors should understand that the Indian election begins on April 7. That’s less than a week away. During Indian elections, citizens can only hold limited amounts of cash. That policy is designed to prevent bribery, but it also means that citizens can’t buy as much gold as they typically do on any given day.
- As a result, gold could just gyrate sideways in a rough range between $1270 - $1320 for a month or so, barring a major geopolitical or US economic event. Once the election is completed, I’m predicting a steady rise in Indian gold demand that will take the price towards $1390, and then up to $1430.
- While most gold analysts focus on the action of the US dollar against the euro as a gold price driver, the rising euro creates only limited US demand for gold. In contrast, a modest fall in the dollar against the Indian rupee can create enormous surges in Indian citizen gold demand. Please click here now . The dollar is clearly breaking down against the rupee, thereby increasing the amount of gold Indians can buy with their rupees. That’s bullish for gold!
- Like gold, the silver market appears to be becoming more stable. Please click here now . I’ve outlined a rough range that is possible for silver during and after the Indian election. To help understand the fundamentals behind my very bullish big picture outlook, please click here now .
- I expect the technological improvements in the Indian silver market to make silver jewellery much more competitive with gold, particularly amongst Western buyers. A rise in silver prices to just the $30 area would produce a 50% gain, for patient investors who can buy some silver now.
- Higher gold prices tend to produce exponentially higher gold stock prices. It’s unlikely that much excitement awaits gold stock investors for another month or so, but a head and shoulders top pattern may be forming on the weekly gold versus GDX ratio chart. That’s bullish for gold stocks, in the big picture.
- To view that key ratio chart, please click here now . Note the collapse in volume, and the disintegration in the RSI indicator. When the Western super-crisis theme dominated all markets, institutional money managers gravitated towards gold bullion more than gold stocks.
- I believe the potential top pattern forming on this chart is consistent with the transition from asset destruction (deflation) to inflation.
- More time is needed to complete the top pattern, but I’m confident that the institutional mindset of “growth with safety” is ending, and an era of “growth with inflation” is close to commencing.
- In April 2013, gold bullion appears to have begun a process of topping out against most gold stocks. I expect the process to be completed in 2014, and hopefully by this summer. From that point, a multi-decade period of general gold stocks outperformance against bullion should begin. When the super-crisis theme was on the front burner, gold market participants had to make very quick decisions that were often uncomfortable. The Western gold community is probably entering an era where gold stock investing is going to be much less stressful, and much more profitable!
Apr 1, 2014
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