Technicals, fundamentals augur well for gold, silver

US deficits, global currency debasement and recent market action suggest the precious metals could be poised for a breakout.

By Minyanville.com Feb 8, 2013 3:02PM
Hundred dollar bills surrounded by gold copyright Anthony Bradshaw, PhotographerBy John Cassimatis

It's been a while since I've written about the metals, and that's because I expected a whole lot of nothing. 

And that's basically what we've got here. 

The consolidation from its August 2011 highs rolls into its eighth month. I have to admit -- I am getting excited. 

Let's lay out the bullish case for gold in an orderly fashion.

These five items make up my usual checklist of points to consider when thinking about gold and silver's future direction.



  • Time. If we look at a 10-year history of gold price movement, we see three prior breakout drives followed by consolidations. We had a drive to $727 followed by a 17-month correction; the next move took us to $1,132 and that consolidation was 18 months; the last move went to $1,920+ and now we hit 18 months next week. This was one of the main reasons why I was always worried about the September "breakout" even though I ended up buying it. Check this box for the bulls.                                                                                                
  • Spec positions down/shorts up. Gold and silver have seen dramatic and consistent reductions in spec longs -- gold especially as large spec hedge net longs have gone from roughly 210K contracts to appox 130K. Silver's reduction has been more muted, but is off its highs. While I'd like to see silver's commercial short position lower, silver will follow gold. Keep in mind, gold's net long position by hedge funds and institutions could go lower still, allowing silver's complex to look better. Since the market has essentially been flat over the reporting period, speculative drawdowns/short spikes should be viewed in a highly optimistic fashion. Keep this box neutral since silver has not flushed out as many weak hands as gold at this point.
  • Trend lines. Gold breaks out at $1,698 and silver at $32.125. It's really that simple. Silver has actually kissed its resistance four or five times over the past week with the steadfast commercial shorting agencies holding the line each time. The point is that we are close, and a break of those levels will dramatically affect order flow. The problem for bulls is, as with all inflection points, we are still being capped by those prices currently. The problem for bears is that we probably should have distanced ourselves a bit more from those breakout prices considering the amount of long holdings dumped. I give the edge to the bulls here.
  • Sentiment. Everybody loves to hate gold here. We read about QE exit plans. The big banks we all know, love, and trust have lowered their forecasts. Market participants have gotten frustrated with gold's lack of response to QE4 and fiscal cliff "resolution" (it's hard to even write those last three words without laughing). Sentiment is poor, and that is a big check for the bulls as once again longstanding truisms reign -- that is, that the majority of the people will always get it wrong.
  • RSIs. On a daily, monthly, and weekly consideration, RSIs are closer to fully bullish than fully bearish. And it's not really a close contest. Check one for the bulls.
This is probably the best report the bulls have gotten in a long while. Many say that a correction is a function of both time and price. I strongly agree with that statement. Now that the metals' "time" category has finally shifted to the bulls is huge here. Believe me, the same tailwinds for the metals exist. We are still printing over half our annual deficit. Global currency debasement is in full swing. US leadership (kicking the can down the road until a crisis moment) and fiscal deficits (surmounting debt in the context of a trillion-plus more per annum) continue to roar like a lion. (Wow, I began writing this article at $1,665 and now gold has rallied back....)

What could go wrong? The only thing that worries me slightly are the bonds. While we all know that rising yields is a necessary precursor/catalyst for a parabolic metals market, the initial move higher could provide a knee-jerk negative reaction as real rates of return (based on government formulas) inch into positive territory. While I worry about this, I also think the rise in rates is going to take longer than everyone thinks it is. Perhaps gold can make its run to $2,400 first and then suffer the pain of that adjustment. At this point, I am not going to overthink something that hasn't happened yet, and in Japan, 20 years in, still has not occurred. Just file that concern for now.

$1,698 gold, $32.125 silver. Those are the prices. I have long positions ahead of those prices and I assure you I will be taking purchasing power to a very low level on their penetration. Of this I am sure.

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Tags: GLDgold
161Comments
Feb 8, 2013 8:59PM
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Gold quadrupled under Bush,  actually, it doesn't matter which politician or party is doing what.  The course is set, we cannot pay down our debt.  Ever.  Stop chasing your tails with the political rhetoric, it's a smokescreen for the dumbed down. "Both sides" share equal blame as does the complacent populace meaning most likely you.  Yeah you, who cannot or won't do the math to see where the debt situation is going.
Feb 8, 2013 5:59PM
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I think this guy is right. The dollar has lost almost 70% of its value since Nixon took it off the gold standard. All these QE's are destroying our currency. When the dollar drops, gold goes up. Where gold goes, silver follows. Maybe metals aren't that great for investment, but they're certainly sound for a hedge against inflation.

Feb 8, 2013 4:01PM
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I got out of the stock market a few years ago.  Made a few hundred thou with gold.  It's not been good lately so I too, think it will skyrocket.  I can't wait for the stock market to collapse!  And with this idiot-in-chief obama running things in Washington, it has to happen very soon.  
Feb 8, 2013 6:47PM
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obummer keeps spending and printing money gold will go higher Im sure

 

Im investing in guns and ammo  

Feb 8, 2013 6:48PM
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Gold No! Silver Yes. Think about it.
Feb 8, 2013 9:42PM
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Oh, and what if there are no groceries in the store?
Feb 8, 2013 4:36PM
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Every morning BO and Bernky talk over the Lie de Jour and take bets on whether the Wallstreeters will bye it or not..And the market goes up and/or down depending on who gets to hear what they want to hear..Problem is it's still all a load of bull scat..
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Obama and policies are ruing indutries step by step. The collapse will be slow but definate.
Feb 10, 2013 9:36AM
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With silver and gold who knows the market is manipulated and enabled thru central planners. The true price of silver is alot higher then it is now. I have been a silver buyer since it was 14 dollars an oz and I think its got a huge upside.
Feb 10, 2013 10:04AM
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I don’t ever respond much for any posts or articles on MSN or any other site for that matter, but this one struck a nerve, especially being that the truth is that since coming off of the gold standard the proportion income/debt ratio for individuals has dramatically increased.  The main reason being that without being on a gold standard or something of equal tangible value then the paper money is printed on is just that …paper. Our balance of the governments standards to offset the deficit by generation of revenues of either taxes(which was a slick one they pulled on the FISCAL CLIFF propaganda, all of that media attention was a diversionary tactic to say…HEY, were going to raise your INDIVIDUAL TAXES…WE NEED MORE MONEY TO SPEND SO OUR DEFICT DOESN”T LOOK SO BAD…) and the MEDIA was all into helping the hype to escalate the fears that the economy would take a straight nose dive, when in essence there currently is no possible way that it can, NOT TO SAY that it’s not coming as mentioned in a post below, but they were strategic in showing meetings and holdouts to the last minute to agree to a DEAL…..BS. (and that doesn’t stand for a Bachelor of Science).  If anything our government is currently like most individuals, trying to make it by day by day looking for a bank or other methods to put more money in its pocket.  Like it or not it’s the truth, take for instance alcohol, between export, excise, manufacturing, etc., etc., etc. for both Federal and State since the 70’s taxes in revenue have escalated over 500% nearing $30 Billion/annum, with tobacco…$28 Billion at a 450% increase +/-50% based off of reduction of 8% per annum of people quitting…. Then let’s turn to GAS/FUEL—MOST EVERYONE’S BASIS OF EXISTINECE to either get to work to pay your interest on you homes(federally funded…) or if you indulge in one of the above or even heat your home for those who say I do not indulge in any of these, then you’re working for that as well, in 1977 our average gas tax was 4.4 cents a gallon, now closing in on the 30 cent mark Fed only(and again this includes tariffs, production, transportation, etc.). a 700% increase… SO IS ANYONE PICKING UP ON THE TREND BETWEEN THE AVERAGES OF FEDERAL REVENUE INCOME VS. COMING OFF THE GOLD STANDARD WHICH IN TODAY’S DOLLARS WOULD BE AN OFFSET OF AROUND 550%??? But the one thing that the government has missed their mark on and continues to do so unless THEY get their spending under control is inflation, which in essence is a direct correlation to the additional funding through tax hikes that they’re trying to offset. US Society can only handle this for so long and then they (us) all will falter, either through spending less, job loss, or general inflation which would have huge pullbacks in the market and eventually create a fairly major collapse.  ONE THING TO ADD…and I have to do so as I see the volumes and trend indicators marijuana stocks…ANOTHER HUGE SOURCE OF INCOME for the Feds, which would also offset BILLIONS in spending reductions against the drug wars, not just the location and apprehension, but prosecution, prison, parole, etc,  (both Fed and State add up to over $11.08 Billion/annum, 8 Billion alone goes to Coast Guard for drug trafficking), and all of which has to me monitored and paid for in some form on top of that.  That’s why there has been no huge pushbacks on the Federal side for State and Local intervention of legalization, THEY ARE “TESTING THE WATERS..”  Just rough revenue numbers with current states that are legalized, in some form or fashion for possession but has no formidable taxation program in place YET,--- $6-7 Billion a yr/ now multiply that times another 31 states that would imposes just a goods tax for sales…$200 Billion/yr++.  That’s almost 7x--- 7 TIMES the amount of alcohol or tobacco, TAKE NOTE, DON’T MISS OUT ON THE STOCK UPRISE FOR MARIJUANA STOCKS, BEFORE THE MARKET TAKES A DOWNTURN FOR ADJUSTMENT!

Feb 8, 2013 9:40PM
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Ok, for the sake of argument, assume really, really bad inflation, >20% month or week, as a result of the central banks race to devalue their respective currencies to keep their respective economies afloat.   What are you going to do with physical gold or silver?  If you go to an exchange, they are going to nail you big time on the buy/sell spread, and you are going to end up with currency anyway.  I don't think I'm going to be able to go to the grocery store with a gold eagle and buy groceries or pay my property taxes.  And, what's to stop the government from simply confiscating gold and silver coins at whatever value the eggheads in washington might deem appropriate.

 

I think there may be some measure of security in owning physical gold and silver, the rub is what are you going to be able to do with it if the SHTF?

Feb 8, 2013 5:31PM
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you've overlooked the potential for a reactionary bearish jolt to commodities if BOJ, BOE, ECB, et al continue their currency wars. A race to the bottom will likely fail all of their economies at some point, but the unintended consequence of a stronger dollar will shake out more longs. Once it's discovered (9-12-15 months?) that the the central bank manipulation hasn't juiced the individual gdp of any of the contenders, the snapback gold rally will be frightening....this presumes that the PIIGS are all bailed out, of course.
Feb 9, 2013 11:32AM
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Still trying to wrap my head around some of the remarks.....

When Nixon was President...We went off the Gold Standard...Gold had been $35 per t/oz.

Gold now about $1700 per t/oz.  An increase let's say of about 550% est.

Wages were min. $1.35-1.75..Decent wage about $3-4 per hour..Today about $8 and maybe $25.

First house 2bdrm, about $10,000....Before recent pullback, similar 2-3bdrm, about $80-120,000.

Bought Spec/order Camaro in 1968, About $3000. Another plainer one in '72 about $2600.

Same type Camaros today about $45,000 and $32,000.

 

And the Value of the Dollar has gone down about 70%, since "Tricky Dick" was President...??

Man, maybe we have taken a screwing? Or am I missing something here..?

Seems we can just about buy the same things(close) when comparing the wages,back in the day. 

Feb 10, 2013 2:27AM
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Wow. Really too bad just a few worthwhile comments. I would be great if these forums would have multiple categories to post. Anti current admin, anti social, anti any other political view other than yours, etc. Thank you to those of you that posted relevant information. Also, for those of you that use the check spelling function but don't use the correct word, if the spell check happens to work, you still lose all credibility.
Feb 10, 2013 9:02AM
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An interesting note to where the metals will go can be found under our noses and its part of the whole scheme.  First thing is placing a unit of value on gold/silver.  Eventually the dollar will be ruined big time and will also fall from grace as a reserve currency.  Unit of value = what ever value unit is a replacement for the dollar.  Converting continually devalued dollars into a precious commodity is wise, especially when built in defacing is occuring each day.  Same way using Euros or Yen convert now as the value of currency goes down and the purchasing power of the precious commodity holds steady, or eventually will be used as a unit of trade or "unit of value".  The so called break out to higher prices is relative and also signals further defacing of paper money.  Remember, history shows paper eventually fails, the current ship of currency pilots are steering into the abyss.  Returning to a normal recovery is not possible, no person or society has ever borrowed its way into solvency.  Default is the only way, what does that mean for the dollars value? 
Feb 9, 2013 6:01PM
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While gold bugs are worrying about the price of gold I`m cashing stock dividend

checks.

Feb 10, 2013 2:19PM
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Ok Ok, The criticism I've gotten is warranted, I should have been more clear in what I was trying to say. The point I'm trying to make is this. More people can afford to buy silver than they can gold, and if you do buy metals take physical possession of it. IN the event that the SHTF happens, your in a better position to bargain for the things you need. Arm yourself to the teeth with like minded persons and don't be afraid to drop the hammer.Paper money will only be good for starting fires.
Feb 8, 2013 10:24PM
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I really do not think any one is paying attention at all. As long as the current administration is in (power) the entire american economy will collapse, meaning currency and commodities will be useless. Your very existence is in jeopardy. The uneducated voted in this current president (dictator) . We will  just have to try and survive, but do not hold your breath. Legislation has been introduced to eliminate two term office holding. Remember the KGB.
Feb 8, 2013 7:23PM
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Gold & Silver and other PMs can be a good store of Value on a Temporary Basis...

Buying/Selling/Trading are how you make money I guess..? IMO.

 

WE buy and sell Goldminers....Works for us, and it takes Research and your Due Dilligence.

The problem with dealers and such places as Jewelers/Coin shops/Pawn...etc.etc..

Is they take advantage of desperate people and charge too many fees and commissions.

And the main reason, I deal very little in coins or no bullion...Jewelry we usually keep.

Individuals are not a Central Government...And have few options to gain fair practices.

Governments hold and store Gold for different/other reasons then "most" individuals..

Individuals holding or "hoarding" Gold/Silver seldom make much money over time, because of purchasing power and inflation..

 

Feb 10, 2013 9:16AM
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Placing unit of value on an ounce of gold = 4 or 5 antique gold coins could get you a decent car today.  Two pre 1964 dimes buys 1.5 gallons of fuel.  Look for hyper inflation, its here today.  Recent proposals by some state governments for increases in taxes signal such currency defacing....Michigan's vehicle registrations and gasoline tax proposals are an example.  What does a 150% increase look like?  This means even governments realize the costs for maintaining infrastructure are set to skyrocket as it has.  The costs for labor and materials has now begun to ramp skyward. 
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