Are Gold and Silver completing their correction cycle?


Dear PGM Capital Blog readers,

April 15, 2014, marks the first anniversary of the 2013, selloff of Gold and other precious metals with the exception of Palladium, which closed 2013 with a gain. Gold and Silver miners got hit even harder in 2013.

Gold price plunged 28 percent in 2013, breaking at least eight years of annual gains. Due to this most investors and traders are asking themselves what’s next for Gold and the other precious metals.

In this article we’ll try via Fundamental- as well as Technical analysis, to find an answer for what is next for Gold, Silver and other precious metals.

The following points prove that the fundamentals for Gold are very strong:

  • Central Banks all over the world which currently stimulate their Economies and debase their respective currencies with their respective QE programs.
  • The current Gold price of  US$ 1,303.20 an ounce is below the average break-even costs of the major Gold miners.
  • Import of physical gold of Asian Countries via Switzerland and Hong Kong exceeded total world production, excluding China’s and Russia’s production in 2o13.
  • World Gold Council’s prediction that China’s gold demand will rise with 25 percent by 2017. (Read full report)
  • The COMEX registered Gold inventory at 7-year low as can be seen from below chart.280094-1391949381298716-Hebba-Investments

On April 15 of this year, exactly one year after the sell off of April 15, 2013, shortly before 8:27am ET, someone decided that it was the perfect time to dump thousands of Gold futures contracts worth over half a billion US-Dollars, which smashed Gold futures down over US$ 12.00 an ounce instantaneously, breaking below the 200 DMA and triggered the futures exchange to halt trading in the precious metal for 10-seconds.

From a long term perspective, we can now conclude that a major double bottom has formed around US$ 1,180.00-an-ounce level, which will act as a solid resistance from where we have seen major gold rallies to take off since April 15, 2013.

Gold-Double-BottomBesides the double bottom, we have seen gold close above the 50- and 200-day moving average and – most importantly – we have seen the 50-day moving average cross the 200-day moving average. This major technical event is called the golden cross and happened on March 21st 2014 and gave further signs to an end of the longer term correction in gold prices that we have seen these past 2 years.

Below charts shows the golden cross of gold that happende on March 21st, 2014.Gold-Golden-Cross-March-2014After the short-term gold rally from December 2013 until March 2014, during which we saw prices go from $1180 to $1372 an oz, we are seeing a healthy correction taking place, which brought prices down to an US$ 1,270.00 an oz level.

We believe that this correction cycle is now in its final stage and that the first leg of the next bull rally that will start at the end of April or early May this year will take gold prices to around US$1450-1550 range.

First of all we need to take a look at the miners, who historically have been a leading indicator for the gold price itself. JYAh4wyXThe gold miners vector ETF, with symbol GDX, recently started to rally after closing with a bullish hammer on April 21st 2014 and setting key support at US$23.04. Gold miners rallied in recent days even though gold prices were negative for a couple more days.

The other major technical indicator for a bullish turn-around is that gold posted a bullish hammer on the daily (April 25th 2014) and weekly chart. We expect prices to further increase for the next week and remain cautiously bullish, but it is important for gold to break the solid resistance at $1331.40 as soon as possible for this bull market not to run out of steam.

Silver is becoming very interesting, since the Gold to Silver ratio is very close to hit the major resistance at 67.50 and we expect that there may be a turn-around in the gold to silver ratio very soon, which will lead to silver outperforming gold in the mid-term. gold_2_year_silver There are also other technical indicators like the Elliot Wave Theory to support that we are at or near a turn-around point and it will start our next gold bull market.

So far this year, gold has been the best-performing asset class, but I think the pullback we have seen over the last few weeks is just another indication of how much negative sentiment remains, which is a good contrarian indicator that Gold is at the brink of continuing its long term bull market. History has proven that the share price of gold miners is a leading indicator in which direction the price of the yellow metal will move next. As can be seen from below Year-to-Date chart, in which we can clearly how the Gold Miners Vector ETF (GDX) has outperformed the Gold price.

GLD versus GDX Year to Date

Another indicator is the Swiss Gold import / Export of Gold. As reported by the Swiss custom (see link for details) in the month of January 2014, the country imported CHF 7,2 billion on Gold, which is equivalent to 199 tonnes of Gold, of which 60 percent comes from the United Kingdom, which isn’t a gold producing country.

This amount of 199 tonnes is bigger than the total monthly production (excluding China’s and Russia’s) of 177 tonnes. According to the Swiss customs administration, the top five purchasers were all countries in Asia, and made up more than 80% of the total worth of CHF6.9 billion (US$7.8 billion).

As can be seen from below 5-day chart of the price of gold, buyers came the moment the price hit US$ 1,270.00 an oz, pushing the price up for it to close the week at US$ 1,303.28 an ounce, which can be considered as very bullish.

Investors should always remember that, in the short terms markets moves are based on sentiments but ultimately, however, the fundamentals will always prevail.

Last but not least, before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of Precious metals as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.

Yours Sincerely,

Eric Panneflek

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