Gold Bull Flag…Is It Real?

Is there a strong bull flag pattern in play on the daily gold chart? 

The US stock market has lost upside momentum, and the falling price of oil threatens to create an “Armageddon” type of event in the junk bond market, yet gold looks and feels superb.

In addition to the bullish flag pattern, there’s an inverse head and shoulder bull continuation pattern that looks solid.  The target of this pattern is the $1275 - $1280 area.  Is the Western gold community going to receive an early Christmas present, in the form of another rally in the gold price?  These charts suggest they are! 

That’s the hourly bars chart, which I use to magnify both the flag and the head and shoulders pattern.  A solid rally seems imminent.

I think the dollar may be about to fall fairly hard against the Japanese yen, and that could help to activate the bullish patterns on the gold charts. 

That’s the daily chart, showing the dollar down again against the yen, in early trading today.  Note the bearish non-confirmation event in play on my 14,7,7 Stochastics oscillator. 

Many gold bears, like Jeff Currie of Goldman Sachs, appear to be somewhat stunned that when gold briefly traded under $1180, it failed to fall quickly to $1050.  Instead, while the yen has suffered a truly horrific collapse, gold has rallied back to $1200.

The error in gold market analysis by the bears can largely be explained by their complete failure to predict the recovery of demand in India.  The recovery has been spectacular, and I predict it’s not just here to stay, but here to soar, on what I’m predicting will be double digit GDP growth.

That’s the hourly bars chart for oil.  I was a light buyer of oil stocks as oil arrived in the $73 area. 

I’ll be a much heavier buyer at $55 and $40, and I’ll ask the gold community to buy if the price falls there, but the big news about lower priced oil, is related to its powerful effects on the Indian economy and the nation’s current account.

Indian inflation just fell to a record low.  The mafia appears to have some influence on the Indian finance ministry, but under what appears to be substantial pressure from the central bank, I expect India to reduce and possibly completely eliminate gold import duties by the spring of 2015, and perhaps sooner. 

There is simply too much pressure to cut these duties, with smuggling totally out of control, record low inflation, and falling oil prices that could soon turn the current account deficit into a surplus.

The chop in gold duties will boost government tax revenues.  It will take hundreds of thousands of jewellery workers off the breadline, and put them back to work.  Most importantly (for the Western gold community), it will boost demand for gold.  

China is also in the news, and the news is excellent.  I think most analysts are seriously underestimating the importance of the Chinese central bank’s decision, made just days ago, which allows more jewellers to import gold. 

Also, Hong Kong’s top gold industry players have just formed a major link with the Shenzhen jewellery manufacturing area in China, where about 70% of all Chinese gold jewellery is manufactured.

This new Hong Kong/China gold market synergy is very bullish for gold. 

It should quickly produce a significant increase in Chinese gold demand. 

At the current point in time, gold is clearly a pillar of strength, both fundamentally and technically.  While events in China and India revolve mainly around gold jewellery demand ramp-up, America may be set to become a key driver of gold stocks.  Here’s why:

I’ve argued that the Fed would reduce its balance sheet, and that’s in play now.  I’ve predicted that the reduction would create a smaller money supply, allowing for a surprising upturn in money velocity.  That is happening at the same time as wage pressures grow, and commercial banks are nudged by the Fed to begin making more aggressive loans with their reserves. 

Those reserves exceed two trillion dollars.  Alan Greenspan has referred to their potential movement as inflationary tinder, and rightly so.

Influential economist Mike Ivanovitch is respected in the mainstream financial community.  His new views on US inflation dangers suggests that interest rates will rise, but not much, because commercial banks are set to lend out reserves, and flood the system with liquidity.

Mike ended his discussion with this strong statement: “Equities are still my preferred asset class -- provided the portfolios are carefully reviewed toward a defensive posture. Also, think of putting some of that yellow stuff under your Christmas tree.” –CNBC News, December 8, 2014.

While most gold analysts are focused on the fear trade, I think it’s too early in the economic cycle for that.  Institutional money managers focused on gold bullion ETFs during the 2008 crisis.  They saw system risk, and focused on bullion rather than gold stocks.  I think that as the inflation I’m predicting begins to appear in 2015, the money managers will focus on gold stocks much more than on bullion.

That’s the daily chart for GDX.  The downtrend line has been clearly penetrated, and there’s an irregular drifting rectangle pattern in play.  My short term target is $22.  It’s tax-loss selling season.  As a result, gold stocks are trading erratically, even though gold itself is doing well. 

A nice gold stocks rally should begin early in January.  That’s just three weeks away.  My suggestion is to put some quality gold stocks under the Christmas tree, and get ready for a super year in 2015!

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