Gold: Minor Weakness Is Nothing To Fear

As gold traded in the $1250 - $1255 area a week ago, I suggested the price would immediately decline from there, to the $1230 area or lower. 

That’s exactly what happened.  Unfortunately, by late yesterday afternoon, the decline had become a bit frightening for some gold price enthusiasts.  A nasty wave of selling quickly drove the price down to about $1222.

This is the current daily chart.  A sell signal is currently in play on my “price stoker” (14,7,7 Stochastics).  That’s clearly visible at the bottom of the chart.

This is a quite reliable oscillator for minor trend price action, and the FOMC meeting that gets underway today is likely the fundamental price driver creating the price stoker sell signal.

Hedge fund managers often like to move to the gold market sidelines, in advance of these FOMC meetings, and that appears to be the case this week. 

I expect that gold could stay under some pressure this week, until Friday’s US Employment Situation report is released, at about 8:30 AM on Friday.

That’s the hourly bars chart.  If gold were to trade in the $1219 area, that would be a rough 50% retracement of the $1183 - $1255 rally. 

Such pullbacks are perfectly normal after decent rallies.  That’s the weekly chart, and the overall picture is a healthy one.

Chinese demand is starting to rise again and Indian demand is superb.  Gold is well-supported here, and investor fear is unwarranted. 

It appears that most gold analysts expend vastly too much energy trying to call gigantic rallies and declines, in history’s greatest asset.  Most of the time, gold trades with modest volatility, and the price often moves sideways for substantial periods of time.

That’s the GDXJ weekly chart.  Like gold itself, junior gold stocks continue to trade sideways.

Note the enormous volume.  A changing of the guard from weak to strong hands is good news, but it doesn’t necessarily mean that the price goes a lot higher, let alone in a short period of time.  To attract institutional “hot money”, GDXJ must trade above $54.56 for many weeks. 

Watch the 14,3,3 Stochastics series, for an upside breakout above the 20 line, and watch for a crossover buy signal on the PPO indicator.  That will be the first sign that GDXJ could be ready to rally to $54.56.

The stock market is creaking.  Several Fed presidents have expressed concerns about the level of interest rates.  That’s the quarterly bars ratio chart of the Dow versus T-bonds. 

The Dow has not outperformed bonds since the year 2000. 

If it does outperform in 2015, I think it will simply be because bonds fall more than the Dow falls, as the Fed shocks most money managers, and raises interest rates.

That’s the daily CRB commodity index chart.  I’m looking for a big rally in “commods” in 2015.  Here’s why:

In the late 1970s, the Fed unveiled massive rate hikes, ostensibly to battle inflation that was almost out of control.  Commodity markets crashed.

In contrast, the Fed is not currently dealing with inflation that is out of control.  A rise in rates in 2015 could cause the dollar to rally a bit more than it has against other fiat currencies.

It’s important to understand how bonds prices move.  When rates are very close to zero, as they are now, even a modest rise in interest rates can create a dramatic drop in the price of bonds.

Junk bond prices are most susceptible to interest rate hikes.  These bonds could look like they got hit with a financial nuclear bomb, if the Fed hikes rates even modestly.

A number of key Fed officials have expressed substantial public concern about what they term the “disconnect” between the Fed’s planned interest rate policy in 2015 (rate hikes), and the perception of Wall Street money managers and economists, about what is coming (more QE, more free money).  I’m in 100% agreement with these officials.

Gold, commodities, and the general economy of America have little to fear from the Fed in 2015.  That’s not the case for global stock markets, global bond markets, and global junk and mortgage markets. 

Faced with the twin horrors of the taper, and India essentially in handcuffs, gold has fared very well in 2014.  Import statistics suggest that the citizens of India have now moved past the government restrictions as a concern, and are eagerly bidding for gold.  As the Fed likely hikes rates in 2015, I expect gold to fare equally well, and perhaps much better!

Special Offer For Gold-Eagle Readers:  Please send me an Email to [email protected] and I’ll send you my “Get Jacked With J!” free report.  I’ve developed a proprietary technical indicator that flashes buy and sell signals for GDXJ.  I’ll show you the history of the signals, and what the current signal is now!

Stewart Thomson 

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