The New Gold Era: Sublime Confidence

As the month of August gets underway, the gold market has a solid feel to it. 

Analysts in 2014 who have held extreme price targets (both bullish and bearish), have found themselves looking like fish out of water. 

Gold has not skyrocketed on the supposed “massive physical shortages” envisioned by the super-bulls.  Nor has it crashed and burned, as the super-bears promised it would on US rate hike fears or QE tapering.

Western gold community investors are probably now in an era where extreme emotions of fear and greed should be replaced by what I call sublime confidence.

New OTC derivatives are traded on clearing houses, rather than at mega-banks behind closed doors.  This has added tremendous stability to the financial system.

The likelihood of a “Lehman 2.0” situation has greatly diminished, although it has not disappeared completely.

China’s solid ongoing transition in 2014 from an exports-oriented economy to a domestic consumer economy, adds depth and stability to gold jewellery demand there.

In India, economic growth had slumped to under 5%, and the economy was overrun by the mafia.  The May elections appear to be a game changer for growth and the reduction of government debt/corruption.

"Our government is pursuing pro-development policies. I am sure these policies being pursued by the government will take up India's GDP growth to 8.5 per cent in the next couple of years," the Union Minister for Shipping, Road Transport and Highways, told reporters here.’ –The Economic Times, Mumbai, India, August 3, 2014.

Whether it’s a particularly overbought oscillator on the daily gold chart, or a rise in commercial trader short positions on the COMEX, I think there’s little for Western gold community investors to fear. 

That’s a snapshot of the most recent COT report for gold.  Nervous gold stock investors will note the large net short position currently held by commercial traders.

While they did cover some of these positions in the latest reporting period, they are still net short at least 160,000 contracts.

That’s a snapshot of the COT report from late July in 2009.  The commercial traders were net short many more contracts than their current position. 

Look closely at the two green circles that I’ve highlighted on this chart.  There is great symmetry between the actions of the commercial traders in July-August 2009 and their actions today. 

In the summer of 2009 traders built a huge net short gold position of more than 200,000 contracts, as price surged up from the right shoulder low of what I call one of the greatest inverse head and shoulders bull confirmation patterns in the history.

I would argue that there’s a strong chance that gold is poised to create a much bigger pattern of the same type now, driven by a relentless rise in global demand for gold jewellery.  Commercial trader selling here is really very modest…and it’s certainly nothing to be afraid of.

What about rate hikes?  Isn’t gold’s price “all in the dollar”?  Well, gold’s price is all in the dollar, but it’s becoming more driven by the action of the dollar against the rupee and the renminbi (yuan), rather than just the euro.

Today’s report (courtesy of Econoday) shows that India’s central bank left rates unchanged at this morning’s key policy meeting.  Most Indian economists feel that central banker Raghuram Rajan will slowly lower rates, in a multi-year process  that begins in 2015, while his counterpart (Janet Yellen) in American begins to raise US rates.

This process could create huge institutional money flows into Indian stock markets and private equity, increasing the likelihood of the government hitting its 8.5% growth target.

At the same time as Indian growth surges (and hence citizen wealth to buy more gold surges), I’m predicting that US inflation will begin to tick noticeably higher, while the US business cycle peaks.  

Do the charts support these fundamental arguments that gold is “solid as a rock” at this point in time?  For the probable answer, please see above chart.  That’s the 8-hour bar chart for gold.  I suggested that gold could easily trade in the $1280 - $1290 area…as Friday’s US jobs report approached.  It traded there, and that decline added aesthetic symmetry to the inverse head and shoulders bottom pattern in play. 

The right shoulder itself takes the form of a green bullish wedge, which I’ve highlighted on the chart.  My suggestion has been for investors to place light buys in the $1285 - $1270 range, using my “PGEN” (pyramid generator) to systematically allocate capital.  For details on the PGEN and systematic capital allocation, investors should send an Email to [email protected].

That’s the CRB index monthly chart.  It flashed an impressive 5 and 15-month  moving average crossover buy signal in early 2014, which subsequently rallied to the 313 level.  This moving average series has very few false signals.  There’s also a clear upside breakout from a key down trend line.  The CRB index has retraced about half of the rally.  There’s no point in wasting time trying to decide exactly where it might turn higher.  What’s important is to understand the possibility that deflation likely ended in 2013, and that reflation has begun.  The overall picture on this chart adds another layer of technical support to the concept of a solid floor for gold being in place now.  A floor is not a “bottom that occurs just before blast-off!” event.  It’s a general price zone of enormous support, where downside price volatility should not be feared.

This key weekly chart shows the price action of gold versus GDX (gold stocks).  The large Head and Shoulders Top pattern suggests that gold stocks are on the cusp of a significant period of outperformance against gold.  A rally that does not exceed the right shoulder highs of 57.55 could be used by investors to buy gold stock in anticipation of that period of outperformance

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Special Offer For Gold-Eagle Readers: Please send me an email to [email protected] and I’ll send you my free “Goldilocks” report.  The senior gold stocks are too sluggish for many investors, and the juniors carry a lot of risk.  The intermediate-size producers provide a great combination of risk management and upside reward; a “Goldilocks” situation.  I’ll show you the top five intermediate gold stocks I’m focused on right now, and why.       

Stewart Thomson 

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Stewart Thomson is a retired Merrill Lynch broker. Stewart writes the Graceland Updates daily between 4am-7am. They are sent out around 8am-9am. The newsletter is attractively priced and the format is a unique numbered point form.  Giving clarity of each point and saving valuable reading time.

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