Gold: If The Worst Is Over, What's Next?

A number of top bank economists have turned bullish on gold in the past few months.  That’s helping to boost confidence amongst thousands of Western gold community investors. 

Scotiabank and HSBC have lead the way on that front, and now top metals strategist Mike Widmer at Merrill Lynch has thrown his weight behind the bulls as well.

That’s a snapshot of Mike’s analysis, courtesy of

MarketWatch.com.

Of particular interest to me, is his view that Western investors can continue to sell gold, but the gold price will rise anyways.  That’s a theme I have promoted in my newsletter consistently in 2014.

If the “worst is over” for gold now, does that mean the price rises substantially, in a short period of time?

Unfortunately, the answer to that question is probably…. No.  It’s going to take a number of years for demand from India and China to dramatically overwhelm mine supply, and US inflation won’t become a serious gold price driver until the business cycle peaks out.

As the Western business cycle matures, inflationary pressures tend to rise.  I’ve predicted that 2014 H2 (2^nd half of 2014 calendar year) would see institutional money managers and Fed officials begin to talk about growing inflationary pressures.  That’s starting to happen now.

Investors should begin to focus more on the CPI (consumer price index) reports, and the next one is scheduled for release today at 8:30am. 

I’ve highlighted the current CPI chart, which appears to be an upside breakout on the chart.

When the business conditions are improving, as they are now, the Fed is prone to modestly raise interest rates, to cool inflationary pressures.  That can impede the upside progress of gold.

The eight year business cycle that is used by the Fed means the economy should peak in 2015.  As the cycle turns down, if inflation continues to rise, which I am projecting it will, the Fed will have a much harder time raising rates. 

If they do raise them with the economy in a down cycle, it could create substantial institutional selling of general equities, and substantial buying of gold stocks.

Gold is generally well supported here, both by Chindian demand, and by the beginning of an inflationary up cycle in the West.  Still, while a geopolitical black swan could easily send gold to new highs above $1923 very quickly, I think most gold investors are perhaps a little overly-enthusiastic about the short term effects of Chindian demand and Western inflation on the gold price.

Institutional money managers and large momentum-style hedge funds like to see an asset class in an uptrend, before committing substantial capital to it. 

I’ve highlighted an important symmetrical triangle on this daily gold chart.  

Note the highs near $1392 in mid-March and $1410 in the fall of 2013.  If gold can trade above $1392 it should draw the attention of large fund managers, and draw their liquidity flows into gold, silver, and precious metal stocks.

A further rise to above $1410 could get the attention of powerful bank economists who are still bearish, like Jeff Currie at Goldman Sachs.  That could help push gold prices towards the $1500 - $1600 zone. 

The 14,7,7 Stochastics series lead line is at about 25 now, on that daily chart.  Intermediate trend gold rallies ($50 - $150 in size) typically begin when it is near the 20 area.  I think a rally to challenge $1392 could begin within just a few days.

Are analysts and investors who are trying to identify some kind of “final bottom and then the big one to the upside!” move for gold, making a serious mistake?  I think so.  It will likely take several years for Chindian demand and Western inflation to rise enough to justify vastly higher gold prices. 

Investors who end up buying closer to $1500 - $1600, after waiting for more assurance that gold has “truly bottomed” could be very disappointed with how sluggishly gold behaves, for quite some time, after they buy.  

The time to be heavily invested in the precious metals sector is not later.  It’s now.  The buying should have been done in 2013, not 2014, and the focus should have been on gold and silver stocks, not bullion.

Bullion is the vehicle of choice when the fear trade is front and centre, as it was during the super-crisis that began in 2008.  When inflation and gold jewellery are the main themes of price discovery, which they are now, gold stocks are the vehicle of choice.

That’s the GDX daily chart.  I’ve highlighted a tiny head and shoulders top pattern.  It’s only a minor concern, and a rise above the key intermediate trend highs near $28 seems imminent.

That’s the daily chart for SIL-NYSE.  Silver stocks look set to gain about 3% for every 1% gain shown by gold stocks.  Watch the $15.50 area closely.  A rally towards that price zone should begin in just a few days.  If that rally produces a new high for 2014, I expect substantial institutional capital to flow into silver stocks. 

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Stewart Thomson 

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