Compelling Case for Gold into Year End

September 20, 2013 at 10:31

truthing

With Ben Bernanke admitting he has got financial markets so hopelessly addicted to ‘monetary-crack’ (AKA: printed money), that he can’t even reduce the money printing by one single Dollar without fear of collapsing the system, the set-up for gold is now looking beyond compelling, and it’s not just Ben Bernanke’s monetary-mayhem, it’s just about any indicator you care to look.

First up let’s look at some technicals.

After the Fed’s announcement yesterday gold had it’s best one-day moving since January 2009, rising $80 yesterday – that’s over 6% in one single day.

Gold $ (daily):

gold daily 19 sept 2013 a The bullish case for gold for the rest of the year is now beyond compelling  (click for shaper image)

The last time gold rose by this amount in a single day was in January 2009. The price of gold at the time was around the $800 level (yes, gold really was that ‘cheap’ just five years ago), it then went on to rally by $1100, or 140%, over the following  two and half years.

The 6% rally bought the gold price smashing back above, not only the 55 day moving average, but also back above the 100DMA.

Gold $ (daily):

gold daily 19 sept 2013 b The bullish case for gold for the rest of the year is now beyond compelling  (click for shaper image)

This is significant, because by the end of the month the 55DMA will be back above the 100DMA, creating what is known as a ‘golden cross’ – a bullish technical indicator.

Gold $ (daily):

gold daily 19 sept 2013 d The bullish case for gold for the rest of the year is now beyond compelling  (click for shaper image)

And the last time the 55DMA broke above the 100DMA was back in September 2012 – where the gold price promptly rallied 11%.

Gold $ (daily):

gold daily 19 sept 2013 c The bullish case for gold for the rest of the year is now beyond compelling  (click for shaper image)

A similar move again would take gold back to around the $1500 level – which is significant when we look at the next technical set-up.

On tuesday of this week we noted a bullish ‘reverse head & shoulders’ chart formation forming on gold:

After the 100 day moving average failed to hold, quickly followed by the 55DMA giving way, there really is only one technical formation that is probably keeping the bears from trying to push the gold price much lower,and possible fresh lows if the squid is to be believed.

There seems to be a pretty clear (sloping) reverse head-and-shoulders forming in gold. Explaining a reverse H&S pattern from Investopeidia:

A chart pattern used in technical analysis to predict the reversal of a current downtrend. This pattern is identified when the price action of a security meets the following characteristics:

1. The price falls to a trough and then rises.

2. The price falls below the former trough and then rises again.

3. Finally, the price falls again, but not as far as the second trough.

Once the final trough is made, the price heads upward toward the resistance found near the top of the previous troughs. Investors typically enter into a long position when the price rises above the resistance of the neckline. The first and third trough are considered shoulders, and the second peak forms the head.

And here is what a reverse H&S should look like:

inverted head and shoulders pattern The bullish case for gold for the rest of the year is now beyond compelling  (click for sharper image)

And here is a ‘real world’ example using the Alaska Air stock price:

Head and shoulders bottom The bullish case for gold for the rest of the year is now beyond compelling  (click for sharper image)

And here is the chart for gold (daily) – note the amazing similarity between the two:

gold 17 september 2013 h and s The bullish case for gold for the rest of the year is now beyond compelling  (click for sharper image)

And here is what the chart looks like today:

gold daily 19 sept 2013 e The bullish case for gold for the rest of the year is now beyond compelling  (click for sharper image)

As you can see, the sloping neck-line is currently around the $1420 level – which is where the golden-cross above comes in. When we get confirmation of that cross (in the next week or so), it should be good enough to take gold a least though the neck-line of the reverse H&S, which should then confirm this pattern.

So how high could gold go after a confirmed reverse H&S? From tuesday again:

So just how far can gold go if/when this reverse H&S is confirmed? A ‘typical’ reverse H&S will see gains equal to the distance between the ‘head’ and the ‘neckline’:

gold 17 september 2013 h and s a The bullish case for gold for the rest of the year is now beyond compelling  (click for sharper image)

Around the $1700 mark.

So, just on a technical basis, the set-up for gold is very bullish, but when you add in the fundamentals the case becomes beyond compelling.

All year we’ve been reporting about declining gold mine activity and the year-end number for the amount dug out of the ground in 2013 is certain to be significantly lower than 2012 – so supply is looking very tight for the physical, confirmed by the recent period of backwardation for the precious metal.

Then there is the demand side of the equation – and on that front the numbers are simply staggering. Here is an overview of the latest Q2 numbers from WGC:

  • Continued strong consumer demand
  • Bars, coins and jewellery demand surged ahead 54%
  • Consumers in multiple markets saw the price drop as a buying opportunity
  • The demand for Jewellery was the highest since 2007
  • 50% of world demand coming from India and China
  • US market also saw growth
  • Coin demand jumps 92% – a record
  • Bar demand jumps 75% – a record
  • China total demand very strong – despite Q2 traditionally being quiet
  • Reports in China of suppliers running out of stock
  • Investor gold demand in China surges an incredible 157%
  • India demand jumps 70% y/o/y
  • Indian retail demand up 116%

Then there is a gold-bugs best friend – the money printing courtesy of Bernanke at the Fed. Make no mistake, the announcement yesterday is a big deal. As we said earlier:

…it turns out that the world has become so addicted to the money creation from the Fed that they now can’t even cut the money printing by $1 – this tells us that all the mainstream spin about a recovering economy is just that, spin. And behind the scenes the central planners are starting to panic as they now know they’ve boxed themselves into a very tight corner where the mere suggestion that there might be a ‘trimming’ of the money printing sends long-bond yields screaming higher…

… The Fed is telling you that the US economy is a complete basket case and has become utterly addicted to the monetary ‘crack’ that the Fed is pushing – and one of these days the ‘patient’ is going to die of an overdose.

In short the Fed can never stop the printing, and they have absolutely no intention of doing so – eventually their wafer-thin ‘credibility’ will evaporate in a puff of monetary smoke, and in the process taking with it faith in the Dollar itself.

And finally we have the debt limit – remember that? Well it’s about to become front and centre once again in the next couple of months, as Congress will look to raise the debt ceiling (more like a ‘target’ from where we’re sitting) to somewhere north of $19tn – possibly higher.

Why is this important? Because as the chart shows, there has been an uncanny relationship between the debt-limit of the US and the price of gold.

gold to debt limit The bullish case for gold for the rest of the year is now beyond compelling  (click for sharper image)

And here is what that chart looks like today.

Debt limit and gold sept 2013 The bullish case for gold for the rest of the year is now beyond compelling  (click for sharper image)

As you can see, the gold price is well below the $1600 level it was trading at when the debt limit was ‘just’ $14.3tn. That limit is set to rise to $19tn (at least) in the coming months – which should be good enough to take gold to new all-time highs.

It’s worth remembering back in the summer of 2011. There was the usual jaw-boning and general ineptitude that is par-for-the-course these days in any political decision. But after the dust had settled, the debt limit was raised, the US was down-graded and gold went from under $1500 at the start of summer, all the way to that all-time-high of $1920 by the end of August – that’s a 20% move in a matter of months.

So will this debt-limit debate mirror the one back in 2011? It will if John Boehner, the speaker of the house said:

At a brief news conference following a closed-door meeting of House Republicans, Boehner warned that this 2013 fight over the debt limit would be “no different” from his party’s efforts in 2011 to link a debt limit hike to deficit-reduction efforts.

So, if it does turn out to be ‘no-different’ this time around, can we expect the gold price reaction to be ‘no different’ this time around as well?

Then there is the general sentiment around gold. It is still awful, as Goldman Sachs illustrated, with their call for gold to fall under $1000 from a couple of days ago. The herd still think gold is a ‘sell’ here, and the herd is, without fail, always wrong.

With gold being beaten down so much this year, combined with the technical and fundamental set-up with have in the gold market right now, we could be in store for some explosive moves higher before the end of the year.

The reasons to own gold simply have never been as compelling as they are right now. The next few months are going to be very interesting to say the least.