The precious metals sector - again - moved lower today, but - again - it doesn't change our views on it. We believe that precious metals will move higher rather sooner than later (most likely during the first half of April) and that being long gold, silver and mining stocks is justified from the risk/reward perspective.
Based on today's move it seems that the rally hasn't begun yet, but this doesn't mean that it's not about to begin today or in the next several days. In fact, that is the most likely outcome in our view. The support line in gold that is created by connecting two major tops: August 2011 and November 2011 ones and that has been broken in late-January 2012 is being verified one more time. What we see right now is still a post-breakout consolidation that is often seen before the rally takes off.
This time, the consolidation was significant (2 months long) but the odds are (also based on the self-similar pattern that compares now and 2006-2007) that it’s just about to end. One of the quite reliable rules of thumb is that the bigger the consolidation is, the bigger the following rally is.
Based on yesterday's closing price we've seen another signal from our SP Extreme indicator. This is a buy signal in our view, and the fact is that we've seen quite a lot of them from this particular indicator in the past few weeks. This is not something that we see quite often. The last time we've seen so many signals from this indicator was in mid-2009, when HUI moved close to 300 level. Several months later, it topped above 500. If this is to repeat, HUI could top close to 750 in a few months.
At that time silver was a bit above $12 and gold was just above $900 level. Those price levels (and HUI at 300) were never seen after that bottom. If gold's 2009 percentage rally is indicative of future gold price, then we are looking at $2,100 target.
The reason for mentioning all of the above is to put today's and previous week's price moves into proper perspective.
The fundamental situation for precious metals is favorable and both gold and silver are well below their inflation-adjusted 1980 highs. Gold moved above $1,900 and has been correcting this move for almost a year now. There are multiple signs suggesting that the consolidation is over or very very close to being over. The price has already broken above the declining consolidation pattern and has been consolidating after the breakout for 2 months. This is enough not only by itself, but also when compared to previous similar consolidations, for instance the very similar one seen in 2006-2007.
On top of that we are being asked by concerned long-term investors (!) why is gold declining. The people that we are referring to did not ask us that when gold was almost $100 lower - yet, they are concerned now, as they are beginning to "hear from various sources" that gold is declining. Therefore, the investor sentiment is very unfavorable and this is something seen at major (!) bottoms.
Consequently, we're looking for at least (!) $200 rally in gold here - $300 being quite probable.
Now, please compare all of the above to the fact that gold moved less than $10 below March 22 low and less than $15 below the March 14 low. It doesn't really matter as long as all the bullish factors mentioned above are still present - and that is the case right now. Consequently, we think that staying long is appropriate.
On a side note, gold declined as USD Index moved higher right after its cyclical turning point, so as USD reverses, gold could move higher. The resistance level is at 80.5, which is quite close to where USD is right now. For now, as gold stays above $1,600, the situation will remain bullish. If it moves lower, then the situation may still be bullish, but in this case we will re-examine it once again.
As always, we'll keep you updated should our views on the market change - even if it means sending another message in several minutes.
Thank you.
Sincerely,
Przemyslaw Radomski
