Analyzing the Precious Metals Market: Is a Bull Market Ahead?
For the past twelve years, gold and silver prices have been in a powerful bull market that saw gold rise by over 700% and silver by over 800%. Unsurprisingly, precious metals have become one of the most popular investment vehicles in recent years and have seen their popularity boosted by the ongoing Global Financial Crisis and the steps that global central banks are taking to re-stimulate their economies, including ZIRP (Zero Interest Rate Policy) and QE (Quantitative Easing, which is a form of “money printing.”) In this post, we will take a look at charts and other information that suggest that another bullish move in precious metals is possible.
The chart below shows gold’s longer-term trend and how gold price rallies often “breakout” from price consolidation zones called “bases.” As you can see, there were important breakouts in late 2007 and late 2009 that led to healthy gains, and there is a strong chance that gold has been building another one of these bases since its last peak in August 2011.
Silver, which is highly correlated with the price of gold, also shows a similar base-rally-base pattern like gold, and may also be forming a base before another move up:
In this next chart of gold, we take a closer look at its possible consolidation base to identify important resistance levels that need to be broken above before a bullish base breakout is confirmed:
In the chart of silver below, we show important resistance levels within silver’s possible base that need to be broken above for a bullish breakout confirmation:
As a bonus, we included a chart of an index of gold mining stocks called the “Gold Bugs Index”, which is still in a downtrend and doesn’t seem to be building a base like gold itself is:
Another possible bullish factor for gold is the fact that commercial gold hedgers or the “smart money” (typically end-users and producers of gold, who know the market well and tend to be extremely accurate in their market timing), are building bullish positions in gold. The last few times that commercial gold hedgers became this bullish, gold prices have launched important rallies:
Commercial silver hedgers, who have a successful trading track record like their gold market counterparts, are also building bullish positions in silver:
Precious metals traders often look to the U.S. Dollar Index (an index of the Dollar’s value against major world currencies) for insights into trends in the precious metals markets, due to the Dollar’s strong inverse relationship with precious metals prices. The Dollar’s recent rally has certainly contributed to recent weakness in precious metals prices, but it’s interesting to note that commercial Dollar Index hedgers are now becoming bearish on the Dollar, after successfully becoming bullish before the Dollar’s recent surge. If the commercial hedgers are correct about a coming downtrend in the Dollar, that would be a bullish scenario for precious metals. Also note that the Dollar is approaching its prior high of 84, which is likely to act as a resistance level, and may even cause the Dollar to form a bearish “Double Top” pattern if it can’t break above that resistance level:
Another important factor to consider is gold’s recent inverse relationship with the SP500. The SP500 has rallied as economic concerns have somewhat abated, which also reduced demand for gold (and silver) as a safe-haven investment. In our last two blog posts, we showed that there are possible bearish chart formations developing in the Nasdaq and the SP500, and if they truly play out, it could provide a boost to gold and silver as safe-haven demand makes a comeback:
Last, but certainly not least in importance, is this chart of the U.S.’ adjusted monetary base, or the total number of Dollars in the U.S. monetary system that are in the form of cash or cash-equivalents (short-term bank deposits, notes, etc.). Gold and silver are seen as an alternative to fiat or “paper” currencies like the Dollar because they are unable to be printed out of thin air. As you can see from the chart, the U.S. monetary base has been surging since the Global Financial Crisis, and the main reason for this is the U.S. Federal Reserve’s Quantitative Easing policy, which entails “printing” money to re-stimulate our hard-hit economy. Investors have been keen to diversify out of Dollar-denominated investments and into “hard assets” like precious metals to avoid the negative effects of this “money printing.” The Federal Reserve has indicated its intention to print $40 billion each month for as long as necessary until the U.S.’ unemployment rate reaches 6.5%, from its current 7.7%. Many economists estimate that the Fed will keep stimulating until about 2015, which would result in a continuation of the monetary base’s surge, along with a likely increase in the price of gold:
As usual with our our blog posts, we are not making any firm market predictions, because we are traders, first and foremost, and we trade with the prevailing market trend, instead of fighting it. The purpose of these blog posts is to show possible scenarios of how the market may play out, without saying that any one particular market scenario will play out.
Also, nothing within this post should be taken as investment advice or a recommendation to buy or sell any investment, as it is for educational purposes only.