iGold

It is important that precious metals investors keep multiple time horizons in perspective as they make their investment decisions. Often the focus is on the day to day gyrations in the prices of silver and gold. Yet it is critical to revisit the longer-term perspective on a regular basis, as the price action currently being seen has the potential to set the silver market on an important course lasting well into the next decade.

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Gold’s behavior near the $1,190 – $1,200 resistance level this week will be telling and thus important to watch. Broken support should act as resistance on the next advance. In plain English, what we are saying is that since buyers failed to show up at $1,200 last November in the wake of the post-Trump sell-off, all else being equal we would expect them to be absent this week when the price tests that level again.

If the gold price backs off in this resistance region as we expect it to, it will indicate a market that is set to spend the next few months range-bound between $1,200 and $1,115, with the possibility of grinding lower toward the 2015 lows near $1,045.

However, should the market disregard the $1,200 resistance and continue higher over the next 1-2 weeks, it will indicate that an entirely new class of buyers has emerged. Effectively, it would mean a different set of buyers are filling in for those absent last November.

Watching gold as it approaches $1,200 will thus be an important indicator for the remainder of 2017. A strong advance through this level will be telling us that the long-term 2011-2016 (magenta color) downtrend will not represent as significant of a challenge on the next attempt as it did during the multiple attempts of 2016: a new set of buyers will have entered the market to support prices.

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With 2017 upon us and another year in the record books, let us examine the performance of the precious metals in relation to other major asset classes for the full year in an attempt to learn what 2017 may have in store. We begin the article with a broad examination of world assets and then narrow our focus toward gold, silver, and the related mining equities.

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The US dollar took the opportunity of the Fed rate hike last week to advance further from the developing breakout we were observing over the past month. The dollar surged over 1% after the hike, eclipsing the 102 level on the Dollar Index and finally closing near 103 by Friday.

The breakout looks successful, and we now have an intermediate-term target for the dollar at 108 on the Index.

Gold and the precious metals are expected to be under pressure through the remainder of the dollar’s advance toward 108, although it is not true that the two must move opposite the entire time: there are distinct episodes in which the dollar and gold will move in the same direction. So while we will remain cautious on the precious metals until the dollar approaches its intermediate target, it is likely that gold will attempt to establish its intermediate low before the dollar reaches its expected peak.

We are now within five points of the dollar intermediate target… and as, for example, the previous five points from 98 to 103 were gained in just six weeks, the next low for gold could roughly be expected to form within a similar timeframe.

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The next Federal Reserve policy meeting is not until December 14. Nonetheless, the US 3-Month Treasury Bill market is already pricing in a hike to the key interbank lending rate.

Why is this important for precious metals investors? Because it was the first Fed Rate hike in nearly a decade last December that marked major turning points in several interrelated markets, including the 2015 bottom in gold and silver prices.

The graph below shows the 3-Month Treasury Yield since 2014.

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In the aftermath of the unexpected Trump victory, there is a warning signal showing up in the precious metals markets that investors should be aware of. Despite fundamentals that seem to be supportive for gold, the market may be headed for a retest of the December 2015 low of $1,045, or even lower within the next 3-6 months.

While we remain bullish on precious metals over the long run for fundamental reasons – historic low interest rates, central bank inflation policies, unsustainable debt levels, and unwinnable international wars – we are very keenly aware that these fundamentals do not dictate that prices of precious metals must rise.

For example, these same fundamentals were true from 2011 – 2015, yet gold lost over 45% of its value with silver losing 65% over the same timeframe. Those who clung to their fundamental beliefs, that the above factors would cause the precious metals to rise, suffered serious losses.

The truth is that markets do not move based on fundamentals over the short or medium-term. Yes, over many decades, gold will retain its value, but over periods less than two decades the incredible swings in the price for gold is caused by the psychology of the market, rather than any specific fundamental.

As investors, we must pay attention to what the market is actually doing, and not what we want it to be doing, if we want to succeed.

To do otherwise is a recipe for disaster.

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Donald Trump pulled off an upset victory Tuesday for the US Presidency, overcoming Hillary Clinton, who despite recent polls showed that the former Senator had a sizeable lead heading into the election. Yet by the end of the count, it was Trump who captured the required 270+ electoral college votes to win. And as most major world markets were pricing in an outcome in line with the polls, chaos erupted within the financial markets as votes began to show Trump securing a probable victory.

If there is one thing markets hate it is uncertainty. And as Trump will be the first US President without prior government experience to step into office, the outcome is certainly giving markets plenty to worry about.

By midnight of the election day, the US dollar had fallen 2.5% against a basket of world currencies, the Dow Jones Industrial Average was showing a loss of over 600 points for the morning open, and gold had spiked $65 to above $1,335. This was an impulsive fear reaction across the board.

Yet by the end of the trading day, much of the initial fear had abated…with the dollar recouping its losses, the Dow Index finishing in positive territory, and gold giving back all of its gains.

This volatility is certainly extreme, but what is a precious metals investor to make of these wild gyrations? Was this a one-time blip for gold, or is there something more in the works?

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What becomes apparent is that the reason the UK pound flash crash occurred last week is because it represents the completion of a massive 24-year Head & Shoulders topping pattern. Dating back from the low of 1.40 from 1993, each segment of the pattern has taken roughly 8 years to complete. Each subsequent 8-year low has seen a declining neckline (shown in black above) tested, up through the latest low post-Brexit at 1.32.

The 1.28 – 1.35 range for the pound shown on the first chart from June through October represented the last consolidation for the pound before the plunge through the neckline confirmed this pattern.

As the amplitude of the head measured 0.76, the ultimate target for this pattern is an equal distance below the neckline, which gives us reason to believe the pound will be breaking below parity with the US dollar over the next eight years and could reach a final target of 0.59. In other words, it may ultimately take only $0.59 US cents to buy one British pound.

The ramifications for gold are significant.

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We have significant concern that the US dollar is now forming a long-term top. Moreover, we may see a devaluation of up to 50% in value of the dollar over the coming decade. The fundamental backdrop is already in place with the unprecedented money creation by the Federal Reserve since 2008. Confirming technical indicators of a fall in the value of the dollar will be shown through an examination of past dollar-devaluation cycles.

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On Wednesday September 21, the Federal Reserve released its latest decision on interest rate policy in the United States. The committee left its target rate unchanged at 0.25% – 0.50%, a range which has been in effect since December 2015.

The most notable section of the statement issued at the Fed press conference was, however, not related to the lack of change in interest rates, but rather to the Fed’s expectations for the future. To quote the statement: “The case for an increase in the federal funds rate has strengthened.”

This language is in stark contrast to the words the Fed has used at previous policy meetings this year, which have generally not mentioned such hints for rate hikes pending. The Fed is clearly bracing the markets for a second rate hike, most likely at the December meeting, which would set a range for short-term interest rates between 0.50% – 0.75%.

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