iGold

There is much discussion in the financial press regarding the upcoming Federal Reserve meeting on December 15-16 and the likelihood of an increase in the Federal Funds Rate, which has been held close to 0% by the Central Bank since the financial crisis of 2008. The futures market is currently pricing in a significant chance for a rate increase to between 0.25 – 0.50% at the upcoming meeting. This, in turn, has made precious metals investors increasingly nervous in recent weeks, as many have come to believe that rising interest rates mean gold and silver will fall, due to an expected move higher for the US Dollar after the rate hike.

It is time to dispel this myth once and for all. Indeed, in 70 years of publicly available data from the Federal Reserve Board itself, we can very clearly see that rising short-term interest rates correspond to rising precious metals prices. Both recent examples and historic trends will illustrate this point.

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It is fairly common knowledge that the gold mining  industry has been one of the worst performing sectors in the capital markets over the last five years. From major established gold producers such as Harmony Gold Mining and Kinross falling to under $2 per share amidst doubts about their ability to service debt, to the bankruptcy or fire-sale takeover of countless junior exploration companies — the decline in gold prices over the last few years has spared few victims in the mining world.

Numerous fundamental reasons have been offered to explain the severity of the decline. Rising cash costs, an inability to finance exploration at favorable rates, and fears of mine nationalization have all been raised as reasons for the brutal bear market. While we can see merit to each possibility, as fundamental-based technicians we would rather let the market show us its opinion as opposed to trying to pinpoint a single scapegoat.

Given that we expect a historic low to be forming in gold over the course of the next 6-12 months (LINK: http://www.gold-eagle.com/article/gold-forecast-final-low-targets-bear-market), it seems appropriate to revisit the gold mining sector at this juncture to have a glimpse of what might be the fate of the surviving companies that actually dig the precious metal out of the ground.

Our analysis shows that a significant revaluation in this sector is due to begin over the course of the next 12-18 months. There are historical precedents for individual companies to see gains well in excess of 1,000% during these types of revaluations. Because even a small allocation of one’s portfolio to this thesis can have a tremendous wealth-building effect, we present the case here.

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In our previous article covering the long-term gold forecast, we made the case that the breakout in gold from the 1980 – 2009 consolidation below $850/ounce represents an extremely rare and powerful pattern in the commodity markets, a move that is likely to lead to decades of gains once the current bear market is over.

Given the recent weakness in the price of gold, we thought it a good time to update readers on our expectations for the final low of the current bear market. There is a confluence of no less than five important support levels between $850 and $1,033/oz. that we believe should provide support for the price of gold should further weakness develop over the months ahead. Such a final low would represent the best entry point for gold investors who have been waiting on the sidelines for prices to begin trending higher again.

The Power of Multiple Support Levels

In our technical studies, when a single support level exists for a market, we will often say simply that support exists at that specific price point. When two support levels come in near the same region, we will say that this represents strong support at that area. And when three separate support levels exist in the same vicinity, that represents an extremely strong level of support.

On our 15-year gold chart, there now exist five separate support levels currently within a swath of roughly $180. This represents an immense level of buying power which should enter the gold market within this region. While the range may be too large for short-term traders to use in timing, for long-term investors who agree with our thesis that prices may eventually reach a multiple of the 2011 $1,917 high, any purchases in this band of support should represent an excellent long-term accumulation point.

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In our previous article, we discussed the technical case for a significant long-term bottom now being put into place in the silver market, of magnitude comparable to the bottom we saw in late 2008, which led to a 400% rally in silver, and over 1,000% gains in many of the top-tier silver miners.

While we tend to focus on technical indicators in our analysis, the significance of such a pending rally in the precious metals forced us to take a step back and ask ourselves the question again: what are the fundamental drivers of such a pending move? What is actually going on amongst miners, scrappers, hedgers, jewelers, industrialists, and investors that is setting up for such a major revaluation of this historically monetary metal?

While we value studying charts and patterns — and indeed believe that all of the fundamental data that is known to the market (the sum of all participants in the sector) shows up in the charts (i.e. the current price) — we remain fundamental-based investors at heart. That is to say: we understand that fundamental drivers are what move the market over the long run.

So we took a step back and sought to refresh our perspective by looking at the long-term trends developing on both the supply and demand sides of the silver market.

Our review follows: we are more bullish than ever on silver prices and believe that the moves we have seen over the last 10 years are but a mere preview of the price level that is to come over the next decade.

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Our technical model is showing the completion of a downside capitulation signal for silver prices, indicating that a significant long term bottom is either already in place or will be finalized over the next several weeks across the silver market. Whether or not we see additional short-term weakness to the extent of a few dollars per ounce, the emergence from this pattern will represent a long term silver buy signal of similar magnitude to the one that occurred in November 2008, which saw silver rise over 400% within 2.5 years. Over the same timespan, certain silver miners saw gains well in excess of 1,000%.

We remain optimistic on silver due to fundamental supply/demand metrics, which include significant uptrends in investor demand since 2005 amidst mostly inelastic and stable industrial and jewelry demand. Such will be the topic for another article; in this feature, we focus on the technical side of the market and begin with an examination of our most important indicator: the relative strength ratio of the company Silver Wheaton (SLW) to silver bullion.

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Gold is in the process of retesting its breakout from a multi-decade consolidation stretching back to 1980. The significance of such a retest cannot be understated: multi-decade consolidations usually lead to multi-decade advances, with targets many times the previous consolidation high. In percentage terms, gold has only just begun to move above its 1980 former all-time high, and for this reason, we believe it is critical for investors to view this market with sufficient historical perspective.

Multi-decade consolidations are a rare formation in the capital markets. By multi-decade consolidations, we are referring to markets in which an asset makes a specific price high, followed by at least two decades of price action below that high (the consolidation), followed by an eventual breakout above the high. In the case of the gold market, we are referring to the high made in 1980 at $850/ounce, followed by the 28-year consolidation below that high, until the breakout which finally exceeded $850 in 2008.

After oscillating above and below the $850 mark from 2008 through early 2009, gold prices finally took off for good in the fall of 2009, confirming the breakout. As we know, gold continued to accelerate into September of 2011, climbing to above $1,900. Since that time, the precious metal has been in a four year bear market, standing just above $1,140 as this article goes to press.

The critical piece of data in this chronicle is that the current four-year bear market has occurred entirely above the 1980 high. What this means is that this bear market represents a retest of the breakout from the former multi-decade consolidation.

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