iGold

Gold finds itself directly in the crosshairs of a battle between precious metals bulls and bears. The bears are attempting to hold the metal down at this level, because a breach of a long-term trend line would be a major technical event in the eyes of many investors. It would be a signal to the mutual funds and institutions waiting on the sidelines that the 2011-2015 bear market is decisively over.

Having been mostly on the sidelines from 2011-2015, we are in the bullish camp at this juncture. Consequently, have a reasonable expectation that this long-term down trend will be broken in the near future, possibly as early as September.

Why September For A Gold Breakout?

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Silver miners are now factoring in sales prices for silver of between $21.50 and $36.00, depending on which miner we are analyzing. When we perform this analysis on a wide basket of producing companies, we find a high confluence of targets in the $24.00 – $25.00 spot price level.

The major point is that the primary surge higher off the December 2015 bottom has further to go for silver.

Nearly all major silver miners are pricing in higher spot silver prices for their revenue streams. Although we are now directly within the weakest season for the precious metals (summer), the silver miners are predicting another advance in prices either late this summer or into the fall.

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The 2011-2016 decline was a pause in a generational bull market for precious metals.

Current prices will be seen as one of the last great buying opportunities when we look back a decade from now. The bull flag pattern is nearing completion. Moreover, a strong advance above $1,400 will be the trigger that manifests growing recognition for gold as a worthy component of investors’ portfolios. The long-term targets ahead of us are significantly higher than current prices. The ramifications of such targets for silver, the currency markets, and the mining sector will be discussed in future articles.

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The grinding nature of gold’s price action, since the surge in February, has left many investors concerned. Why hasn’t the metal continued to build upon the gains of earlier this year?

Nothing in nature moves in a straight line. Gold, a fundamental element of nature, and the markets, being the sum of human nature, are no different.

Consolidations are very healthy for markets. They represent a shifting of ownership from weak hands to strong.

We view any price action above the bottom end of our green highlighted zone at $1,176 to be an ideal setup for a strong continuation move later this year.

The reason? If gold can consolidate during this — the seasonally weakest period of the year — it will mean new demand is showing up in the market even during the months that we typically expect to see buyers largely absent.

Below we show the gold seasonality chart for the past 20 years. Note that demand typically picks up starting mid/late August and remains rather strong through February. Meanwhile, the March – July timeframe usually represents the weakest season for gold.

This is why we believe that if gold can buck the seasonal trend, and merely consolidate through the mid-summer, the precious metals will actually be showing underlying strength — and will be setting up for a significant rally this fall.

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Gold has now fallen for four weeks in a row and has come back into an important technical support zone. This is the lower range of the anticipated trajectory we have been outlining for some months. We expect prices to now begin to carve out a bottom, though this process may take some weeks to play out. Consequently, the final low may not be in place yet.

Last Friday, gold closed down $37 or some 3% from a week prior to finish at $1,215 per troy ounce.

The technical action warrants a thorough discussion, and for that we refer to the following 18-month chart of spot gold:

First, note that gold has now fallen $105 from it’s recent $1,306 high. This is an 8% decline. It is fascinating to watch the shift in investor psychology with such a modest correction, as we observe a lot of fear in the precious metals sector at this time.

Of course, as investors in not only the physical metals but also the precious metals mining sector, we can see how such relatively small moves in the metals can translate into tremendous swings in the valuations of these companies. In gold’s 22% move higher in gold from December through April, we saw 100-200% gains across many gold mining companies; and now, with the 8% drop lower in gold prices, we have seen 20-40% corrections across these same equities.

What type of gains will the mining sector see at $1,400…$1,500…$1,900 gold?

But, let’s get back to the current price of spot gold. The price has broken through our short-term upward sloping trend lines, which are now shown above in turquoise for reference. This short-term technical breakdown means that gold will need to consolidate for some time before it is ready to advance through the $1,305 region that now serves as resistance.

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Gold has been weak over the last few days, falling back down to $1,225, as this article goes to press. The major contributor to gold’s fall has been strength in the U.S. dollar since last Wednesday, when the Federal Reserve released minutes from its most recent policy meeting, hinting at a stronger chance of a rate hike at its upcoming June session. Higher interest rates tend to strengthen the value of the dollar versus foreign currencies, as investors can achieve a higher rate of return by holding US-denominated debt.

Over the short run, a stronger dollar often corresponds to weaker gold prices, as traders see less need for the age-old metallic store of wealth when the fiat dollar is firming.

Indeed, when we look at the very short-term action in the U.S. Dollar Index versus gold, we can clearly see this inverse correlation. Note how the recent high for gold at $1,305 corresponded within one day to the low seen in the Dollar Index at 92.5. Since then, as the dollar has risen, gold has fallen:

It is tempting to want to extrapolate this phenomenon into longer time periods. For example, what if the dollar continues to rise? Will gold keep falling?

U.S. Dollar Index – Meaningless Over the Long Run

We want to caution readers that over the long run, the value of the US dollar versus other international currencies (which is what the U.S. Dollar Index measures) has little impact on the price of gold. We must remember that in today’s monetary system, for the first time in the history of human civilization, not a single currency has any direct tangible backing to it. Thus, measuring the U.S. dollar versus the Euro, the British pound, or the Australian dollar is a relative measure of one fiat currency versus another. Each currency is being debased – simply at different speeds.

Over the long run, the U.S. Dollar Index has little impact on the price of real assets such as gold, silver, land, or other commodities. We can see this when we back out our chart above to a generational time frame.

Below we show the U.S. Dollar Index and gold since 1980. We have picked the recent figure on the Dollar Index at 92, and then drawn highlights to show the corresponding gold price at other times throughout the last few decades when the index matched the same 92 level.

Note how over these decades, while the dollar index has essentially gone nowhere, oscillating above and below the 92 figure, gold has seen the following four prices: $450 in 1988, $300 in 1998, $450 in 2005, and $1,300 in 2016.

Note also that gold’s high of $1,900 in 2011 did not match the dollar’s low of 72 in 2008. Nor did the dollar’s high in 1985 match gold’s low in 1999.

The Dollar Index is meaningless for gold prices over the long run. Gold is moving independently of any relative fluctuations between fiat currencies.

In other words, gold’s rise must be a worldwide event.

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While gold is up $230 from December for a gain of 22% and silver has added $3.45 for a 25% gain over the same time frame, the real news in the investment world has been the action in the gold and silver miners. Indeed, from the winter lows, the HUI Index of gold and silver mining equities is up an incredible 130%, far outpacing the gains mentioned above in the precious metals themselves.

Is it too late for investors to participate in this move? To attempt to answer that question, in this article we look at the mathematics behind the mining industry and some historic valuation metrics for the gold and silver miners compared to other economic assets.

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Gold continues to show underlying strength despite volatility that is leaving many investors sitting on the sidelines.

Bears are frustrated that the predicted collapse in the precious metal has not yet materialized.

Bulls are expecting a skyrocket higher any day.

Yet a third possibility exists, and there is still time to take a middle road in one’s perceptions. Ironically, such a moderate view might just end up being the most profitable in the long run.

Indeed, the philosophy of Aristotle’s aptly-titled “Golden Mean” itself encourages us to consider the middle path, and so we begin with an examination of the gentle uptrend currently in place in the gold market.

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Gold is up nearly 21% from its December 2015 lows. Moreover, silver has added an impressive 28% to its price during the same timeframe. Most notably, the HUI gold and silver mining index is up over 100% during this period.

Despite the strong performance we have seen from the precious metals complex thus far in only the first few months of 2016, many fear that the move is already nearing an end. Readers should be aware that the potential for both gold, silver, and strong mining equities is much greater than the moves seen thus far. Indeed, a review of the metals and several valuation metrics over a longer time frame can provide us with clues as to what we should expect through the later part of this decade.

Below we review the long-term perspective for gold since the year 2000. Gold bottomed in 2001 after a nearly 20-year bear market following the peak in 1980 at $850/oz. The return advance to again challenge the $850 level took eight years, although it was not until the following year (2009) that prices decisively broke through this level for good.

Gold then advanced for two years above the former all-time high, hitting $1,917/oz in 2011, before falling back some 45% over the course of nearly five years through the end of 2015.

Markets that consolidate for 29 years (1980 – 2009) below an important peak level ($850) do not finish their subsequent advances in only two years. What was seen from 2009-2011 was simply the initial surge higher from the multi-decade 1980 – 2009 consolidation. The retreat since 2011 is thus a correction within what will be a more significant move higher both in time and in price above the former 1980 peak.

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