iGold

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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Our technical model for gold shows that the $1,045 per ounce low in late 2015 was of similar magnitude to the $700 low of late 2008. Consequently, a multi-year advance in price is now in the beginning stages of emerging. The situation in the world’s historic monetary element is extremely tight at present – and because the ramifications for the pending advance are so significant, it is critical for investors to prepare themselves prudently at this juncture.

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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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