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In a key turnaround,
gold bounced up from its December lows this month
on fresh safe haven buying as QE3 possibilities came back to the table.
The psychological
$1600 level was quickly surpassed. This is essentially the level that will
determine if 2012 ends up being
the 12th consecutive up year
for gold.
For now, we are seeing some backing and filling, which isn’t a bad thing... as long as the December
lows hold. This is currently a very important juncture for
gold, and for silver.
HELP ON THE WAY?
When Europe or the U.S. looks vulnerable, especially in the
jobs area, it quickly
fuels emotions. And we
all know how Bernanke feels
about this... he will save the system at all costs. In fact, all of
the monetary policy makers worldwide are being pressured to help the ailing global economy.
This is why the markets
bounced up after their sell-off. A liquidity infusion would be bullish for gold.
BIG PICTURE IS BULLISH
The big picture continues to point the way
up. And the global debt crisis
and record low interest
rates are a bullish factor for gold too.
Chart 1 shows this clearly.
It shows the gold price above,
with the “real” T-Bill interest rate below since 1967.
When the real T-Bill
rate is negative (below zero on the chart) it means
that rates are providing
a negative return, adjusted
for inflation.
This is bullish for gold because there’s no competition. Normally, an investment that pays a higher interest has the advantage. But
if interest rates aren’t
paying interest, and neither does gold, then there is
no advantage between the two.
Note that the
two major bull markets in
gold happened while real interest rates were mostly negative.
Even though gold peaked in September and it’s been declining for nine months, the gold trend is still up, regardless of the currency it’s traded in.
Plus, gold has been stronger
than the other precious metals and gold shares, especially since last year when Europe started flaring up.
Another good sign
for gold has been its underlying
strength as the U.S. dollar has moved
higher. Gold held above its December
low, for instance, when
the dollar index soared to an almost
two year high. This type
of situation tends to lead a renewed gold rise.
Demand also
remains bullish. Central banks continue to be active buyers. They
bought bullion at the fastest pace in five decades in 2011, and they’ll likely purchase a similar amount this year,
according to the World Gold Council. In fact, central banks continued buying during weakness this past month.
GOLD TIMING: At key juncture
Gold’s downward
correction since September
is now taking longer than it did in
2008.
The 2008 decline
from March to November was steeper and gold lost almost 30%. The current decline has been mild in comparison, losing nearly 20%.
Chart 2 shows this comparison.
Since the 2008 decline was the worst one in the 11 year old bull market, it again
reinforces the importance of last December’s low. This low is key. If it holds, all is well.
If it doesn’t and gold breaks clearly
below $1536 for a few days,
we could see gold fall much further first, before a renewed rise again starts.
A 30% decline, similar to
2008 for example, could take gold to the $1350 - $1400 level.
For now, so far so good. Plus, as you can see
on Chart 2B, gold is
near a D low area, indicating that gold is close to a low. But we must also be prepared for a possible
final washout, in case it
comes.
To refresh your memories,
gold has moved in an impressive recurring
pattern on an intermediate basis. In a bull market its best rise is what
we call a ‘C’ rise
when gold reaches new
bull market highs.
The worst decline is called
a ‘D” decline, which
is where gold is today... forming
a double ‘D’ bottom.
And it’s why we’re watching the December lows so closely.
Bear markets tend
to start with D declines and if this low is clearly
broken, it would be a bad
sign.
Once the ‘D’ decline is over, however, the upcoming A & B
moves tend to be a consolidation time, before another C rise takes off. So stay tuned.
ON THE
UPSIDE: Keep an eye on...
Most important is
that gold stays above $1536, the December low.
Then once it rises and stays above its 65-week moving average at $1635, it will be in bullish
territory. Gold could then rise to its next resistance
at the $1700 level.
From there, the next hurdle will
be the $1800 level. This will be a
harder one to surpass because
it’s kept a lid on the weakness since November.
But once it does, gold could then jump up to its record high
near $1900. And it’ll
be smooth sailing, in another leg up in this amazing bull market when new record highs are reached.
And when
$2000 is eventually surpassed, it’ll likely be THE level that causes an exploding bull market to take hold.
--
Mary Anne
& Pamela Aden are well known
analysts and editors of The Aden Forecast, a market newsletter named 2010 Letter of the Year by MarketWatch, which provides specific forecasts and recommendations on gold,
stocks, interest rates and the other
major markets. For more information, go to www.adenforecast.com
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