We have been writing
about a bullish outlook for gold, silver and precious metals mining stocks
for quite some time now, even though the seemingly bad situation in these markets.
This opinion is based on a sound rationale (excellent fundamental situation
for precious metals and extremely negative investors’ sentiment often seen at
important turnarounds, among others) but we understand that it is still hard
to be bullish, looking at the charts that have been full of moves down for
the last couple of weeks. We have received an interesting question from one
of our subscribers that shows one misconception (in our opinion) about what
is needed for a rally in the yellow metal that we would like to comment on:
Q: Hello, "The fundamentals,
such as open-ended QE, have been factored into prices. So ‘higher gold’ needs
a new story. Investors are no longer excited about the QE story. If there is
no other bullish story (how can a story be more bullish than open-ended QE?),
the price of gold price will likely go lower." Could you please comment
on this? Thanks! Regards.
A: Yes.
The fundamentals,
such as open-ended QE, have been factored into prices.
Yes, we can agree with
that. The information has been around for a while, people are aware of that.
So, ‘higher gold’
needs a new story.
Here we disagree. If a
story as bullish as open-ended QE doesn't make gold go higher, then what
story could? Maybe it's not a new story that is necessary?
Investors are no
longer excited about the QE story
Exactly. Investors are no
longer excited (!) and that's the whole point. Open-ended QE and other
fundamental factors are positive. All that is missing is this
"excitement." This is another way of saying that the situation
looks good but people just don't want to buy because they are afraid of
losing money. Is the fear really rational? If we agree that the fundamentals
are positive, then it's not rational - it's purely emotional and caused by
extensive consolidation.
If there is no other
bullish story (how can a story be more bullish than open-ended QE?), the
price of gold will likely go lower.
When the sentiment
becomes extreme enough (extremely negative that is), we will see a turnaround
even without an additional story. The fundamentals are already great. Now, a
great story (Cyprus-led bank run?) could trigger the rally faster, but it's
not required for the gold market to move higher in our view.
What is exactly gold
doing now? Let’s take a look (charts courtesy by http://stockcharts.com.)
Gold’s rally is finally
visible here, and the RSI levels (based on weekly closing
prices) reflect this as well. This indicator is
back above the horizontal red line after staying below it for several weeks.
This same action was seen back in 2008 and was quickly followed by a
significant rally in gold prices. Back then, after the
final bottom formed, gold moved to its previous high shortly.
Last week we wrote
about a small breakout in gold viewed
from the euro perspective – let’s have a look at this chart to see how the situation
progressed.
We saw a break above the
declining resistance line early last week. The breakout has been confirmed in
terms of range and time. Prices moved high enough to be visible in the
long-term perspective and stayed above this line for three consecutive
trading days. The situation here is very bullish.
Let us now move on to the
chart that shows us the yellow metal’s performance from the general non-USD
perspective (the average of gold priced in major currencies), as a similar
situation to the above chart seems to have developed there. In short, the
following chart represents and average of gold price from the previous chart
and other non-USD ones.
Here we see what amounts
to a small breakout so far. Prices are close to but slightly above the
declining resistance line and have been there for three consecutive trading
days. However, since this is a long-term chart, we prefer to see at least one
weekly close above this line to say that the breakout is confirmed. In any
case, the outlook has improved this week from a non-USD perspective.
Actually, gold closed last week right at this line, but moved above it on
Monday as gold didn’t do much from the USD perspective, but the USD Index
rallied.
Summing up, gold recently broke above
important resistance lines so when viewed from the euro perspective or when
non-USD averages are taken into account, an already bullish situation has
improved even further. Overall, the outlook remains bullish for gold and – as
we’ve mentioned at the beginning of this essay – we don’t think that any
breaking-news story is really needed to spark off the long-awaited rally in
the yellow metal as the situation is already extreme. It could, however,
cause the rally to start sooner.
Thank you for reading.
Sincerely,
Przemyslaw Radomski, CFA
PS. We have decided to
keep our Subscribers updated via daily (!) Market Alerts at least until the
end of April - even though the Cyprus deal seems to have been resolved, it
will likely make the situation particularly interesting for gold & silver
investors (and we already see specific price patterns on the gold market), so
daily alerts might be very useful. Secure your access here.
