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Prices for both gold and silver rose for the third straight week, the first time this has happened in a year-and-a-half, as demand for precious metals continues to stabilize in the West while physical demand in the East remains strong. In January, 246 tons of gold were withdrawn from the Shanghai Gold Exchange as China continues expressing its love for the precious metal. This marks a record level of gold deliveries on the exchange as well as a significant increase over the same time last year.
According to Frank Holmes, last year, gold started to take it on the chin when the real rate of return went from a negative 0.62 percent in March to a positive 0.54 percent by December. A positive real rate of return is typically a major headwind for gold.
Between March and December of 2013, two things happened: 1) yields rose in anticipation that the Federal Reserve would begin tapering its bond purchases, and 2) the consumer price index declined. However, going forward, I anticipate that CPI will increase, and, given the modest economic growth we've been seeing in the U.S. economy, interest rates won't be able to rise too quickly.
Also, in three decades, there were only three times that gold stocks only saw a consecutive three-year loss (1990-1992, 1996-1998, and 2011-2013.
The technical picture for precious metals remains positive, and this was aided by weak economic data, particularly in the U.S., that has bolstered the case for the Federal Reserve to go slow in tapering its massive money printing effort.
After dipping at mid-week following the release of the January Fed meeting minutes that showed a central bank seemingly determined to end its bond buying program this year, precious metals ended the week on a strong note. Part of the late-week surge was due to renewed safe haven demand stemming from violence in the Ukraine, however, there is a growing consensus that recently weak economic data in the U.S. and elsewhere may not be due solely to bad winter weather, in which case, the Fed may have to rethink its tapering plans.
Granted, the weather has been bad, but there are simply too many "It's not just the weather" type of reports in the financial media lately to ignore this.
Short-term technical indicators remain positive for gold and silver as dips are short-lived and quickly bought, though some consolidation should be expected after the recent price run-up that could also temper demand in the East where buyers are much more cost-sensitive.
Hedge funds were reportedly net buyers of gold in the fourth quarter, and metal ETFs continue to show U.S. investors slowly returning to gold and silver.
The holdings for GLD are now up a fraction of a tonne in 2014 while the iShares Silver Trust ETF (SLV) added an impressive 116 tonnes just last week, pushing its year-to-date increase to 188 tonnes. Recall that both of these ETFs are widely considered to be a solid gauge of U.S. sentiment toward precious metals, though the inventory flows have a strong history of lagging the price action. Many, including myself, have concluded that the drop in the GLD inventory may very well be big players taking delivery of the physical bullion itself.
The Hong Kong Gold Exchange announced plans last week to build a 1,500 tonne gold storage facility in mainland China.
Meanwhile, Western analysts are turning a bit more bullish on precious metals, citing the less bearish views of Western investors. A research note from Citi FX said to "expect further gains" for both gold and silver, citing the recent double-bottom and some surprising similarities to the mid-point of the 1970s gold bull market.
UBS analysts Edel Tully and Joni Teves raised their 2014 average gold price forecast from $1,200 an ounce to $1,300 while noting that investors' attitudes toward the precious metals have improved. "Gold has started to shed its stigma, if slowly," they wrote in a report. Also, JP Morgan had a more positive outlook on gold as they said prices are likely to hit $1,450 by the end of the year on bullish fundamentals.
We may be in for some consolidation beginning very soon, but the trend still has some upside potential in it. We forecasted a late Dec/early Jan low in metal and We’ve been forecasting a July/Aug type of rally in metal. We have met the minimum upside objectives for that forecast but there is still some potential upside remaining. Overall the rally does have the potential to extend into another leg higher after March 21st (plus or minus a few weeks).
Gold Chart
Gold is arriving at the next blue line resistance and this one is likely to give us an initial high near 1340-1347. Any pullbacks to 1318-1325 should provide initial support and potentially spur one more push higher this week or into very early next week. From there we anticipate a pullback in metals into the medium term cycle due March 21st (plus or minus a few weeks). Currently our thinking another push higher into Mid-May would develop from there but it’s a bit early to solidify that forecast. Option expiration is this week for metals on the 25th -26th and I can’t rule out a quick flash pullback between now and Wednesday. Thus we should be alert that this 1340 area has the potential of being a high point for the week. At the moment we think there are a couple of days left in the short term cycle so it is not out of the question to run up to 1360-1372. It’s the options expiration this week that does leave the potential of a pullback first and then a move to that latter resistance going into March 1st -4th. Resistance for the remainder of the day into the GLOBEX close is 1339-1342. Support is 1325-1332. A close above 1344 favors the upside action is not complete, regardless of pullback after that is achieved. It’s ideal first target would be 1372. Otherwise its good to be cautious here.
 
CYCLES
Here is the view of the upside action we’ve been in favor of. The left portion is the July/Aug rally in yellow and the right portion is the current rally we forecasted to develop after the Dec low was achieved. As you can see we are complete point 4 and are heading towards point 5. We obviously can’t expect EXACT repetition so for the most part the minimum objectives are now completed at this upper dotted trend line. It is this trendline that has to be overcome in order to get one more push higher in metal. The next short term cycle is due March 1st (plus or minus 72 hours). Thus there could be as much as a week left to the upside, but as little as a few more days. We wish we could have a narrower standard deviation window for these cycles, but the fact that they continue to work year after year, month after month for the past 30 years without going away is due to the wide standard deviation and its ability to invert from a high to low and vice versa. Otherwise this cycle would have been discovered by the majority and would be neutralized. A close above this trendline for more than one bar would favor higher prices towards 1360-1380 with 1372 being the ideal target. At its highest momentum potential the 1422 area could be reached, but lets take it one day at a time as the seasonal trend is entering one of the weakest times of the year for metal. For now---the cycle upside remains in play but we need to be real careful.
Seasonal trends
The chart below is what we are weary of for the metals. It favors a pullback/correction as we end February and enter the march timeframe. LOOK at the February time frame and March. The end of February has the potential of giving gold a good pullback in price. Thus the January/February rally is in line with seasonal trends we've seen in gold (most often during bull trends) and so for us to expect a pullback to begin near this area of time is favored.
SILVER
Silver has reached 1st resistance 22.00-22.20 with a 22.10 print high today. Support is the 21.30-21.50 area and the 20.30-20.60 level for now. The upside potential has met minimum objectives but silver still has 22.60-23.10 as a potential price target on this leg. Should we extend a new leg higher after the March cycle low, then a run to 25-27 can come into play. In summary the trend is still up but we must remain aware of the seasonal trend turn that is coming due in this time frame
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