Both gold and silver have been old news and boring news for quite some time now. Once again both of these markets have lulled everyone to sleep and are now quietly staging their revenge on both bulls and bears alike.
What type of revenge? Price revenge and rapid price revenge.
Allow me to explain.
It is a simple fact that the gold price since 2001 has made an enormous persistent price run higher into the peak of 2011 near $1920 per ounce. Yes, everyone keeps talking about the old high price in gold that was so amazing, but what is more important is the nature of the run that occurred between 2001 to 2011. It was a persistent almost perfect technical run that receives A+ scores for performance, orderly tape action (on the monthly long term price chart) and swiftness of price recovery.
So we have that previous bull run phase as clear history of proven price performance of the gold price. It was an enormous sign of strength and simply the best performing market out of any other on a relative basis.
But recently we have seen the gold price do a 2 to 3 year price correction. The correction has been nasty and confusing. But now it has ended (for reasons the will become clear later in this article) and it brings up the question: how should price react after finishing a multi year correction given that gold had such a spectacular performance during the 2001 to 2011 time frame?
The answer? The answer is that price should react very swiftly back up to the old highs. This should occur because we already know the previous bias of price strength. Now comes the resumption of the price strength.
This can occur for several reasons. One big reason is that typically at bear market lows there are large short positions from lingering bearish positions. To close out these short positions traders need to ‘buy to cover’ and this can cause a massive short squeeze that leads to further buying and in some cases near vertical price moves higher.
Another reason is that we are about to enter the strong seasonal zone for precious metals as we move into the end of the year.
There are various other technical analysis reasons why I think we could see the gold and silver price spike higher in persistent monthly price bar advances into the end of this year.
Here are a few in summary:
- The monthly MACD has crosses north on the XAU gold silver mining stock index as well as the gold and silver price. This means that the ‘wind is at our backs’ in the metals going forward. It means bullish bias and up trending price action.
- The large head and shoulders bottoming patterns that we are seeing in the gold price on the monthly time frame put the gold price in a technical position where it could easily break north and trade very persistently for a full 6 months into the end of the year. I will show you a price chart example of a different commodity that did exactly that after recovering from a head and shoulders bottoming pattern.
- Remember that when a commodity (such as gold and silver) transfers from mini bear market to a resuming bull market, it sometimes does this in a fashion that is very swift and does not allow the previous bulls and bears enough time to stake easy low price positions.
- The combined power of new buying and massive short squeeze covering can lead to the gold price getting back to its old high and even breaking to new all time highs to finish the year.
The chart below is a commodity chart that is daily prices but I want you to see the head and shoulder bottoming nature of the pattern. But more importantly look at the price recovery portion of the chart highlighted in yellow.
What the above chart shows (despite the fact that it is a different commodity and on a different time frame) is the power of an enormous short squeeze after a head and shoulders bottom formation completes.
If a similar move occurs in the gold price going into the end of this year, it could likely place the gold price near 1800 or even 2000 dollars per ounce. After that I would expect some type of consolidation again, but the key point here is to not underestimate the power of an unprecedented short squeeze and can push price up very persistently with almost no or very short price corrections.
Despite the potential ‘craziness’ of it, it is technically quite normal. There is a large tradeable void in the gold price up to 1500. A move above 1500 would trigger a quick buying panic quickly back up to 1800. And this swift price move would create an almost perfect symmetry of a much larger head and shoulder’s bottoming pattern. See the chart below to understand the visualization of how it might look.
The opportunity here is enormous. Gold should reassert its strength going into the end of this year as a ‘signal’ that the bull is still very much alive and this move should only be the ‘warm up’ for the fireworks that will continue into 2015 and beyond.
I think the story that will light a fire under the metals markets is inflation going forward and the continued devaluation of the US Dollar will once again become a dominant and perhaps mainstream media theme eventually. Other potential fundamental catalysts are war in the middle east, oil supply shocks and price spikes and foreign countries decisions to stop hoarding dollars and instead seeking alternative currencies such as gold and silver.
The MOST DIFFICULT aspect of a rapid and persistent price rise in any commodity or stock is the ability to interpret it as a massive sign of strength and expect continuation rather than viewing it as a top or being ‘overbought’. Assuming that we do start to see some very strong spikes up in the gold price, it will be important to view them as ‘signs of strength’ and pre cursors to more price strength, rather then being overbought or ‘too high’.