Gold futures closed higher on Friday, extending their gains to an eighth straight session and ending the week with a gain of 4.4% as recent soft U.S. economic data, including a fall in industrial production, buoyed demand for the metal. April gold rose $18.50, or 1.4%, for the session to settle at $1,318.60 an ounce on Comex -- the highest settlement since Oct. 31, according to FactSet data tracking the most-active contracts. March silver rallied $1.03, or 5%, to end at $21.42 an ounce, with prices up 7.5% for the week to settle at their highest since early November.
Since December 22, 2013 I have posted my expectations for a major bottom to take place in the gold and silver markets. Our Live Trading Room subscribers and readers were able to obtain this level of intelligence well ahead of the curve. We projected that Dec 22/24 should usher a major cyclical and multi year bottom and with the application of The VC Price Momentum Indicator to identify the optimal price entry levels, we have documented and booked some exciting and very profitable trades these past few weeks.
"The silver market has finally confirmed a major breakout by closing above $21 per oz." said Bill Murphy, SR. Vice President of the IRA Advisor Group. "The market is beginning to recognize silver is way undervalued to other class assets and specially in the precious metals sector." For the year so far, silver has climbed about 10% while gold has gained 9.7%.
Gold closed above the psychological $1.300 level of resistance. Once the bulls were able to get through that level, it unleashed a short covering rally by triggering buy stops just above $1.300. These added fuel to the fire that brought the yellow metal prices above the $1.320 daily high made for the first time in months and completed our upside short - term target of $1.300 from our initial entry at $1.241 (a $59 dollar gain per oz or $5,900 in the futures contract) documented on last week's report.
Emerging Market Turmoil
Gold had seen an initial boost from safe-haven demand amid a sharp rise in risk aversion as emerging markets intensified in January. In a recent interview, Dr. Paul Craig Roberts, former Assistant Secretary of the US Treasury and a Wall Street Journal columnist, outlined three explanations for the current turmoil in emerging markets, and foresees a stark choice for the US Fed in the coming year: save the dollar or save the banks.
Roberts said one explanation for the current turmoil in emerging markets is related to the Fed's creation of increased liquidity. "All of the liquidity the Fed created," he said, "some of it flowed into the emerging markets and now that the Fed is indicating an end to Qualitative Easing, the money is flowing out and as it does, of course, it causes the sale of the currencies of those countries, so it plummets, which causes all sorts of financial chaos."
Roberts also sees Washington as the source of the second explanation. He argued that "The government, the guys in Washington, manipulate every market." He mentioned the LIBOR, interest rates, currencies, and a plunge protection team that manipulates the stock market. This explanation for changes in emerging markets focuses on geopolitical forces. With Venezuela's currency falling, it can be seen as "part of the overthrow of what remain of the Chavez political forces," Roberts said, and as "payback from Washington." Roberts argued that the United States wants to overthrow Venezuela, Ecuador, Russia and other states who oppose US hegemony, so financial manipulation is one tactic to achieve that aim.
The third explanation outlined by Roberts relates to support for the US dollar. He said, "If you depreciate other currencies, it helps support the dollar." Since the Fed has been printing so much money, the US is looking for ways to increase the value of the dollar and devaluing other currencies is one such method.
In a recent interview for the Equity Management Academy, Rick Rule, Chairman of Sprott US Holdings, commented on the academic nature of the Fed, the continued need for low interest rates, the hidden strength of the US economy, and the durability of the US dollar as the world's reserve currency.
"Of the candidates for Fed chairman," Rule said, "she [Janet Yellen] was probably a good pick." However, Rule had plenty of criticism for the process of selecting a new chairman. "It appears that among the credentials you need to become Fed chairman is that you have never had gainful employment, at least in the private sector." He focused on the academic background of many in the Fed, including past chairmen. In a recent article in Foreign Affairs, when asked about why he missed foreseeing the 2008 financial collapse, Allan Greenspan said, "The market did not conform to the laws." Rule argued that the idea that our economy ought to conform to laws instead of the other way around is based on an academic view of the world and is "very strange."
Given the aggregate total of US government debt, Rule said the Fed cannot "afford to let interest rates rise." Unfortunately, Rule argued, "The voters of the United States by and large support this….There are more consumers and spenders than producers and savers." Since low interest rates transfer wealth from savers to consumers, the Fed policy of keeping interest rates low has "widespread support."
Gold and Silver
Turning to the gold and silver markets, Rule said, "We are going to see a very volatile market, with higher highs and lower lows." In terms of mining stocks, he said that the extraordinary bear market brought some buyers into the market, but not many. He sees today as similar to 2000-2002, when the overall market was soft, but better exploration juniors began to generate 100% returns. Rule said, "If we begin to see capitulation pricing this year, we will see a recovery that will stun even the most optimistic investors in the market."
US Dollar Durable
Rule argued strongly against the idea of the Chinese renminbi replacing the US dollar as the world's reserve currency. Although the emerging markets do not trust the United States, "they trust each other even less." Four months ago, when the United States was on the verge of defaulting on its sovereign debt, the market responded by bidding up the value of the US dollar and US debt. This showed the "durability of the franchise." Although the US dollar has major problems, it is, Rule said, "The prettiest mare in the slaughterhouse." The Chinese renminbi is hindered by the opacity of the Chinese economy, the structure of an economy where 20,000 people attempt to rule 1.2 billion, and by the depth of the securities market. Rule said all that talk about the Chinese currency superseding the US dollar helps to do is "sell newsletters." The depth of liquidity and transparency of the US dollar is unrivaled.
Rule believes that China is buying gold, not to tie their currency to gold, but because China is getting hurt by US treasuries, which pay 3%, even while the buying power of the dollar declines by 6%. Therefore, China is "getting banged for 300 basis points per year."
Let's take a look at the gold and silver technical picture and see what trading opportunities we can identify for next week.
The April gold futures contract closed at 1319 . The market closing above the 9 MA (1251) is confirmation that the trend momentum is bullish. A close below the 9 MA would negate the weekly bullish short-term trend to neutral.
With the market closing above The VC Weekly Price Momentum Indicator of 1302, it confirms that the price momentum is bullish. A close below the VC Weekly, would negate the bullish signal to neutral.
Cover short on corrections at the 1282 to 1245 levels and go long on a weekly reversal stop. If long, use the 1245 level as a Stop Close Only and Good Till Cancelled order. Look to take some profits on longs, as we reach the 1339 and 1359 levels during the week.
The March silver futures contract closed at 21.49. The market closing above the 9 day MA (20.08) is confirmation that the trend momentum is bullish. A close below the 9 MA would negate the weekly bullish short-term trend to neutral.
With the market closing above The VC Weekly Price Momentum Indicator of 20.97, it confirms that the price momentum is bullish. A close below the VC Weekly, it would negate the bullish signal to neutral.
Cover short on corrections at the 20.44 to 19.40 levels and go long on a weekly reversal stop. If long, use the 19.40 level as a Stop Close Only and Good Till Cancelled order. Look to take some profits on longs, as we reach the 22.01 and 22.53 levels during the week.
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Trading derivatives, financial instruments and precious metals involves significant risk of loss and is not suitable for everyone. Past performance is not necessarily indicative of future results.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AGOL, AGQ, DBS, DGL, DGLD, DGP, DGZ, DSLV, DZZ, GLD, GLDI, GLL, IAU, PHYS, SGOL, SIVR, SLV, SLVO, TBAR, UBG, UGL, UGLD, USLV, USV, ZSL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.