Buy Signals are Popping Up in Gold and Silver

Buy signals are popping up in many places as a result of Tuesday's positive action in the metal pits. Since I posted my last article, gold has made several ‘higher lows,’ a sign that the bull market is alive and well. Admittedly the Amex Gold BUGS Index (HUI), XAU and Amex Gold Miners (GDM), went lower than I expected. In retrospect I blame the various ETF’s for drawing money away from the gold and silver stocks. The streetTRACKS Gold Shares (GLD) now has over 19,800.000 ounces of gold in back of it. Even during pull-backs in gold, while investors are dumping their gold stocks, fresh money keeps moving into the GLD.

When people see gold and silver shining brightly amidst the battered economic ruins, they will finally realize that the gold bugs were right all along.

We are now at a stage where mining stocks are severely under-priced, especially when compared to the ETF’s. Gold production is in decline. The mining world needs seven new mines to come on-stream every year, in order to reduce the deficit between gold demand and gold supply. In 1980, every gold producer with a listing was trading at 10.00 or higher.

The ongoing sub-prime credit problems, initially caused by Federal Reserve policy under (’easy Al’) Mr. Greenspan, are obviously going to be ’solved’ the only way the Fed knows how, and that is via the printing press, and via digital money.

Throughout history, once a nation embarked on the inflationary route, there has only ever been one final outcome: total destruction of the currency. Since 1913 the Fed, (supposedly created to protect the U.S. dollar. A must read on this topic is: The Creature From Jekyll Island), has managed to destroy 95% of the purchasing power of the dollar. Does anyone really believe the remaining 5% is safe?

Currencies in a number of countries are being inflated at double-digit rates, while the gold supply can only be increased at about 1.6% per year. All the gold ever mined, piled up, would form a cube of less than 20 meters, growing by 12 cm per year. Most of the gold in this hypothetical cube is in the form of jewelry. The driving force behind the current bull market in gold is the fact that fiat money is being created some twelve times faster than gold. In 1980, when gold topped out at $850.00, the U.S. M3 money supply was $1.8 trillion. Today, gold is pegged at $800.00, but M3 is now $13 trillion (www.nowandfutures.com). A ratio similar to 1980 puts the potential gold price at $5,600.00.

Central banks are battling the gold price, and they are capable of slowing down its ascent, but they cannot stop it. If they could stop it, gold would still be selling at $260.00 an ounce, the price where Gordon Browne made his last ditch effort, by selling 25 tonnes of British Government gold.

The following are just a few reasons why gold will rise:

The annual deficit between production versus consumption.

The Federal Reserve is printing dollars.

The American government is running a fiscal deficit.

Congress does not worry about deficit spending.

U.S. private debt is at a record high.

Many large banks are over-exposed to derivatives.

The world is at war against militant Islam. Wars cost money, and always last longer than anticipated. Wars are inflationary.

The U.S. has gone from a net creditor to a net borrower.

The U.S. dollar is in a bear market.

‘Real’ interest rates are negative. Whenever the true rate of price inflation rises to or above interest rates, gold rises.

Gold is rising in virtually every currency.

Central banks, including the U.S., are overstating their gold reserves (www.gata.org).

Featured above is the daily gold chart, and as you can see, the gold price is working out a pennant formation. Pennants formed atop "flagpoles" in bull markets most often resolve to the upside. The green arrows point to an ˜upside reversal" (bullish). The RSI is finding support at the 50 level (green line). A close above the blue arrows will cause a lot of short covering, and will send gold upwards, to challenge the previous top at $850.00

The above chart is the gold price expressed in Canadian dollars. Despite a strong dollar, gold has just broken out on the upside of an Advancing Right Angled Triangle (ARAT). The 50DMA is in positive alignment to the 200DMA (bullish). The RSI and MACD are positive (thin black lines). The target for this move is $1,000.00 ($10.00 on the chart).

The above chart is the gold price expressed in Australian dollars. The cup with handle formation is a common and reliable chart pattern. The breakout is expected from the handle, and most often occurs on the upside. The RSI and MACD are positive (green lines).

The above chart is the XAU gold and silver stocks index. In September the XAU broke out from a multi-month trading range. It appeared that the breakout had been tested several weeks ago, but alas another test came along. This test took price back to the line of breakout. Today the index produced an upside reversal (blue arrow), at the 50% correction mark. That is a bullish signal, and another green flag. The RSI and MACD are positive (top and bottom of chart).

Featured is the daily silver chart. The price of silver pulled back to the 50% correction mark, just above $13.67 before turning positive on Tuesday. It is a ‘first sign,’ as a close above the blue arrow will turn silver bullish again. The 50DMA is in positive alignment to the 200DMA (green arrow), another bullish sign. The RSI is ready to turn up from 40 (top of chart).

DISCLAIMER: Please do your own due diligence. I am NOT responsible for your trading decisions.

Comments

[ussmls7]

Gold/Silver would break all records if the SEC would do there job, the names of the ones hold prices down would be the trigger that starts the race. The CFTC is now at a point where there will be call to cover in the near future. Hang on for a heck of a ride.

[bert]

By your own reasoning gold should be at $5,600 today (If it worked in ratio to currency devaluation and other commodoties prices), but it doesn't as is obviously the case! Therefore the price of gold depends mostly on psychology especially if it is going to get so expensive that it won't be used for jewelry. Nothing is to stop the Fed and or the Chinese from shorting gold at key moments. (Maybe the Chinese could buy gold or maybe they don't want to see it as a currency to challenge their Yuan.) I believe that central banks undermine gold by making it move the same as the markets causing it to lose its safe haven status. The Fed can manipulate psychology and since there is nothing more than that to sustain the price there can be no assumption that prices will increase. (I am long gold)

[BBrown]

When a vault with a fork lift is shown to ETF investors, with a reputable group of people to verify that the ETF gold is "real" and is in a safe place, I would be more likely to invest in an ETF. With previous statements announcing that third parties are involved in the delivery of ETF gold, then we are again back to the situation that "Sub-Prime" and "Derivatives"... have put us in. My lost faith in the US dollar has transcended over to ETF's, it's now a matter of prove it to me and show me the Gold. Anyone can say they have 19M ounces of gold. I seriously doubt that should all the ETF investors ask for their shares of the ETF gold, that the ETF fund could even begin to cover it.