Gold: Buy Signal Approaching

As things stand today, the main threat for gold remains the anticipation that the Fed’s next move will be an increase in interest rates. The markets currently expect that the Fed will make its first rate hike before the year end.  

We believe the market is mistaken in anticipating that the worst for Wall Street is behind us and that the Fed is about to shift its priorities from preventing a recession to fighting inflation.  

In reality, for politicians, central bankers and financial authorities, there is no question between the choice of price stability and the stability of the financial system. We are in the midst of a serious crisis of the financial system where the interests of all powerful players align.  

Fixing the rusty Wall Street money-making engine and the suffering real estate market will take considerably more time than the market currently expects. Rectifying these two problems is on the highest priority list for Fed and the federal government. Inflation, while it cannot be ignored, is on a backburner. Obviously, the situation remains bullish for precious metals.  

The most appropriate way to view the latest correction is as part of a continuing multi-month consolidation in precious metals. In fact, since March gold price is starting to form a giant cup and handle formation, which could propel its price to the next price target of $1,250. 

We remain convinced that the final lows in this gold consolidation have now been set at around $850. But in terms of time, more consolidation work remains to be done. If gold holds $880 - $900 in August, this would be a very bullish sign going into fall and winter.  

Yet it is important to remember that August often brings a seasonal low in gold and gold stocks. Trading volumes decline dramatically and little selling pressure can go a long way price-wise. 

A sign that gold has finally found a bottom is a sharp recent rise in India’s physical demand for the metal. Indians are typically fussy buyers preferring to buy at low prices and never to chase a rally.

Another positive sign is a long-awaited resilience of gold compared to crude oil. Despite many analysts’ grave predictions of what would happen to gold when oil declined by $25 per barrel, the metal remained relatively strong falling by only 5.5% compared to 16% for oil.  

In the meantime, while oil has further room to fall (first support at $120 and then $110), natural gas, which typically leads oil, may be very close to its low. Zinc, lead and platinum and some other metals may already have bottomed as well.  

On the precious metals stocks, the main development is a buy signal issued by the Gold/$XAU ratio, which hit an exceptionally high level of 5.4. Over the past eight years, a reading between 5.0 and 5.2 triggered a reliable buy signal. 

Gold bugs’ sentiment collapsed last week. This is related to a painful washout in the junior sector combined with a serious correction among the senior producers.

A steep correction in $CDNX index (which represents small exploration and development companies traded on the Venture exchange in Canada), such as the one experienced in July, has typically produced a sharp rebound in the following months. 

Our portfolio was hit by large losses in the past couple of weeks. As we have pointed out before, we are fortunate to have a sizable cash position which serves as a buffer against volatility. Many individual stocks that Resource Stock Guide tracks appear to be close to a bottom, after experiencing a similar meltdown as in August 2007. We continue to add shares of selective companies. Keep your buy orders on limit and considerably below market. 

This is an excerpt from a Resource Stock Guide Newsletter dated July 27, 2008.

Comments

[ICouldBeWrong:]

"A sign that gold has finally found a bottom is a sharp recent rise in India’s physical demand for the metal."

Can you provide any links to allow verification of this statement?

2008 Jul 28 04:25 AM

[Don-100:]

For those interested in extensive analysis of gold price seasonality, you may want to check out www.zealllc.com/. I have been following this site for several years now and it has really improved my understanding of the precious metals market. While they offer a newsletter for a fee, the general knowledge from the free portion of their site has been sufficient for one to trade precious metals (and other investments) quite successfully. And no, I do not have any relationship with them, other than I finally decided a couple of years ago to purchase their newsletter. I felt guilty making money from their free info. Good Luck!

2008 Jul 28 07:12 AM

[whidbey:]

It appears that seasonality, technicals and governmental polities are all pointing to a rally in gold. Silver lags a little and the juniors seem to be eager, but not capable of a move without the majors leading the way and in the process becoming acquisition hungry. So little has changed very much, but your Indian demand story is encouraging without altering much. The one I am watching is government demand when it becomes generally known that the USA intends to spend the dollar back strength. Sound crazy? Will, it is.

2008 Jul 28 10:14 AM

[Skeptik:]

Indian demand:Huge demand for India gold as prices stay soft
Thu Jul 24, 2008 3:29pm IST
MUMBAI (Reuters) - India's gold prices eased further on Thursday as weak crude oil eroded the value of the metal as an inflation hedge, and local buyers reacted with heavy purchases, dealers said.

"There is a huge demand... in the last couple of days alone 10 tonnes may have been sold all over India," said Prithviraj Kothari, director of Riddisiddhi Bullions Ltd.

Foreign gold, that guides the local market, rebounded from a two-week low on bargain hunting as crude oil stabilized after steep drops from its all-time highs this month.

In the local market a stronger rupee made gold softer, keeping it well under the 13,000 rupees per 10 grams mark, perceived as too expensive.

Investors, women and jewellers were thronging Zaveri Bazaar to buy gold, said Jitendra Kantilal of Jugraj Kantilal & Co, a prominent trader in Mumbai's Zaveri Bazaar.

"They are buying coins and bars... mostly 100 gram bars for investment," said Kantilal.

But consumers haven't given up hopes of more dips, said D.P. Naresh, a wholesaler in Bangalore.

"There is a lot of appetite for prices at lower levels," said Naresh. "At $915 an ounce, there would be huge interest."

India's lean season for gold purchases is set to end in another month after which festivals and weddings are expected to spur demand for the yellow metal.

2008 Jul 28 10:27 AM

[bold4gold:]

Excellent analysis. I couldn't agree more about the direction of gold priced in us dollars.

2008 Jul 28 11:26 AM

[Golden Oxen:]

Your observation that rising interest rates will hurt the gold bull market are not true and historically inaccurate. In the last great gold bull market 35$ to 850 $ Interest rates went for 3% to 18%. Do not be fooled by the buffoons on CNBC or by Fed propaganda doled out to the dim witted. The only thing that will ever stop the 3000 year old gold bull market is Sound Money

2008 Jul 28 05:57 PM

[Jake2:]

Don 100: Just went to your site: zealllc.com/ and, frankly, found it quite boring. Full of verbiage and a pitch a minute for some exotic "financial" product or other.

2008 Jul 28 06:15 PM

[ICouldBeWrong:]

Skeptik: Thanks for the reuters quote. Interesting, I'm going to have to think on that.

Jake2: Personally I like zealllc.com. Their Long Valuation Waves series is excellent, also Real Rates and Gold is good, amongst many others.

But I differ from zealllc.com in that I consider deflation to be a more serious threat than them.

2008 Jul 29 06:26 AM