Whilst most of my research reports predominantly focus on the daily and weekly moves, I feel the need at this point to remind my reader not to lose sight of the big picture. My view has been consistent throughout and whether the market provides us with one more low or not, in my opinion, for the first time since the precious metals topped in 2011, both Gold and Silver, amongst the rest of the precious metals complex, are constructing potential bottom configurations. To put it simply, the easy money on the short side of these markets has already been made.
The U.S Dollar and the Fed
We have been closely monitoring gold’s price action in the last two weeks as the metal attempts to make a huge breakout. The U.S dollar, a headwind to precious metal advances, continues to wane. Indeed, the U.S. dollar’s weakening has given some relief to the commodities complex. Moreover, leading commodities are showing signs of selling exhaustion. Combined with an outspoken fear from the U.S. Fed over hiking interest rates, it seems clear that precious metals, being the first commodity to collapse 2 and a half years ago, has all the conditions in place to make a strong breakout.
It’s worth noting that central bank speakers are often on the wire informing us how well the economy is progressing, as the US Fed members have been doing the past 2 weeks, ensuring us that they have the situation under control despite disappointing economic data. It’s therefore ironic that global central banks have stepped up their gold purchases over the last year. China has been the most aggressive, revealing a 57 percent jump in gold holdings since 2009 and overtaking the second most aggressive buyer, Russia, to become the fifth largest holder. Another sign a bottom may be in: leaders who are telling you everything is alright are purchasing an insurance just in case they are wrong.
The chart below shows that silver has already broken out from a major 3-year declining trend line. Silver has a track record of leading the precious metals complex. Is silver’s early break signalling a trend change? Or is this simply another false breakout, as we have witnessed quite some over the last years? Given the above conditions, we believe there is a fair chance that this breakout is for real.
The weekly Gold chart displays the bear trend that began with the completion of a major descending triangle in April 2013, now being tested for a potential breakout higher:
The strong rallies seen in precious metals, notably Gold and Silver in the last two weeks are undoubtedly encouraging and could be the start of a strong move higher targeting at least $1,250 for Gold and $17 – $18 level for Silver. The nature of the pullback from the current highs is going to hold the key. Hold above key support levels and these markets are poised to finally break considerably higher. If that scenario plays out as described, then the retest we just described will be the last chance to jump into this sector at these low prices.
Nevertheless, investors can look for opportune times to add to their positions. Buying when an upside breakout shows up on the charts, in the early stages of a rally, gives you the ability to ride some momentum before prices get overextended.