This piece expounds upon what we covered last week. In that piece, regarding Gold, we concluded:

If Gold is able to firm up here and now then it has a good shot to rally back to $1750-$1800 over the next few months. If we get the bullish scenario and a fundamental catalyst shift then expect Gold to break past $1800 in Q3. That would mean that Gold consolidated for two years which would be its longest consolidation on record. The longer the consolidation, the more explosive the breakout.

Following that editorial, we noted for premium subscribers that various sentiment indicators continued to look favorable even as the market began to make some progress. For example, the daily sentiment index for Gold touched 6% yet Gold didn’t make a new low. At the same time we saw a continued reduction in speculative long positions. Bloomberg reported that hedge fund long positions in Gold were reduced to the lowest level since August. Technically, take a look at the weekly chart. Gold seemed at risk below $1630 yet it closed above $1650 in each of the past four weeks. Now that Gold is starting to turn bullish all time frames (daily, weekly, monthly) it has a great chance to rally back to $1750-$1800 over the next few months and position itself one step closer to a breakout.

With that said, we want to show why Gold is setting itself up for an excellent breakout later this year. In the chart below we are focusing on two things: the price action and the volatility as measured by bollinger band width (bottom rows). Have a look.

Thus far Gold has experienced three major breakouts and four major consolidations. The type of breakout depends on the preceding consolidation pattern. The strongest breakouts are born out of consolidations which are tight in terms of price but long in terms of time. The 2004-2005 consolidation which lasted 20 months, fits that profile. It had the strongest breakout of the three. Meanwhile, the other breakouts weren’t too shabby.

The current consolidation is most similar to the 2004-2005 consolidation. It is 17 months old and will last two years unless it can blast through $1800 on the next try. Also, its tight range of $1550 to $1800 has remained in place. Furthermore, note the volatility on the various time frames (as measured by bollinger band width). Two of the three readings are at eight-year lows while one is at a five-year low. The last time all readings were at multi-year lows was in 2005.

Gold does have potential measured targets of $2,050 and $2,250 but in our view those are only initial targets. A target of $2,250 is only a 25% advance. Even a 40% move (less than the first two breakouts) equates to $2,500. This sounds wildly bullish but the technical arguments are there and we are counting on another six to eight months of consolidation before the initial breakout. That consolidation will serve to eliminate any marginally weak hands and replace them with ardent bulls. After a two-year consolidation, those on board would be looking for far more than $2,000 or $2,200.

Before I close, I’d like to note that I will be presenting at the Vancouver Resource Investment Conference on Sunday, January 20, 4:30pm at the Vancouver convention center west. This is a great opportunity to talk to analysts and companies face to face. This is a critical time in the precious metals sector. The market remains in consolidation mode and that will continue. Yet, the potential on the other side is vast. There is still time to uncover the stocks poised to be huge winners when and after Gold makes its next breakout. If you’d be interested in professional guidance in uncovering the producers and explorers poised for big gains then we invite you to learn more about our service.

Good Luck!

Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com

Greg Weldon: I’m Starting to Like Gold Here (Technically)

Today, Greg Weldon covered it all. We started with Bonds then moved to Europe (with some comments on the Fed in between). Later we moved to Gold and Greg likes the technical setup. According to Greg, 2013 has the largest amount of debt that must be sold by most major governments. Of course that could be surpassed in the future but for now, this is an absolute critical year for governments and the bond market.

I asked Greg, “Because of that and the need for even greater monetization on an unprecedented scale, does that mean we start to see some inflationary effects from all of this QE.”

“It’s a great question and a very broad question, but I think yes,” said Greg.

Visit Greg’s Website where you can learn more about his services and signup for a free 30-day trial.

Today, Greg Weldon covered it all. We started with Bonds then moved to Europe (with some comments on the Fed in between). Later we moved to Gold and Greg likes the technical setup. According to Greg, 2013 has the largest amount of debt that must be sold by most major governments. Of course that could be surpassed in the future but for now, this is an absolute critical year for governments and the bond market.

I asked Greg, “Because of that and the need for even greater monetization on an unprecedented scale, does that mean we start to see some inflationary effects from all of this QE.”

“It’s a great question and a very broad question, but I think yes,” said Greg.

Visit Greg’s Website where you can learn more about his services and signup for a free 30-day trial.

News Item: German Bundesbank To Repatriate Gold From New York Fed –  Despite previously characterizing the idea that it was planning on moving gold out of the New York Fed as an “irrational fear,” the German Bundesbank is set to announce a huge repatriation of its bullion this week, with France also being emptied of Germangold in a sign that trust between central banks has hit rock bottom

The last audit of Fort Knox’s gold was in 1953, and it was hardly comprehensive. No outside experts were allowed, and only about 5% of the gold was tested. There was no bar count, weighing or conventional assaying. It’s surprising that no inspection has been made in 60 years, since large entities listed on stock exchanges are usually required to undergo an outside audit at least annually.

One of the first accounts claiming there was no gold in Fort Knox appeared in 1974. The writer, Louise Auchincloss Boyer, secretary to Nelson Rockefeller, fell out of her New York apartment window and died three days after publication of the article. The incident resulted in an investigation; in September 1974, six Congressmen, one Senator and the press toured Fort Knox; there was gold, but only a fraction of it was available to see.

Last year, Germany ordered an audit of its gold reserves stored abroad. It had never before conducted a comprehensive audit of its foreign gold reserves.

This suggests that Germany has doubts about the US government’s gold storage practices. It’s hardly conceivable that there is no gold left in Fort Knox or the New York vault; on the other hand, the lack of a comprehensive audit of either facility is unnerving. So are other irregularities associated with Fort Knox: missing shipments, and audits acknowledging the existence of gold based on seals that were not broken, not on the actual count and examination of bars.

What does this mean with respect to the gold price and a dollar collapse? If the value of the greenback is reduced to paper, gold could appreciate to $5,000 or to $10,000 (in today’s dollars). Nobody really knows. The point is that if doubts about the amount of gold stored in Fort Knox are just that – doubts – gold could be a lot more expensive than it is today. If, however, there’s any substance to the rumours that gold reserves in Fort Knox are lower than officially reported, a gold price of $6,000 could be the lower end of where it might go.

More at this liink: Credibility Of The U.S. Bullion Depositary And The Possible Price Of Gold

I received the following from reader Bill Teter:

The CNBC “Fast Money” program, airs Monday through Thursday for one-hour nightly, often features Dennis Gartman as a guest commentator.  He’s intelligent, a ‘fun’ guest who always responds to the question “Good to see you, Dennis” with “Always good to be seen!”  Fast Money often refers to Dennis as “The commodity king” for his opinions on all things so related, from coal to cotton to platinum.  I perk up every time Dennis appears as a guest, because usually the subject of the price trend in gold will be discussed.  Dennis always appears as a kindly and gentlemanly person, and is one of the favorite Guests and some-times Panelist on “Fast” (as they often refer to their show).  After all, “Fast Money” first-and-foremost, is a SHOW!

 But here’s what I learned long ago about Dennis through my personal experience, and now it is revealed in a graph: Dennis is more likely to serve as a good contrarian indicator!  I wasn’t aware that there was a fund that would prove that point until Peter Degraaf ran this chart and commentary today

Featured is the Horizons Gartman Fund since its inception, with the price of gold at the top. 

In my January 6, 2013 post, I said this about Dennis the Menace:

“…We also once again had to endure Dennis Gartman throwing so-called Goldbugs under the bus for the umpteen time (which if history is any indication shall once again prove to actually be a buy signal)….”

While I believe Bill Teter’s assessment is accurate,  no one has come close to being so badly wrong on gold for more than a decade (while being so arrogant) as Jon “Tokyo Rose” Nadler, Dennis Gartman is a shrewed marketer and a very good public speaker. He has masterfully played the media to a point where his actual performance takes a back seat to how well he comes across in their minds. He can and is for the most part, entertaining.

Once you appreciate this, Dennis the Menace will become little more than a fly and rather than swatting him to his death, just appreciate that he’s a goldbug who can’t bring himself to “come out of the closet” as in his mind it would throw a monkey wrench into the superb (and masterfully developed) propaganda machine he knows the media has bought into when it comes to his actual gold forecasting record among his overall performance. Have pity as down deep he knows GATA is right but he also knows supporting GATA’s argument would cast him as a kook, conspiracy nut, and tin-foil hat wearer. His ego and his business couldn’t afford such a label.

Me?

Space helmets on Captain Video!

This analysis is excerpted from part of yesterday’s subscriber update in which we presented our outlook for Gold, Silver and GDX/HUI. When making forecasts and writing outlooks, analysts must look at a multitude of things. We usually begin by examining the macro landscape via intermarket analysis. How are the various markets trending? Which are lagging? Where are the divergences? As we begin 2013, there has been an important shift in regards to precious metals that few analysts have picked up on. The rest of our analysis filters down from this discovery.

We are speaking of the decoupling that has taken place between the equity market and the precious metals complex. This is significant because it began nearly 17 months ago. (Decouplings of three or six months are not significant). Since the Euro crisis in summer 2011, the equity market has rallied nearly 30% and reached a five-year high. During the Euro crisis both Gold and gold shares were trading at all-time highs. GPX, an index of precious metals prices, was at an all time high. Since that time, the gold stocks are down by more than 30%. This is what a decoupling looks like. It’s not obvious over short periods but over long periods of time.

This decoupling means that precious metals cannot begin an impulsive sustained bull move if the equity market continues to move higher. The equity market has to struggle with resistance and begin a mild cyclical bear move. While over the near-term precious metals can confirm a higher low, the 2013 success of the sector depends on the struggles of conventional stocks. What would make stocks struggle?

That is where the fundamentals come into play. At present, capital is moving out of bonds and into stocks. The consensus conventional view for 2013 is one of continued growth with a chance of increase but no threat of inflation. Yet, if interest rates rise the debt burden would increase dramatically due to the current huge debt load but low cost of service. If the cost of servicing $15 Trillion in debt is 2%, then a rise to 3% equates to an extra $150 Billion in interest expense. In other words, interest rates cannot be allowed to rise materially. At somepoint rising interest rates would become bullish for precious metals and bearish for the stock market. Moreover, if interest rates cannot effectively be managed downward, then that would be even more bullish for precious metals and bearish for conventional assets like bonds and stocks.

Its important to note that both the economy and the equity market have little margin for error. The economy has picked up statistically in recent quarters and is getting some help from emerging markets. Yet, it is only churning along (like a camel in the desert) due to massive deficits and continuous debt monetization. At the same time, the equity market (S&P 500) is now at a five-year high and very close to massive resistance. In any event, it is very clear that the decoupling will continue. You must decide if and when the markets will shift.

Turning to the technical outlook, we find Gold well entrenched in a consolidation. While momentum is turning higher, Gold is unlikely to breakout anytime soon due to the strong resistance at $1750-$1800. If Gold is able to firm up here and now then it has a good shot to rally back to $1750-$1800 over the next few months. If we get the bullish scenario and a fundamental catalyst shift then expect Gold to break past $1800 in Q3. That would mean that Gold consolidated for two years which would be its longest consolidation on record. The longer the consolidation, the more explosive the breakout. A breakout in the second half of 2013 (with momentum already rising) would bode extremely well for 2014.

Silver is in a much larger and slower consolidation. It will take longer to evolve but eventually build stronger momentum than Gold. The initial upside target is obviously $35. Assuming Gold breaks past $1800-$1900 then Silver should break past $35 and at least test $44, the August 2011 high. It is very encouraging to see the silver stocks outperforming Silver (bottom row).

Turning to the shares, we love the clarity from the monthly candle chart. It details just how important the key levels are. Note the strength of support at $40. In addition, we see that while the market has been weak, it has failed to close below $45 in each of the past three months. If GDX is able to close at or above $46 this month then we believe the secondary bottom is in. In that case, look for GDX to test $52 (extremely important pivot point). As we’ve written in recent updates, the $52-$55 area for GDX stands between the current market and an impulsive advance that could last a few years.