bottom in anything is always a danger, it certainly appears to us that Gold is
finally finding a platform off of which the next leg higher may have already
begun. The long term structural dynamics which suggest a Gold price closer to
$3500 by 2016 remain firmly in place and we do not expect them to change anytime
soon.
Before feeling that Gold has in
fact bottomed, though, we would like to see a (weekly) close through near-term
resistance around $1321-$1338, and beyond (that level) medium-term resistance
around $1522-$1532. Such closes in our view would confirm the next leg higher
in Gold has begun.
Should this in fact be the turn in
Gold, it is likely Silver will actually outperform as it has done in the
past.
We have been of the bias that the
correction in Gold this year was just that – a deep correction – rather than an
end to the long-term rally. As such, determining when the correction is
actually over is paramount as we continue to expect Gold to move towards our
long-term target of $3400-$3500 by 2016 (more on this later). While calling a
bottom in anything is always a danger, it certainly appears to us that Gold is
finally finding a platform off of which the next leg higher may have already
begun.
The recent correction actually
looks very similar to that which took place in the middle of the phenomenal Gold
rally in the 1970s. (As we have previously expressed, the current economic and
asset market backdrop that we are going through is very reminiscent of that seen
during the 1970s.):
- After a rally where Gold
increased five-fold, it saw a 44% correction over 17 months (1974-76), finally
bottoming 14% below the 55-month moving average.
- After a rally where Gold increased seven-fold, it saw a 39% correction over 23 months (2011-13), finally stopping 14% below the 55-month moving average. Will we look back at this point as the bottom?
As we think through that question,
there are two things to consider:
Is this really a deep correction rather than the end of Gold’s long term rally? – What would we need to see to suggest the correction lower is over? (On a side note, it is worth pointing out another similarity related to the Equity market for that time period:)
When Gold bottomed in August,1976,
the Dow Jones Industrial Average rallied 6% over the next 4 weeks before putting
in the multi-year high and correcting over 20% in the flowing 1 1⁄2 years.
Since Gold has hit its recent low, the Dow Jones Industrial Average has rallied
7% over the last 4 weeks and has put in a new all-time high. We will be keeping
a close eye to see if history once again repeats.
The bigger picture dynamics for a higher Gold price in the coming years has not changed (see Gold and the US debt limit chart below).
The relationship is clear. A chart
using the asset side of the balance sheet for the Fed, ECB or, more recently,
the Bank of Japan would look similar.
There is nothing to suggest that
the trend for the US Debt Limit over the next few years is anything but up. The
debt limit is currently expected to hold through September, but after that it
will need to be raised for the US Federal Government to continue to operate --
(the alternative is some fairy tale scenario where the Federal Government
reduces its annual budget deficit to zero going forward – given that it is
usually in the hundreds of billions of USD a year, and that a simple reduction
of $85 billion this year caused an uproar, it is hard to see that
happening)...."
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