It’s been a great start to the year for gold - and its fellow precious metals - so far.
In fact, I’m beginning to wonder if my target of a high in gold of $1150 an ounce this year was a little conservative. Perhaps I’m feeling too exuberant and that’s a warning signal, but there are certain signs that suggest an intermediate-term top is coming - I’ll tell you what they are in a moment - and I don’t see many of them.
In fact, if the Federal Reserve cuts interest rates later today by half a point, we might even see my target before the end of February…
Why gold looks set to keep rising
So what are some of the signs that can warn that the gold price is heading for a top?
1. The gold-silver ratio will often close considerably, but it has been mired (or ‘consolidating’ as people on the wrong side of the trade like to call it), for ten months now between 57 and 54. Anything below 45 would be a warning sign – and we are a long way from that (see below).
The reason a spike down in the gold-silver ratio is a sign of an imminent top is that silver tends to makes its move later in the run and quicker. So when silver soars, it’s a sign that a top is not too far away. Silver has been doing well, certainly, but it is still lagging gold.
2. Another sign of a top would be a period of significant outperformance of gold by the HUI (the index of gold miners). We have not seen that yet (see below).
3. Another signal would be some irrational overvaluations of the juniors. We are not getting that. In fact, we seeing irrational undervaluations and the Canadian juniors have dramatically lagged gold. I’d like to see that average get above 4.25 (see the chart below).
4. There is still a lot of caution among traders I talk to. Even goldbugs are still dubious. If a top were imminent, we would see more recklessness on their part with a corresponding parabolic rise in gold. The gold upmove has been more than steady, but I would not yet describe it as parabolic, like it was in April and May 2006, for example.
What will the Fed do?
Of course, if the Fed doesn’t cut rates tonight, gold will fall. But what will it do?
Well, we all know that they should in fact be raising rates, protecting their currency, rewarding savers and not bailing out those who have made bad investments just because they are large institutional banks.
However, that is not their agenda. The market wants a cut. It is demanding a cut. And the Fed has been giving it what it wants, because they are terrified it will crash, so even when it just ticks down a few percent they panic.
Sure Ben Bernanke might think to himself, “We gave them three quarters of a point last week and they didn’t even say thank you. If we cut any more we won’t leave ourselves anywhere to go. We don’t want to be seen to be pandering. So, no, we’re not going to cut rates.”
But the boys on Wall Street want another cut - and if they don’t get one, they will scream ‘Sell’. And that’s what scares the Fed - particularly in an election year.
Of course, they can just give in and throw the market another few rate cuts. But by the time election is over there will be no more cuts or debt expansion-potential left. Then, just like in 1929 when Herbert Hoover took over, we will have a new president… and a stock market crash.
Not many people know this, but Herbert Hoover was a mining engineer, which brings us nicely to our next subject.
Why have the junior miners performed so badly?
It’s possible they will soon turn. The chart below suggests we found a bottom last Monday when all hell broke loose. It has touched a long-term moving average and a long-term lower trendline and bounced off them. It has also done a nice ‘quadruple bottom’ suggesting there are no more sellers, only buyers at these prices.
I would like to see these lows hold. If they do, we should get a nice move up from here.
Last Monday, we had a huge January sale in the juniors. Were people queuing to buy them? They should have been
source-Money Morning