Gold Prices: Timing The Next Bottom

This article is a follow-up to my Gold Forecast: The Next Great Buying Opportunity  posted a little over a month ago. At that time, we noted how gold and silver prices had diverged as the miners made new marginal highs. There were also discrete signs of distribution when miners were forming the Mid-August top. A sell signal was published in our August 12th portfolio update, while GDX was trading at $30.37.

Prices have corrected since then but are yet to reach our targets or truly oversold territory. The slower than expected decline is likely to push our timeframe out past September. Nevertheless, prices will likely drop further and this low, whenever it arrives, will be a superb opportunity. Once the bottom comes, prices will start the second leg of the bull market waving goodbye to the $1,200 price region for a very long time.

Negative Interest Rates

Anyone that follows my work understands the importance of the 8-year cycle in gold. Approximately every eight years, precious metal prices descend into a vital low. Like clockwork, this inflection point has arrived shortly before or just after a US Presidential election. This cycle bottomed a full year early and admittedly caught me by surprise. Marking the shortest 8-year period on record.

What caused the cycle to terminate early? Negative Interest Rates! In late January the Bank of Japan announced it was adopting a negative interest rate policy. Their strategy placed a rate of -0.1% on excess reserves that financial institutions place at the bank. The goal was to stimulate investing and spending throughout the economy. The result was a run on personal safes as many consumers hoarded cash and bought precious metals instead.

The Case For Gold

The arguments against owning physical gold have been washed away with real negative interest rates. One key argument was that owners of gold do not get paid any interest. Well, earning no interest is better than paying someone to hold your money as it loses purchasing power.

As the world grows increasingly frustrated with the corrupt establishment, demand for precious metals will soar. Gold is best known as a hedge against inflation. However, I believe it’s better described as a hedge against government incompetence. Investors will flock to gold during a widespread crisis in confidence.

The Big Picture

As a technician, I can’t seem to write an exclusive without including a couple of charts. Since we often get entangled in the day-to-day movements, I’d like to present a long-term chart of gold. Below you will see the 8-year cycles in gold clearly defined. Historically the best time to invest has been at the dawning of a new 8-year cycle. Our analysis suggests we are in a similar setup to the 1976 and 2001 cycle bottoms. Gold prices are projected to reach $7,500+ in the coming years.

The long-term silver chart shows a distinct cup and handle pattern dating back to the 1980 peak. The recent 8-year cycle bottomed at $13.62 in the fourth quarter of 2015. Prices are expected to claw their way back to the $50.00 resistance level and eventually breakout. Once above $50.00 the sky is the limit. The traditional pattern measures a target of $300+ for silver with the potential of reaching $500. I expect the Gold/Silver ratio to approach 20 or less.

Strategy

We think having a core position in physical metals is paramount. Anything traded electronically or having third party risk can fail. A cyber-attack, bank holiday or terrorist attack could cripple strategic infrastructure halting trading indefinitely. Therefore, we support holding the majority of your precious metals investments in the physical form. Keep your core position until prices reach obscene levels.

Trading a portion of your portfolio is ok, but be careful not to overleverage. Betting big is tempting but as volatility increases so will the losses on overleveraged accounts. We expect to see $100+ swings in gold and $5.00 swings in silver. Poor timing of an entry could wipe out an account in record time.

Parting Note

Whether you invest now or at lower prices, you should surely make money. The worldwide financial crisis is entering the final act. Currencies and Countries will default. Pensions and entitlements must be restructured. Those unprepared will be caught off-guard. Those that have done their homework and stand ready will prosper. You reading this infers the latter. 

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