Eric King:  “Tom, the Cyprus disaster has so many people frightened, your thoughts there?”

Fitzpatrick: “I think at the end of the day some people focused on the size rather than the substance.  At the early stages of last week, the European authorities were quite prepared to haircut insured depositors.  While they may have pulled that idea back in, to a certain extent the cat is out of the bag....

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“What it told us, and what we should have known all along, is that the rules of the game are constantly changing here.  And when you are in a shaky financial market environment, everything is about confidence.  One of the things people must have confidence in is not necessarily that people don’t make mistakes, but that what you are told is actually the truth.  I think it’s increasingly difficult to believe that when it comes to this European situation.

So our sense here, both in the way we look at things in terms of cross-markets and also in terms of developments, is that this may be a more the important game-changer than people are giving it credit for.  A lot of the game-changers of years gone by, people look back and say, ‘We should have realized at the time that was a very important event.’  Our suspicion is that over time this will be seen as one of those events.”

Eric King:  “What do you see going forward, Tom, as a result of all of this chaos?”

Fitzpatrick: “We are already seeing a couple of knee-jerk reactions.  One is the euro has been coming under pressure.  We had expected that the euro would be under pressure and move lower anyway throughout the course of the year.  The weakness in the euro and a bullish new yearly high on the dollar just solidifies that view.

So, our bias has been and remains that we could still see the euro tumble against the dollar all the way down to the 1.15 area.  Given what we have seen in the recent week, that shouldn’t be a difficult things to see.  We are also seeing it show up in interest markets. 

Once again, German 2-Year yields have gone to negative yields.  This indicates people are more concerned about the return of capital, rather than the return on capital.  So they move into bonds where they feel there is a high likelihood of getting their full principal back.

We are also seeing the US dollar and bond markets gaining the appearance of a safe haven status given the dynamics we have and the backdrop.  So we are definitely beginning to see some knock-on effects at the edges.

I have to add that we believe all of these developments are unequivocally good for gold in our view.  Not only is there the ongoing question mark regarding the paper currencies as a whole against gold, but now there are the issues about the return of capital in certain instances.  You can see on the chart provided (below) that gold priced in euros has already experienced a breakout above the down-sloping trend channel.

To us, as this Cyprus fallout builds up in the coming weeks, we actually think this Cyprus crisis could be the catalyst in the background which will finally give us that key breakout we have believed and still believe is yet to come in the gold market.”

Eric King:  “What are you seeing on the charts in gold?”

Fitzpatrick: “We still believe it is a basing and consolidation pattern in gold.  The longer this base continues to build, the larger the impulsive move will be when gold actually breaks out.  Obviously at this point in time we are still waiting for the breakout (see chart below).

The first levels we are looking at in the short-term are located in the $1,620 to $1,625 area.  If we break through that zone it is the starting point which would indicate that gold may be getting ready for the big push.  Above that we are still focused on the major breakout at the $1,790 to $1,800 area.  A break above that major resistance zone would take gold well above the $2,000 area, and we still believe we will see that this year.”

Fitzpatrick had this to say regarding silver: “The downside action we have seen on silver since September and October of last year still looks corrective in nature to us.  We still expect a break above the critical $35 area on silver.  A break above $35 on silver is the equivalent of breaking $1,791 on gold.  So as silver clears that area it really opens up the way for significant gains in the price of silver.”

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Eric King

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