Here is Fitzpatrick’s outstanding gold and silver commentary along with 10 extraordinary charts:  “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 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)....

Continue reading the Tom Fitzpatrick piece below...


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“We have been of the view that Gold still retains value as a “hard” currency.  In an environment where currency depreciation, though not explicitly stated, continues to be viewed as a positive by Central Bankers and politicians, we prefer to own Gold to any fiat currencies.  KWN note:  (The Gold and US debt projection chart below was described by Fitzpatrick as “The Stairway to Hell.”

Continuing with the overlay of Gold and the US Debt Limit, we assume that the relationship between the two will continue to hold going forward.  While there is no guarantee of where the US Debt Limit will be in a few years, a lot of “considered opinion” suggests it will be closer to $22 trillion. 

At this level, Gold would be around $3,500. The below charts further support this price target...

When Gold rallied in 1970-1980 it went from $35 to $850 (It multiplied over 24 times).

However, in looking at our long-term target for Gold and comparing it to this 1970’s period, we truncated our expectations (A 24 fold rally from the 1999-2001 lows of just over $250 would suggest over $6,000 for Gold).  Why did we reduce our expectations?  While the reasons for Gold going up are (in our view) as strong if not stronger than that period (hard currency), the final move in that trend was “event driven.” 

On December 27, 1979 the Soviet Union invaded Afghanistan and the Gold price surged from the pre-Christmas level of $473 to a peak of $850 by January 21, 1980.  If you exclude that move, then Gold had multiplied by a factor of about 13.5 from the start of the uptrend at $35 in 1970.  A 13.5 fold multiplying of Gold from the $254 low in 2001 gives us a price around $3,430 -- (Very similar to what we would see if Gold first went to $1,260 in a move like 2008 and then saw a move like 2008-2011). 

As previously mentioned, within this bull market Gold had a severe correction in 1974-1976 as the Equity market recovered back towards the 1973-1974 pre-crash peak.  (This time we have managed to overcome the 2007 peak but it has taken twice as long and has needed zero interest rates, multiple QE’s and $trillion deficits.  Is that a better or worse performance than the 1970’s ????) 

Ultimately, one of the catalysts that led to the acceleration in the move higher in Gold was when the Equity market rally of 1974-1976 peaked and corrected lower by more than 20% over about 18 months.  Our expectation of an Equity correction of greater than 20% starting later this year may once again prove to be the necessary catalyst to send Gold soaring once again. 

Until then, there are some important levels worth watching on Gold which could further point to this correction being over... 

The first thing we would want to see to suggest the recent downward trend is over would be a break (weekly close) above resistance around $1321-$1338, where the downward channel top converges with the 55-day moving average and the April and May lows.  It is worth noting that the 55-month moving average (referred to in the first chart on page 1) is currently at $1380, and a close through there on a monthly basis would further be bullish. 

Should we see such a break, the 55-to-200-day moving average gap dynamic, which is very stretched, would suggest a move back towards the 200-day moving average, (which is) currently around $1550.  This moving average is slowly converging with important resistance (previously support) levels around $1522-$1532 which held well in 2011 and 2012 -- (This was also the level which, once broken in April, opened the way to the recent lows during the same week that the S&P overcame the 2007 peak)). 

A break through those levels, if we see them, would be in our view the final nail in the coffin to the deep correction in Gold and would suggest we have resumed the multi-year upward trend towards $3400-$3500. 

In addition to Gold in USD terms, some other Gold-related opportunities are appealing (see Gold priced in yen chart below).

Gold in JPY terms has bounced off of the 200-week moving average and is moving higher after overshooting the upward channel bottom.  Weekly momentum has turned higher from very stretched levels.  We continue to expect USDJPY to move higher on a medium and long-term basis so it would make sense for Gold in JPY terms to outperform Gold in USD.

The Gold Miners are also turning higher...

The Arca Gold Miners Index is approaching the gap from April (866-891) as it grinds higher.  There is a positive
momentum divergence, further suggesting the move lower has run out of steam. 

Resistance is at 1081-1117, where the 2012 lows converge with the 55-week moving average.  Through there resistance is around 1346-1367, the converging 2011 low, June 2012 high, and 200-week moving average. 

The Gold Junior Miners Index appears to be turning higher after it posted a bullish key week two weeks ago.  Weekly momentum has also turned higher from low levels.  There is resistance at 1142, the May high, and a break through there would further confirm a move higher is likely. 

Beyond there, good resistance comes in around 1472-1550, where the 2012 low and downward sloping channel top converge with the 55-day moving average.  A close through there, if seen, suggests a move towards 2150-2200, the converging 200-week moving average and September 2012 high. 

As much as we like Gold, though, there is another precious metal which may actually do better (Silver)...

As seen in the Gold/Silver ratio, over the last decade Gold has outperformed Silver when precious metals are being sold off.  Silver is actually the better performer when the metals are rallying.  This leads us to prefer Silver going forward should the precious metals in fact be turning higher. 

The Gold – Silver ratio already appears to be turning lower off of the 76.4% retracement of the 2008-2011 decline (log chart).  There is negative momentum divergence (not triple yet but could still be seen) developing as well, further suggesting a move lower. 

Like Gold, Silver is testing resistance around the top of the recent downward channel at $20.35.  Beyond there is immediate resistance at the 55-day moving average (currently $21.10).  A break through those levels would be the first indication the recent Silver bounce can continue. 

The stretched 55-to-200 day moving average gap dynamic suggests the break through the 55-day moving average would open the way towards the 200-day moving average around $27, which is slowly converging with resistance around $26, the lows from 2011 and 2012.  A break through these levels would be the final confirmation that Silver’s long-term rally has resumed.

For the time being, we are carefully watching the near-term resistance levels on Gold ($1321-$1338) and Silver ($20-$21), and until we see a decisive closes through them, prudence requires us to be cautious.  However, it certainly appears to us that the precious metals are building a base off of which the next rally higher will begin and we continue to expect Gold to move towards $3400-$3500 by 2016 (and Silver should do even better on a percent change basis).”

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