With gold and silver consolidating recent gains, today James Turk told King World News that there are two possibilities that explain the rise in the price of gold. This is a fascinating read because both explanations may be true.
James Turk: “There is a very interesting development taking place over recent weeks in the gold market, Eric. There is a clear but subtle indication of underlying strength, which of course is very bullish news…
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James Turk continues: “Signs of underlying, fundamental strength mean that the demand for gold remains strong, which is exactly what we want to see. When the demand is continuous and strong as the gold price rises, it bodes well for the future of the gold price. And that is exactly what is happening.
It is normal for a any market to go through a correction after a steep rise in price, like the one gold had early this year. From its $1,046 low in December to its $1,263 peak on February 11th, gold jumped $207, or 19.8%. After a steep rise like that, a correction would be expected, and in fact, gold did initially settle back. But rather than a 50% retracement of the $207 advance, gold only fell about 6%.
Gold then started climbing yet again, making a new high in early March at $1,284. A small pullback occurred, followed yet again by a rally to another new high at $1,303 in early May. Gold then fell back over the past couple of weeks in a correction of that last rally.
But what we need to do, Eric, is to look at these short-term rallies and corrections within a longer time frame. To do this, I have prepared the following chart. It clearly illustrates the key point that I would like to make for KWN readers (see multi-month gold chart below).
Gold has been in a correction since early February, but it is not a normal one. Look at the rising trend channel on the above chart. The gold price has not fallen back to retrace that $207 advance at the beginning of the year. Instead we are seeing a rising correction, which is rare.
In a rising correction, investors who did not purchase gold before the rally started are looking for entry points. Rather than waiting for a price decline, they are buying gold even on small setbacks in price. They don’t have the patience to wait for a pullback. They are more concerned about the train leaving the station without them, which means one of two things.
Short Squeeze In Gold?
It could be that shorts are getting squeezed, and they are buying every price setback to minimize their loss and protect their capital. I think this is a very plausible explanation to cause gold to enter a rare rising correction. But there is another possible explanation, and it has ominous overtones.
Investors see gold as a must-have asset because of its safe haven attributes. Therefore, they are buying gold for safety because they sense a financial storm is coming. It is not too hard to see why they may think this when surveying the financial environment.
The US stock market has been looking toppy for months and has not made a new 12-month high for the first time since the major indices began to rise after the 2008 financial collapse. And bonds are overvalued by any measure.
Negative interest rates are eating away at the capital of any investor foolish enough to accept that bizarre feature by paying a government to take their money. And perhaps most worrying of all, prices of important commodities are climbing. Crude oil for example has risen from the high $20s to high $40s, suggesting inflation is coming back.
Billionaires Buying Gold – Look For Higher Prices
Any of these reasons could explain why notable hedge fund managers like Druckenmiller, Singer and Soros among others have been reporting big increases in their holdings of gold.
So to sum up, Eric, we need to listen to what gold is telling us. And right now it is saying that we should expect more of the same, namely, higher gold prices.”
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