Let me start by saying I think it’s hard for anyone to call a bottom. Many experts do, and often they do so with the guidance of charts, fundamental analysis and other informed speculation. I am no expert, but I do think we’re finally seeing a turn in the precious metals markets based on two critical factors.
The US dollar and gold have rallied together as of late. This doesn’t often happen, especially at multi-year highs in the dollar. But it has for the past couple of days. And during very large US dollar rallies. As you can see in the chart below, for the past six months when the US dollar rallied, gold and silver were sold.
This is a convincing indication that the precious metals markets are looking beyond the myopic view of the US dollar index (which really only measures the Euro and Yen weakness/strength vs. the US dollar) and seeing that rising risks demand a safe haven. It may also indicate that the US dollar rally is beginning to lose its luster.
We also saw that the tax loss selling last year did not push gold and silver to new lows, or break down the miners further. This is a very powerful indication that sentiment bottomed out in the October/November bloodbath that was likely a capitulative event.
I am not ready to say that we are turning right now, but I do think that there is a good chance of it. In essence, if the precious metals markets can look beyond the dollar, or better yet, the dollar can begin to give back its rally from late 2014, we will be in for a year of renewed strength in precious metals, and their miners.
The US dollar trade is as crowded as a trade can get and so many are short Euros and Yen that any unexpected surprises will roil the forex markets. But gold and silver are telling us that doesn’t matter. That they can look beyond forex and see that the risks are strong enough to warrant a significant bid (and most likely short covering — we’ll see the COT tomorrow).
From a technical standpoint I’d like to see gold trade above $1,260.00 on a sustained rally (closing the week on Friday above that level would be critical). Ideally this price action would occur by the close of the second week of January, 2015. After that I believe we’ll see some short covering and less aggressive posturing from the sellers counting on another waterfall capitulation in prices.
If gold can make its way back to $1,400 by the end of the first quarter of 2015, then I do believe we’ll see the momentum chasers come back to the table and start driving prices higher through leveraged speculation. This may also renew the appetite from Asian buyers for physical bullion as the low prices have turned from a positive to a perceived negative as of late.