The Roadmap From A Gold Bottom To A Mania

On the heels of historic movements in key global markets, today 40-year veteran, Robert Fitzwilson, put together another tremendous piece. Fitzwilson, who is founder of The Portola Group, laid out the roadmap from a gold bottom to a coming mania. Below is Fitzwilson’s outstanding and exclusive piece for KWN.

Fitzwilson: On June 27th, in a note to clients and friends of the firm, we suggested that the panic in the metals and mining sectors was so extreme that it had to be a bottom by everything we have experienced and studied in our careers. The chart below suggests that our call was correct, at least based upon what has ensued so far.

The top line is the Amex “Gold Bug’s Index” (HUI) which represents a basket of gold mining companies. The bottom two are for the S&P 500 and gold. The returns in the chart are for the period since our call to the close of trading last week. As you can see the Index nearly tripled the return of gold itself….

“It is also interesting that the Index nearly tripled the return of the S&P 500 Index in that same period. Hardly a trading session goes by without the headline being “The S&P 500 and the Dow Jones Indexes hit new highs”. The reality is that the bulk of the stock market strength that had been so loudly touted occurred during the first quarter of this year.


Financial Meltdown, Back-To-Back “Stick Saves” & Gold

On the heels of more turbulence in key global markets, today 40-year veteran, Robert Fitzwilson, put together another extraordinary piece. Fitzwilson, who is founder of The Portola Group, discussed financial meltdown, back-to-back “stick saves,” and what this all means for battered traders and investors in the gold market. Below is Fitzwilson’s outstanding and exclusive piece for KWN.

Fitzwilson: “There is a term in ice hockey called a stick save. Instead of using the curved end of the hockey stick, the player uses the handle end to move the puck. It has been described as having no points for style, and often fails, but sometimes saves the day for the player and his or her team.

Below is a chart of the Dow Jones Industrial Average from 1970 to the present. You can clearly see two stick saves early last decade and the second during the 2008 meltdown.

The first stick save was engineered largely by the policy of driving rates to zero. While it saved the stock market and thrust the real estate markets to new heights, it sowed the seeds for the horrendous crash in 2008….

“A larger stick save was required in the 2008 debacle, requiring the completion of the zero interest rate objective as well as the creation of massive amounts of money on a global and historic scale.

It is no wonder that many people are terrified of equities when one looks at this chart. The volatility has been incredible. You can barely see the Crash of 1987 on the chart, although that was a stomach churning decline on the order of 23%.

The chart below is for gold during the same period.

While the Dow Jones has increased by roughly 14 times since 1980, the price of gold has merely doubled from the peak. Despite that disparity, most people look favorably at the chart for stocks, and are adamant that gold is overvalued.

For stocks, valuation metrics are used such as price-to-earnings ratios. For gold, there is no attempt to relate the price to the forces that drives the metal’s price. What drives gold is the excessive, massive creation of fiat currency. Since 1980, the amount of debt-based money has exploded. If that simple valuation metric of comparing the price of gold to the amount of money is applied, gold is drastically undervalued.


Gold and Silver

Update 17th of June 2013

Gold Weekly Chart

Gold Daily Chart

Dow Jones/Gold ratio Weekly Chart

Arguments for lower prices:

  • Still valid MACD sell signal for Gold on the monthly chart.
  • Gold still in well defined downtrend.
  • If Gold moves below US$1,340.00 we should see a test of US1,320.00 followed by a break of the multi-year uptrend. Already hourly close below US$1,359.00 would be critical.
  • Investors still moving out of Gold ETFs. The SPDR Gold Shares Fund (GLD) is now holding only 1,003.53 tons of Gold .350 tons of Gold have been sold since beginning of this year.
  • During Fed Meetings Gold tends to be very weak.The next FOMC Fed Meeting will be held this week during June 18th & 19th. The rate announcement will be on wednesday 19th of June.
  • India increases tax on Gold imports again. This could cut down indian gold demand by up to 75%.
  • Although gold and silver performed contra-cyclical in recent months (when compared to stocks), the correction in equities could push down precious metals as well (risk off…).

Arguments for higher prices:

  • Gold seems to be working on some kind of double bottom. Confidence in a new rally is still very small therefore every attempt to rally is quickly being sold. But despite the recent sell off one week ago, gold is holding well above US$1,375.00 so far. As well US$1,340.00 has not been violated. Gold is producing first series of higher lows and higher highs…..
  • Bollinger Bands are tightening. Current range is US$1.361,87 to US$1,416.31. A big move is brewing.
  • Weekly SAR indicator gives a buy signal with a weekly close at US$1,423.00. This would be first buy signal since october 2012 !!
  • Potential W-formation shaping in gold. Confirmed if gold closes above US$1,480.00.
  • On the daily chart for the Dow Jones/Gold ratio the indicators MACD & RSI are not confirming latest new high at 11.30 points. Negative divergence points to a trend change!!!! Between mid of november 2012 and mid of may 2013 the Dow Jones Index outperformed Gold and the ratio went from 7.286 up to 11.297 points. The RSI indicator on the weekly chart for this ratio has never been more overbought since mid of 1999 !!!!
  • Strong positive divergences (RSI & MACD) in HUI Gold mining-Index increases chances that the bottom indeed is in place. Short-term we are seeing some weakness but after current minor correction the index should soar.
  • The latest Commitment of Trade (CoT) reports have improved again (especially for silver). According to sentimenttrader every time speculators were holding a combined position below 75,000 contracts Gold was on average 22.2% higher a year later. Personally I haven’t seen a more bullish setup anytime in the last 10 years. Sentiment continues to be at oversold extremes (Gold Public Opinion & Hulbert Gold still at multiyear lows).
  • If gold & silver should continue to move contra cyclical towards stock-markets, a recovery is in the cards as the stock-markets are starting to correct.
  • Germany changes VAT for silver coins. From 1st of January 2014 germans will have to pay 19% VAT on all silver coins. The new tax rate applies to silver bullion coins such as Chinese Panda, Australian Kookaburra, the austrian Silver Philharmonic and as well on silver collector coins. It could lead to a spike in silver coin demand in Germany until end of the year.