Gold, Silver, HUI: Rallies are Starting

Peter Degraaf
Posted Jul 15, 2009

A few weeks ago I drew your attention to the 'golden cross-overs' that have been showing up in so many charts. These cross-overs (where the 50DMA moves into positive alignment with the 200DMA), are still intact, and continue to progress.

By way of review, here is the cross-over for the GLD gold ETF.

The cross-over occurred in February and turned bullish in May (green oval). The RSI and MACD are at support levels. A breakout at the blue arrow turns the trend bullish.

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Featured is the daily gold chart. Price is rising in a positive ARAT formation, featuring higher lows (green arrows). The golden cross-over (blue arrow) is rising. The supporting indicators are at support levels (green lines). The Gold Direction Indicator rose to 50% on Monday, up from 33% on Friday. The stage is set for the next attempt at the resistance marked by the purple arrow. Historically, based on 35 years of data, gold almost always puts in a major bottom in early July, and then zigzags upward for the next 6-7 months. Interestingly, the 36 week gold cycle (developed by Fred Starkey), which last bottomed in November of 2008 was due to bottom on July 13th!

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Featured is the HUI index of gold and silver stocks. Price produced an 'outside upside reversal' on Monday (green arrow). This occurs when price first drops below the range of the previous day, and then closes above the high in the range of the previous day. It is usually a reliable indicator that the trend is changing. The supporting indicators are at support zones (green lines). The cross-over took place in April and the 200DMA is preparing to follow the 50DMA in its upward trajectory. The 6 week HUI cycle was due to bottom on June 30th. It arrived on July 13th. The next cycle bottom is due August 11th.

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Featured is the daily silver chart. Price produced an 'upside reversal' yesterday. This occurs when price first falls to a new low in the cycle and then closed above the closing price of the previous day. In this case price closed at the top of the daily range which makes it even more positive. The RSI is ready to rise up from the '30' support level. The cross-over is well established (green arrow), and the 200DMA is ready to follow the 50DMA in its rising trajectory. A breakout at the blue arrow will turn the trend bullish again. Historically, and based on 35 years of data, silver usually puts in a bottom in late June, a temporary top in late July or early August followed by another (slightly higher) bottom in August before embarking on its annual Christmas rally.

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The gold to silver ratio has recently risen to 71:1 and since this is well above the historic ratio of 16:1 it makes silver an excellent investment choice at this time.

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Featured is the CPI chart maintained by economist John Williams at Shadowstats.com. His research shows that although price inflation has abated since mid 2008 due to the credit crisis, it is still high at +6%. (Official government statistics show price inflation at -1%, - a number of studies have shown the government statistics to be inaccurate).

Obviously price inflation is different for each individual and varies in different parts of the country. The point we wish to make here is that historically whenever price inflation exceeds short-term interest rates (the so-called 'real rate of interest'), gold usually rises.

Using the Shadowstats numbers, the 'real rate of interest' is 4% (CPI less T-bill rate).

As long as this rate remains positive, gold can be expected to rise in price, albeit it with 'bumps' along the way.

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Summary:

The trillions of dollars that are being pumped into the system by the various central banks are slowly trickling into the world's economies. While the bulk of the injections are still locked up in bank vaults, small amounts are already entering into every day commercial transactions. This includes cash infusions into the Chinese economy.

There is usually a lag between the time new money is 'created' until it begins to enter the system, and then more time passes before producers begin to realize that the money supply has been 'watered down.'

This lag can be as long as 1-2 years. The fact that almost everyone today is aware of the money creation', means that we can expect this time lag to be shorter than usual as people begin to expect the price inflation that always follows the 'currency degradation.'

Currencies have been inflated by dozens of countries in the past, but never before have so many countries resorted to this level of 'currency destruction' all at the same time!

Since the annual gold supply barely rises by about 1.5% per year, it is only natural that gold is benefiting from this currency inflation and will continue to benefit.

I am often asked if the manipulation that is ongoing in the gold and silver sector (2 or 3 US bullion banks not involved in producing gold or silver, are 'short' billions of dollars worth of precious metals), will have the effect of depressing prices forever.

The lower gold and silver prices are forced via manipulation, the higher prices will rise at some future point. Higher then would otherwise have been the case.

When the price of a given commodity rises, it increases incentive to produce and it decreases the incentive to consume.

The longer price is artificially depressed, the more pressure builds up, due to a lack of increased production and due to a lack of constraint on consumption.

-Peter Degraaf

Peter Degraaf is an online stock trader with over 50 years of investing experience. He issues a Weekend Report for his many subscribers. For a sample copy, or a 60 day free trial, send him an email: itiswell@cogeco.net or visit his website www.pdegraaf.com.

DISCLAIMER: Please do your own due diligence. I am NOT responsible for your trading decisions. -Peter Degraaf

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