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Wednesday, April 3, 2013

Gold Needs To Breathe, Too

Stewart Thomson
  2 April 2013

All financial eyes should be focused on the BOJ (Bank of Japan) right now.  Money managers are calling this week’s BOJ meeting, the most important one in many years.

It’s likely to be a key factor in determining the next big move for the price of gold.

Key market players expect Governor Kuroda to imitate Ben Bernanke’s actions, and begin buying longer maturity bonds, and more of them, with electronically printed yen.

If Kuroda disappoints the market, the yen could rally, and the Nikkei could tumble.  If the yen rallied against the dollar, gold might rally too, simply because it trades mainly in dollars.

On the other hand, if the market believes Kuroda’s actions are a great first step in reversing Japanese deflation, gold could also rally.  In the big picture, Kuroda seems to be creating a “win win” situation for gold.

The man formerly known as “Mr. Yen”,   Eisuke Sakakibara, former vice finance minister of Japan, thinks Kuroda will fail to reverse deflation. 
I don’t believe Kuroda will fail, but I believe most money managers are drastically underestimating the amount of money printing that is needed to get the job done.

Kuroda has said he will do “whatever it takes” to get the Japanese inflation rate up to 2%.  Cost push inflation (CPI) will likely be the horrific consequence of doing “whatever it takes”.

Japan is the 3rd largest economy in the world, far larger than Germany, which is number 4.  CPI could devastate Japanese savers.  Worse, because Japan is such a large economy, CPI could spread around the world, and I think it will.

The only good news about CPI is that it could push the gold price well above $2000, and push your gold stocks to new highs.   Right now, I don’t think you need any more good news than that!

Until CPI becomes a dominant theme in the eyes of professional money managers, a rising T-bond price will continue to be bullish for gold. Quantitative easing, and the resulting expansion of the Fed’s balance sheet, is the main driver of gold market liquidity flows.

You are looking at the daily chart of the T-bond.  The good news, for gold market investors, is that there is an upside breakout attempt in play, today.  Note the key HSR (horizontal support & resistance) in the 145 area.

Having said that, please note the position of my “stokeillator” (14,7,7 Stochastics series), at the bottom of the chart.  The red lead line has risen to about 90.  A crossover sell signal seems imminent, but I’m hoping that any sell-off creates the right shoulder of a bullish double-headed inverse h&s pattern. It’s very common, technically speaking, for the price of an asset to rise a bit above a key HSR line, before overbought oscillators “work” to pull it back down, and that may be the case here with the T-bond.

The technical set-up of this bond chart is similar to that of gold.  That’s the daily gold chart, and you can see that a crossover sell signal for my stokeillator is clearly in play.

It’s difficult for gold to rally strongly, when technical oscillators are overbought and flashing sell signals.  A light sell-off now, or a sideways “drift”, could be just what is needed to begin a much larger rally of $200-$300 an ounce.  I think that is exactly what is in the cards now, for gold.

Note the important HSR at about $1620.  If the T-bond can surge above 145, gold should burst above $1620. 

That’s the hourly gold chart.  Note the rough rectangular pattern, defined by the two black trend lines.  The target is about $1575. 

Oscillators are like the tides of the ocean, or a person’s breathing pattern.  Fighting the natural tendency of gold to rise and fall in a small way, as oscillators move up and down, is not a good idea.

The situation in the Korean peninsula is potentially a big driver of higher gold prices, but that too, seems to be in sync with my stokeillator; tensions are building, but North Korea has not physically moved any significant number of troops, and that’s needed to raise the tension level.  A major rise in tensions seems imminent, but it’s not quite here yet.

Gold stocks may need a little more “rest time”, too.  You are viewing the BMO Junior Golds Index ETF daily chart.  Note the “waterfall” action of the technical indicators. 

That’s not a giant sell signal.  It’s simply the cycle of “gold stocks life”. 

While you wait for cost push inflation to become a dominant theme in markets around the world, gold stocks will rise and fall in a small way, like the tide comes in and goes out.  A tidal wave of price is coming, but investors need to wait for it, with patience. 

GDXJ has a similar look to the BMO ETF.  This is the daily chart. Volume declined during the recent rally, and now most technical indicators are rolling over, suggesting a little weakness is possible.  Oscillators don’t create tidal waves, though.  Fundamentals do.  The fundamentals will create a tidal wave for gold, and these technical oscillators & indicators are telling you that the price of gold needs to breathe, in and out, like a person does.  Let the gold price breathe naturally, and you’ll find the price action much less stressful!


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