Self-similarity Saves the Day for Precious Metals Investors

By: Przemyslaw Radomski, CFA | Tue, Mar 27, 2012
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Based on the March 23rd, 2012 Premium Update. Visit our archives for more gold & silver analysis.


 

Last week, we devoted the beginning of our essay on the possible move up in gold to reassure our bullish outlook on precious metals despite the fact that prices were falling then. We wrote:

It's tough being a lone voice saying that gold prices will go up when they have tumbled and the financial press is writing obituaries for the gold bull market. It's also encouraging being a lone voice saying that gold prices will go up precisely because it means that the general sentiment is very bearish and this is what we see at major bottoms.

The precious metals are on the move up and right now it seems that the bottom is in. This short-term development is in line with the long-term outlook for precious metals.

Namely, there are no indications the Fed will begin to hike rates any time soon, given the dismal U.S. housing markets. That is a bullish scenario for gold. There is a palpable threat that crude oil prices may go through the roof if an Israeli-American-Iranian conflict will disrupt the flow of oil through the Strait of Hormuz. The European sovereign debt crisis is far from over, and one of the remaining PIIGS might still fail. Portugal is seen by many as a major candidate, while Spain and Italy will have to weather through in the medium-term. And we have already lost track of how many trillions the U.S. government owes. The increasing numbers of Indians and Chinese who are entering the middle class and whose cultures value gold, will buoys up demand and, as we have indicated, there are still many uncertainties and structural problems in the world today.

Last week, Fed Chairman Bernanke defended the need for a central bank in such a world.

"The one thing people don't appreciate, I think, is that central banking is not a new development. It's been around for a very long time," he said, citing the creation of the Swedish central bank in the 17th century.

Speaking of Sweden being an early bird and a harbinger of things to come, Sweden seems to be doing away with coins and paper money. In Sweden, just 3% of the economy is powered by tangible money. Public buses don't accept cash and even churches have installed card readers to take donations. It has gone so far that even some bank branches refuse to take money, preferring to deal with electronic transfers only. The European average of cash transactions is 9%, and in the US it is 7%. The trend is clear --cash is on its way out. So go ahead and start spending all those jangling coins you have been saving in the cookie jar. The day is coming when governments will stop minting coins and printing bills, marking a paradigm shift in human economic history. It wasn't that long ago when there weren't such things as credit cards. Of course, every one of our transactions will be recorded in various databases. We continue to suggest physical gold and silver ownership (in addition to other assets and trading capital) just in case things don't develop too smoothly in the coming years.

Having written so much about gold, we'll begin the technical part with the analysis of the yellow metal. We will start with the very long-term chart (charts courtesy by http://stockcharts.com.)

very long-term chart

In this chart (you can click the chart to enlarge it if you're reading this essay at sunshineprofits.com) no large-scale developments have been seen. However, this week saw gold rally quite considerably. The RSI level has now moved back to the 50-level and the self-similar pattern from the very long-term perspective is very much in play. The implications are that the bottom is almost certainly behind us and we are in for a rally in gold.

Just to bring the self-similar pattern back to our minds: back in 2007, gold's price held below the 50-week moving average for about two weeks. This time around, gold's price moved below this average twice before jumping up. We saw two weeks below this important support level and a move up afterwards. This is one more commonality which shows the similarity between the current trading pattern and the one seen five years ago.

$GOLD - Gold - Spot Price (EOD)) CME

Taking a look at the chart from 2006-07, we see that we are just above the range of the local bottom in our trading pattern. Gold did not rally immediately after bottoming but rather consolidated for several days before the start of a very sharp rally. This is what happened last week.

It seems valid to focus on the time that elapsed during the period of correction. A closer look shows that it was approximately a month before the final bottom was seen in 2007. If we compare it with the situation now, we might see that the recent correction in gold started on February 29th, 2012 (the already infamous Wednesday), and lasted until March 23rd, which is nearly a month. The similarity seems striking.

GLD (SPDR Gold Trust Shares) NYSE

We now turn to the current short-term GLD ETF chart. Continuing our discussion on the length of time, we see that the first local top was on February 23rd and from then until last Friday was precisely one month. The self-similar pattern is very much in play and it very likely confirms that gold's bottom is now in.

$GOLD:UDN (Gold (EOD)/PS DB US$ Bearish) CME/NYSE

In the chart of gold from a non-USD perspective, we have a bullish picture once again. A small move below the rising support line was stopped by the declining medium-term support line and gold moved up afterwards. It seems that the yellow metal has gained some momentum, so the situation here remains bullish.

Summing up, the self-similar pattern remains very much in place and the bottom in gold is very likely in.

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Thank you for reading. Have a great and profitable week!

 


 

Przemyslaw Radomski, CFA

Author: Przemyslaw Radomski, CFA

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Gold & Silver Investment & Trading Website - SunshineProfits.com

Przemyslaw Radomski

Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who takes advantage of the emotionality on the markets, and invites you to do the same.

His company, Sunshine Profits, publishes analytical software that anyone can use in order to get an accurate and unbiased view on the current situation.

Recognizing that predicting market behavior with 100% accuracy is a problem that may never be solved, PR has changed the world of trading and investing by enabling individuals to get easy access to the level of analysis that was once available only to institutions.

High quality and profitability of analytical tools available at www.SunshineProfits.com are results of time, thorough research and testing on PR's own capital.

PR believes that the greatest potential is currently in the precious metals sector. For that reason it is his main point of interest to help you make the most of that potential.

As a CFA charterholder, Przemyslaw Radomski shares the highest standards for professional excellence and ethics for the ultimate benefit of society.

Sunshine Profits enables anyone to forecast market changes with a level of accuracy that was once only available to closed-door institutions. It provides free trial access to its best investment tools (including lists of best gold stocks and best silver stocks), proprietary gold & silver indicators, buy & sell signals, weekly newsletter, and more. Seeing is believing.

Disclaimer: All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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