Gold: Key Rebuy Prices

September 12, 2017

It’s not easy to build wealth in any asset class. It’s even more difficult to retain it.

This is the short-term gold chart.

Over the past week or two, my wealth building mantra has been, “Book profit now”. From a technical standpoint, the world’s mightiest metal has begun to show signs of “head and shouldering”.

Head and shoulders top patterns are negative for the price, and it’s normal for them to appear when gold reaches strong resistance.

Strong resistance is not created out of thin air. It’s created by major fundamental events.

The ramifications of one of those events.

In November of 2016, many gold market players were buying gold aggressively as it became obvious that gold enthusiast Donald Trump had won the US election.

The gold price spiked higher as Trump won, and then imploded when the Indian government’s shocking demonetization announcement ruined the party. Conspiracy buffs will find it very suspicious that the Indian demonetization announcement seemed to happen just minutes after Trump had won.

Regardless, the Trump victory became bitter-sweet for Western gold bugs as they watched the gold price crash.

From a technical perspective, the tremendous volume that occurred on demonetization night has turned the $1350 price zone into powerful resistance.

The good news is that compared to the violence of the November sell-off, the current decline is very mild. I’m a light buyer now, and a much bigger buyer at $1308 and $1280, basis December futures.

It’s important that investors wait for emotional discomfort before rebuying with size. The bottom line is that to build gold market wealth that is sustained, significant patience is required.

This is the dollar versus yen chart. The 108 area is the “line in the sand” for the dollar.

That line in the sand has been severely tested, but so far it has held. When it fails, I expect gold to make a serious charge at major resistance in the $1377 - $1392 price zone.

The SPDR fund (GLD-nyse) gold holdings have climbed to the 834 tonnes area during this gold price rally. I have suggested that the rise in tonnage is related to a “gold market game changer” mentality amongst a growing number of institutional money managers.

They are not buying gold because of any particular market event (low real rates, Korea, the dollar index, etc), but because of a newfound respect for the precious metals as an investment asset class.

Jeff Currie of Goldman Sachs recently suggested that physical gold ownership is a good idea and a key diversifier for equity market investors.

Bank America is now quoted by Kitco News suggesting that a holding of slightly under 5% is beneficial for an equity portfolio.

The big picture for gold is fabulous. In the past, a rising equity market was negative for gold. Now, a rising equity market forces money managers to buy more gold to maintain their fixed allocation percentage to it.

Chinese and Indian money managers recommend higher portfolio allocations to gold than their Western counterparts. As they begin to dominate the market, I predict that the larger Chindian allocations will become “the new normal”.

Also, Merrill notes that Chinese jewellery demand is soft. That’s normal at this time of year, and my Chinese jewellery stocks are making multi-year highs. These stocks are key lead indicators for Western gold/silver mining stocks, and they are flashing big green lights.

GDX has had a fabulous summer rally. Given the $1350 gold market resistance and the arrival of GDX itself at my $25 - $26 target zone, a pause in the action is normal.

Once the consolidation ends, I expect GDX to charge towards $28 - $29. I’m also predicting that the next stage of the rally will be much broader, with many of the more speculative junior stocks joining the upside fun in a much bigger way than they have so far.

Silver is also poised for a very big move higher. It’s carving out a beautiful inverse head and shoulders bottom pattern, and an upside breakout should coincide with gold surging above $1392!

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Stewart Thomson

Graceland Updates

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Stewart Thomson is president of Graceland Investment Management (Cayman) Ltd. Stewart was a very good English literature student, which helped him develop a unique way of communicating his investment ideas.  He developed the “PGEN”, which is a unique capital allocation program. It is designed to allow investors of any size to mimic the action of the banks.  Stewart owns GU Trader, which is a unique gold futures/ETF trading service, which closes out all trades by 5pm each day. High net worth individuals around the world follow Stewart on a daily basis.  Website: www.gracelandupdates.com.

One ounce of gold is so ductile it can be drawn into a wire 50 miles long