Gold: Summer Rally Time?

Liquidity flows into or out of the “love trade” (gold jewellery) and the “fear trade” (inflation and financial system risk), are the two main drivers of the price of gold.

The strongest gold jewellery buyers are in India, and the election of Narendra Modi has already unleashed a huge wave of confidence amongst jewellers there.  ‘Retailers added that the latest steps by the apex bank of allowing banks to offer gold loans and permitting more entities to import the precious metal were signs of encouragement. This could drive up overall demand by 5% to 7% in 2014 from last year’s level of 975 tonnes, said Manish Kedia, bullion retailer.  Manoj Thakkar of bullion retailer Amrapali Industries said, "The premium on gold has gone down from $110 per ounce to $35 per ounce. The prices too have come down after the Reserve Bank of India provided conditional relief in gold imports restrictions by allowing Star trading houses to import gold. We are in for better times now."’ –Mineweb News, Mumbai, June 2, 2014.

While El Nino could delay the arrival of India’s monsoon season by one or two weeks, an end to the import restrictions could unleash a tremendous amount of pent-up demand, more than offsetting the lost crop revenues. 

In the big picture, foreign investment is pouring into India.  Last night, India’s central bank announced policy guidance, suggesting inflation will moderate and GDP growth will improve.  As the economy strengthens, spirits are high, and this bodes well for the gold jewellery business during the second half of 2014.

In America, home of the world’s largest gold fear trade, signs of inflation are beginning to appear.  The Fed uses an eight year business cycle, and the last few years of that cycle tend to be when inflation appears. 

The US economy is entering the tail end of the business cycle now.

On that note, please click here now.  Seattle’s enormous increase in the minimum wage could set off a nation-wide surge in wages, which is highly inflationary.

Here is a closer look at the Seattle plan.

Currently, most major money managers have a relatively similar outlook on major markets, including gold.  If inflation begins to rise significantly over the next six months, significant disagreement about what that inflation means would almost certainly arise.

In turn, that disagreement would create a fair amount of bond market volatility.  Substantial institutional liquidity flows into gold stocks is very likely in that situation.

Looking out over the next 7 months, both the love trade and the fear trade appear to favour the gold market bulls.

That’s the GDX weekly chart, and it’s clear that significant summer rallies are the norm for gold stocks, not the exception.

Look at the position of the 14,3,3 Stochastics oscillator.  It’s very bullish. 

I would suggest that aggressive gold stock investors should be postured in a 70% -90% net long position.   Personally, I’m 90% net long and in very buoyant spirits.

That’s the daily GDX chart.  Note how little price erosion in gold stocks has occurred on a year over year basis. 

Compared to past years, the erosion is minor, and there’s an enormous (albeit somewhat rough) inverse head and shoulders bottom pattern in play.

This daily GDXJ chart looks good.  There’s a nice bullish wedge forming, and my stokeillator (14,7,7 Stochastics series) has just flashed a crossover buy signal.

The technical posture of gold stocks meshes well, with the Western world’s transition from deflation to inflation, and with the mindboggling changes taking place in India.

The exactly launch point of a summer rally is likely impossible to predict, so I find it desirable to maintain a modest number of short positions.  

Also, the monthly US Employment Situation report will be released on Friday, and gold has a rough tendency to decline or trade listlessly in the week leading up to the release of the report. 

Is it possible that a substantial 2014 summer rally begins after the release of this key jobs report?  I think so.

I’ve outlined a rough scenario for summer rally enthusiasts on this daily silver chart.  I’ve suggested silver could move up to about $22. 

Much higher prices are possible if Western world inflation and Indian buying increase significantly, and I think that’s exactly what’s going to occur.

That’s the daily gold chart.   Note the bullish position of my stokeillator at the bottom of the chart. A crossover buy signal appears to be imminent, and such signals tend to be followed by $50 - $150 rallies in the price of gold!

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