Member Letter, gold was sitting too early"> Member Letter, gold was sitting too early" />

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July 18, 2011

Gold Rally on Track

Back in mid-April, silver was on its way into a parabolic peak while the dollar was plunging into a low. At the time I was anticipating a hard correction for silver. However, the timing of silver's break did not mesh well with gold's cycle count. As described in the Member Letter, gold was sitting too early in its weekly cycle to see price roll over into a significant decline. In order to reconcile these differences, I looked back to action that unfolded in 2006 as a potential model for the setup.

Gold Silver 2006 rally

As silver tanked in early May, the 2006 scenario appeared destined for a repeat. But such a resolution ran into a stumbling block in the form of sentiment. The public had become too bearish over the dollar to allow for the downside necessary to fuel a parabolic run in gold. As the dollar bounced out of its low, the action in precious metals remained subdued. Instead of sailing into a final peak, gold bided its time in the form of a triangle consolidation.

Weekly gold price pattern

Likewise, silver followed its crash by forming a solid, 2-month basing pattern.

silver price formed a 2-month basing pattern

Many traders who were burned by the crash are reticent to dip their toes back into the silver waters. After all, broken parabolas tend to need extended consolidation periods before significant, new highs can be set. However, I believe these traders are overlooking two, important technical factors that materialized during the recent basing periods... factors which lead me to believe the coming rallies in gold and silver will be larger than most anticipate.

First, despite the fact that gold basically moved sideways off the May peak, public opinion over gold's prospects, as publish by, dipped to its lowest level since 2008. In other words, the public was more bearish about gold than at either the July 2010 or the January 2011 lows, both of which spawned tremendous rallies. Second, gold set a weekly cycle low during its triangle consolidation. In other words, the yellow metal now sits very early within a cycle, providing for plenty of time... not just weeks, but months... to run higher.

The extreme sentiment readings seen around the dollar and precious metals back in May did not negate a 2006-like crescendo to the recent precious metals rallies, but rather only delayed it. Furthermore, the current cyclical structure indicates that the coming rallies may now be larger than if they had completed in May. The macroeconomic backdrop of crisis in Europe and a Fed ready and willing to counterfeit our currency in the hundreds of billions certainly supports a significant repricing of precious metals.


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