Gold’s Dark Hour Before Dawn

This Wednesday, at 5.25pm, Diggers and Drillers readers got an email from me with a bold prediction.

I’ve put myself squarely on the chopping block in saying that:

‘…We can expect gold to start a multi-month rally that could see it close to or even above a new high by the middle of the year. ‘

That would require gold to rally 20% in the next four months.

It’s a bold call, but in the last few weeks, three long-dormant alarms went off to warn me of a major move in gold.

Each one was enough on its own to suggest that the game is back on.

But in combination, they were yelling at me to sit up, pay attention, and get ready to make some money from gold – and gold stocks

The first of these ‘top secret indicators’ is shouting that the gold supply has dried up. No one is selling. And if the market wants more, the market has to start paying far more for it.

It wouldn’t be fair to Diggers and Drillers readers for me to reveal too much about this indicator, but I can tell you that since 2008, every single time the indicator hit a certain level, gold went on to start a 20%-30% rally straight afterwards.

I’ll be clear – this indicator has had a 100% strike rate predicting big moves in gold, and that is a track record to pay attention to.

This is possibly the most exciting thing to happen to gold since the US debt downgrade in August 2011 sent it soaring $300.

So know this: this indicator has already crashed through this level and just keeps falling.

It’s already at a three year low, which warns us of a major move brewing.

But last night it fell again – in a big way.

It’s now a gnat’s whisker away from reaching levels not seen November 2008, the depths of the GFC. Back then, such low levels for this indicator shortly preceded gold doubling inside of two years.

If you’ve been watching the gold price in recent months, my big call on gold may sound like the ramblings of an overexcitable madman.

As you can see in the chart below, gold has been anything but strong recently. In fact it has just seen its fifth consecutive month of falls.

The Dark Hour Before Dawn for Gold?

gold price chart

Source: StockCharts

This February was particularly rough, with a 5% drop. But this sharp fall is part of the process. Every time my indicator has gone off, the first thing gold did was to have one quick, sharp shakeout; and then the rally started.

So the current pullback simply looks like the dark hour before dawn for gold.

The World’s Biggest Gold Buyer

It’s hard to see it falling much further. Because, when gold dipped last week, buying on the Shanghai gold exchange reached record levels. The other thing is that gold is trading at a $20, or 1.2% premium, in China to the US. China is the world’s biggest gold consumer, so what is happening in China is more important than just about anything else in the gold market.

So it’s good for gold investors to see that 2012 was China’s biggest ever year of gold imports. These jumped 94% on the previous year, to hit 834 tonnes in 2012.

This represents 18.5% of the annual global gold (mine and scrap) new supply; up from just 1.1% of the annual global gold market in 2009. China is putting vast and growing pressure on the physical supply.

This pressure on the physical supply of gold is showing up all over the place now. Apart from my top secret indicator, you can also see it in the futures market.

Gold futures have been trading slightly below the spot price of gold. This is called ‘backwardation’, which is another one of those long words finance types coin to sound clever.

All that matters is that this is another warning siren. It means that investors don’t reckon that counterparties will be able to deliver gold when they say they will. In other words, it’s another sign that physical supply has dried up.

The few times it has happened before, gold has seen major moves very soon after.

The fundamentals are pointing towards a move in gold. But the charts are also sending out some powerful signals too.

The ‘RSI’ is a measure of how oversold, or cheap, something is.

For gold, last week it got down to levels only seen three times in ten years.

Last time it happened was in May 2012, which marked the start of a 15% rally. You can see this in the chart below. The RSI is in the line at the top. I’ve circled that record low in red. Gold is the big chart below that, and I’ve highlighted the subsequent move in green.

Gold’s 15% Move in 2012 – History Repeating Now?

Gold's 15% Move in 2012

Source: StockCharts

It looks like history is now repeating. After gold’s RSI hit record lows last week, gold has followed the same script as it did last year: first a big bounce (4% in a week), and now a slight pullback.

I don’t think it will be long before we see it recover fully, and take off in earnest as the lack of physical supply kicks in.

Watch the US Fed

Besides, we only have to wait until tomorrow for US Federal Reserve Chairman Ben Bernanke to give a speech called ‘Low long-term interest rates’. He’s speaking at a conference called ‘The past and future of monetary policy’, which should be a riot.

But the important point is that he will use this as a platform to argue why the Fed will keep rates low for a long time. As a rule, gold rallies every time the ‘Bernank’ opens his mouth in public.

So this public outing of the bearded wise one could give gold fresh legs next week.

And don’t forget, when gold rallies – silver tends to rally even harder.

…But silver’s a story that will have to wait until Tuesday.

Dr Alex Cowie
Editor, Diggers & Drillers

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