Precious metals review
Comment of the Day

September 02 2010

Commentary by David Fuller

Precious metals review

David Fuller's view Prices for futures-traded precious metals have been rangebound for a number of months so another review is merited, with particular emphasis on technical factors, addressing the following questions:

1. Will gold depart from its cyclical pattern of several years in which ranging pullbacks and consolidations have occurred over approximately 18 months, followed by strong advances commencing in September of every odd-numbered year, as we saw in 09/2005, 09/2007 and 09/2009?

2. How is gold performing against leading currencies?

3. What will be the lead precious metal, up or down?

You may have noticed that there are plenty of people competing for attention and with each other in projecting quantum upside leaps for the gold price. I am loath to join them today, despite having been a long-term bull of gold for the last decade, having traded gold and other precious metals more actively than any other markets during this period, and despite maintaining that gold is still in a secular bull market which could have years to run.

I prefer to save my loudest shouting for when markets appear to be very out of line with historic fundamental value following secular bull or bear markets, and are beginning to show technical evidence of significant trend changes. For instance, gold and just about every other commodity a decade ago, following their 21-year bear markets in nominal and especially real (inflation adjusted) terms. Lesser examples are stock markets following crashes, which makes them candidates for at least cyclical bull trend recoveries. The next secular trend example may be OECD country government bonds where yields are historically low and the so-called PIIGS countries have already shown how rapidly yields can rise when investors become concerned over sovereign debt problems.

Despite remaining bullish of precious metals for all the reasons discussed by this service in detail over the last decade, I am more cautious today because they have become a somewhat crowded trade. Precious metals can certainly become a much more crowded trade in coming years and I am on record for saying that gold's primary bull trend is likely to end with the price accelerating during a mania. Nevertheless that is a technical hunch based on other secular trends such as gold's last bubble peak in 1980. Therefore I will rely almost entirely on factual, behavioural technical action for the duration of the present secular bull trend in precious metals. In other words, I an content for the market to show me what it is going to do. This will be infinitely more useful for timing, in my opinion, than subjective and emotional fundamental projections which are often no more than a wish list.

Returning to my three questions above, I do not know why gold formed the approximately 18-month ranges before advancing sharply over the next several months but these reoccurring patterns sometimes become self-fulfilling. I have always assumed that the trend dynamics would change at some point and we could be near that transition today because gold is approaching its upper boundary once again. The orderly 5-week and counting advance shown on this weekly chart has all but wiped out the setback following two downside key day reversals in June, which you can see on this daily graph. Another downward dynamic is currently required to indicate more than brief resistance near the highs to date. A close beneath the July reaction lows would be necessary to suggest that supply had regained the upper hand. Gold's overall performance recently has been steadier than any other commodity and also most stock markets. Bullion is not overextended relative to its trend mean represented by the rising 200-day moving average, best seen on the weekly chart above.

Regarding my second question, gold also shows a generally firm overall upward trend against all fiat currencies, as you can see from these 10-year charts of bullion priced in the Asian Dollar Index, the Latin American Dollar Index, euros, sterling, Australian dollars, New Zealand dollars, Canadian dollars, Swiss francs, Japanese yen, Chinese renminbi and the Norwegian Krone (see Library for gold in more currencies). If gold is to see a meaningful advance during its more favourable seasonable period commencing this month and lasting through 1Q 2011, early evidence will be in the form of new highs against nearly all fiat currencies.

The third question is the hardest to answer but another precious metal has outperformed gold during each of its other major advances. These top medium-term cyclical performers usually lagged on the initial new highs but soon took over the lead as the advance progress. This was extremely useful analytically because leaders usually lead in both directions. Consequently, the lead precious metal peaked and showed clear downward dynamics at least a few days before gold recorded its cyclical highs within the secular upward trend. We saw this leadership from silver from 4Q 2005, platinum from 4Q 2007 and palladium from 4Q 2009. Looking at these weekly charts of palladium, platinum and silver today, my guess is that if another upside leg is imminent, palladium or silver would take up the leadership well before yearend. Conversely, if precious metals are going to extend their sideways ranges rather than trend higher over the next several months, early downside evidence would probably come from platinum which is lagging at the moment.

Lastly, the NYSE Arca Gold BUGS Index is testing the upper side of its range once again. This is a solid performance and I would give the upside the benefit of the doubt, provided the last reaction low near 430 is not taken out.

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