As we begin 2013, there has been an important shift in regards to precious metals…the decoupling that has taken place between the equity market and the precious metals complex…[which] began nearly 17 months ago (decouplings of three or six months are not significant). Since the Euro crisis in summer 2011, the equity market has rallied nearly 30% and reached a five-year high, but gold stocks are down by more than 30%…[and, as such,] precious metals cannot begin an impulsive sustained bull move if the equity market continues to move higher. The equity market has to struggle with resistance and begin a mild cyclical bear move. While over the near-term precious metals can confirm a higher low, the 2013 success of the sector depends on the struggles of conventional stocks. [This article explains why that is the case and uses several charts to illustrate the point.] Words: 899
So writes Jordan Roy-Byrne, CMT (http://thedailygold.com) in edited excerpts from his original article* entitled 2013 Gold & Silver Outlook.
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Roy-Byrne goes on to say in further edited excerpts:
The chart below is what a decoupling looks like. It’s not obvious over short periods – only over long periods of time.
This decoupling means that precious metals cannot begin an impulsive sustained bull move if the equity market continues to move higher. The equity market has to struggle with resistance and begin a mild cyclical bear move. While over the near-term precious metals can confirm a higher low, the 2013 success of the sector depends on the struggles of conventional stocks. What would make stocks struggle?
That is where the fundamentals come into play.
- At present, capital is moving out of bonds and into stocks. The consensus conventional view for 2013 is one of continued [such] growth with a chance of [a marginal] increase, but no [major] threat, of inflation….
- If interest rates rise, [however,] the debt burden would increase dramatically due to the current huge debt load…[and current] low cost of service….[and,] at some point, rising interest rates would become bullish for precious metals and bearish for the stock market.
- Moreover, if interest rates cannot effectively be managed downward, then that would be even more bullish for precious metals and bearish for conventional assets like bonds and stocks.
Its important to note that both the economy and the equity market have little margin for error:
- The economy has picked up statistically in recent quarters, and is getting some help from emerging markets, yet it is only churning along…due to massive deficits and continuous debt monetization.
- At the same time, the equity market (S&P 500) is now at a five-year high and very close to massive resistance.
In any event, it is very clear that the decoupling will continue. You must decide if, and when, the markets will shift.
Turning to the technical outlook:
- Gold is well entrenched in a consolidation. While momentum is turning higher, Gold is unlikely to break out anytime soon due to the strong resistance at $1750-$1800.
- If Gold is able to firm up…[soon, however,] then it has a good shot to rally back to $1750-$1800 over the next few months.
- If we get the bullish scenario and a fundamental catalyst shift then expect Gold to break past $1800 in Q3.
- That would mean that Gold consolidated for two years which would be its longest consolidation on record. The longer the consolidation, the more explosive the breakout.
A breakout in the second half of 2013 (with momentum already rising) would bode extremely well for 2014.
- Silver is in a much larger and slower consolidation. It will take longer to evolve but eventually build stronger momentum than Gold.
- The initial upside target is obviously $35.
- Assuming Gold breaks past $1800-$1900 then Silver should break past $35 and at least test $44, the August 2011 high.
It is very encouraging to see the silver stocks outperforming Silver (bottom row).
Turning to the shares, we love the clarity from the monthly candle chart. It details just how important the key levels are.
- Note the strength of support at $40….
- While the market has been weak, it has failed to close below $45 in each of the past three months.
- If GDX is able to close at, or above, $46 this month then we believe the secondary bottom is in. In that case, look for GDX to test $52 (extremely important pivot point)….
- The $52-$55 area for GDX stands between the current market and an impulsive advance that could last a few years.
Over the short-term it appears that the gold stocks are forming rounding bottoms… that take time to form. At the same time, the action in Gold and Silver is looking more and more constructive.
Generally speaking, we see precious metals starting the year well and potentially finishing the year very well. However, do realize that while this could be the low for 2013, it could be many months before precious metals experience their next breakout. Conventional investments still have momentum and it will take some time for that relationship to shift.
The bad news is, you are going to have to continue to be patient. The good news is we see this being the most explosive breakout since 2005 and you have plenty of time to try and identify the mining stocks poised to be big winners when this cyclical bull begins in earnest.
Good Luck! Jordan Roy-Byrne, CMT Jordan@TheDailyGold.com
Editor’s Note: The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
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