Dec 20 2011 3:07PM

Year-end profit-taking drives gold below key technical levels, prompting a mad rush for the exits by speculators.

But with the U.S. and Europe set up for a money-printing spree rivaling anything seen in our lifetimes, the longer-term picture for gold is brighter than ever.

In other words: This is a major buying opportunity.

It’s difficult to write a monthly newsletter, even one that attempts to focus on longer-term trends, in today’s increasingly fast-moving world.
This fact was demonstrated to me once again as I sat down to write my lead commentary for this year-end edition. As this double-issue traditionally spans the final days of one year and the beginning of the next, it is naturally best-suited for a discussion of the broader issues affecting the global economy, the investment markets and the metals.

Still, I gave in to the temptation to begin by commenting on the familiar pattern being traced out by the gold price. You see, gold had been heading into the year end in an ever-narrowing consolidation pattern, threatening to break — hard — to either the upside or downside.
My initial draft of this article noted how, in normal times, a break to the upside would seem certain. Every time this same triangle, or “flag,” pattern has appeared, gold has ended the consolidation with a strong, long-lasting rally upward.

But...as I wrote just hours ago...these are not normal times, and a number of forces are now conspiring against the yellow metal. These include headline risk (the chance that some adverse news would send investors and traders running from gold) and year-end book squaring (money managers selling gold to book profits).

I warned, in my original draft of this article, that while every previous flag pattern had culminated in a powerful rally, these bearish dynamics could send gold flying downward toward much lower support levels.

Good advice. Little did I know that it would become moot before anyone ever saw it.

Old Indicators

For New Times

Illustrating how quickly forecasts can become history these days, gold almost immediately fell through the lower support line in the triangle. The cause? The very same risks I had detailed: Traders were booking profits while they could, and European nations reached an agreement on closer economic integration that left investors wanting more.

That was all that was needed to trip up the yellow metal’s impending rally. With Britain refusing to go along with a more-extensive and impactful agreement, and with the European Central Bank commenting that the accords were too flimsy to give them cover to start printing money, the speculators who had fueled gold’s run at the margins decided to run for shelter.

And gold plunged over the span of a couple of days from the low $1,700s to the high-$1,500s. In the process, the metal tripped numerous sell-stops, exacerbating the fall.

As I write, spot gold is in the high $1,500s, having fallen through its 200-day moving average for the first time since 2009. Thus, we are being forced to temporarily abandon the technical indicators we’ve been using since early 2009 (50-day moving average and Bollinger Bands; triangle consolidation patterns, etc.). These indicators worked well while gold was rapidly ascending during the Fed’s massive monetary infusion, and while the prospect of imminent money-printing in Europe was on everyone’s mind.

Instead, we should now look at the indicator that failed us only once, during the darkest days of the 2008 credit crisis. That indicator is not gold’s 200-day moving average, but rather its 300-day MA.

As long-time readers will remember, from the beginning of gold’s bull market in 2000 up to the crisis of fall 2008, the metal periodically pierced downside support at the widely watched 200-day MA. As I often speculated back then, it seemed as if gold was going the extra mile to shake out the uncommitted bulls.

So rather than track the 200-day MA, we discovered that it was more instructive to watch the 300-day MA, a level from which gold would repeatedly bounce before resuming its upward march.

Right now, that 300-day moving average stands at around $1,532, about $50 lower than the current level as I write. If we breach that support, this will be an unprecedented correction for this bull market.

Fundamentally Sound

There have been other fundamental factors adding to gold’s sell-off. For one thing, rumors have been rampant that European banks have been selling borrowed gold to raise cash to meet short-term dollar obligations.

Recent strange fluctuations in gold lease rates give some credence to these rumors, but the claims by some talking heads on the financial networks that central banks are now selling gold hand-over-fist are not supported by any evidence I’ve seen.

Also, latest data showing lower inflation in China and a weakening economy in India sent some speculators to the sidelines at the very beginning of this correction. Even though the effects on gold demand are likely to be negligible for the near future, those who exited on the basis of this information have to feel pretty fortunate.

And all these factors combined to prompt commercial hedgers to add to their short positions over the past couple of weeks — again, in advance of the big drop. Looking forward, these additional shorts served to compress the market like a spring; when the commercials begin to cover, which they will surely do at some point, it will add to the power of the price rebound.

Also, from a long-term fundamental standpoint, everyone knows that both the U.S. and Europe are going to have to print a lot of money. The problem is that going into the year-end book-squaring season, investors were relying on some short-term validation of that fact.

We needed the headlines from Europe to spawn additional buying, enough to soak up the selling that many funds were doing to book profits for year-end reporting.

That didn’t happen. Instead, as I mentioned, the last big summit in Europe, convened to finally come up with a solution, had the precise opposite effect that gold bulls needed. Britain’s refusal to go along with the “closer integration” of fiscal controls made the headlines, but the bigger news was that no progress was made to actually solve the problems of European debt and slow growth. The can was only kicked further down the road.

So where does this take us?

As you can see from the accompanying chart of the weekly swings in gold (courtesy of our friends at Thechartstore.com), the metal has consistently advanced over the past decade in a series of long rallies punctuated by relatively short corrections/consolidations. Although this chart was drawn before gold’s big drop, it’s more important to use this chart for timing rather than the degree of the correction. (In any event, it shows that the current correction pales in comparison to past setbacks.)

So looking at the timing only, it seems that this chart is pointing toward a new rally beginning sometime early next year.

Given the depth of the current sell-off, however, it could begin before the end of the year, as the selling may soon exhaust itself, and late December is historically a strong time for gold. In addition, Mark Hulbert’s widely followed index of gold-timer sentiment is now at an historically low 0.3%. I’ve never seen it this low during this bull market, and this contrarian indicator is screaming that a major rally is in the offing.

Looking even further forward, it seems we’re destined to repeat history in our efforts to survive the Western world credit crunch.

In Europe, it will be a matter of first repeating the U.S. experience of 2008. Then, together with the U.S., both regions could see a repeat of the 1970s experience over the longer term.

As my friend Frank Giustra recently put it in an editorial for the Vancouver Sun, “The bottom line is that the money needed to bail out Europe and to fund America’s spiraling debt and future unfunded obligations is in the tens of trillions. IT DOES NOT EXIST. It has to be created by printing money in massive quantities, and despite all the rhetoric you will hear against such policies, in the end it’s the path of least resistance. Printing money is an invisible tax on savings, much easier to initiate, than, say, raising taxes or cutting back on services and entitlements.”

It’s going to happen, because it must. The only remaining questions are when, and to what degree.

Still Mired

In The Muck

In the meantime, the gold stocks, from the smallest micro-cap exploration outfit to the largest global producer, are still stuck in the mud.
Tax-loss selling season is helping to keep the juniors depressed, but the larger factor is the reluctance to own the paper proxies for the metals. Even when investors periodically show an appetite for risk, it only extends as far as gold, or even silver.

We just haven’t experienced a period of normalcy extending long enough for investors to feel comfortable owning resource equities. And they won’t begin to feel comfortable until we see the first signs of the money printing that will be employed to spark the U.S. and European economies and depreciate the value of their debts.

Again, it will come. But at least for the next few weeks, we’ll remain in an situation where it will take courage to maintain our convictions. For those with both the courage and a taste for bargains, however, it will be a target-rich environment.

I’ve taken that approach in this year-end review of the junior resource sector and our favorite companies. Well-run companies are continuing to make news and build value, and I’ve featured some of the best bargains in the following updates.

By Brien Lundin

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc.  Neither Kitco Metals Inc. nor the author can guarantee accuracy of all information provided. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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Brien Lundin is the editor and publisher of Gold Newsletter, a publication that has ranked among the world’s leading precious metals and resource stock advisories since 1971. To learn more about Gold Newsletter, visit www.goldnewsletter.com.

Mr. Lundin is also the host of the famed New Orleans Investment Conference, the world’s oldest and most respected gold investment event. This year’s event will feature Glenn Beck, Charles Krauthammer, Marc Faber, Peter Schiff, Stephen Leeb, Dennis Gartman, Stephen Hayes, Stephen Moore and dozens of other top experts...plus a scintillating debate pitting Charles Krauthammer against James Carville and P.J. O’Rourke.

To learn more, visit www.neworleansconference.com.