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(Kitco News) - We’re on the verge of massive moves for precious metals, bonds and the stock market, but investors who wait for the economic fundamentals to catch up to price action will miss out, according to technical analysts Patrick Karim and Kevin Wadsworth of NorthstarBadCharts.com.
“Fundamentals are further from reality than price charts,” said Karim. "The price chart is the aggregate of all these guys who have fundamental stories, who push money left and right. Everybody has a fundamental reason and narrative, but the price, we're so lucky it's free! Anybody could look it up.”
Karim and Wadsworth spoke with Kitco News reporter Ernest Hoffman on April 5, where they laid out a strong technical case for gold.
“The technical analysis is key to understanding what's going on with gold at the moment,” Wadsworth said. “When you look at the gold chart you can see this cup and handle pattern that's been building out over 12 years now is nearing its completion. In fact, just over the last few days we've been seeing the price of gold pushing out above the upper resistance line on the handle portion of this chart.”
“At the moment, the probabilities are shifting very strongly in favor of precious metals.”
Wadsworth said that a big piece of evidence that backs up their bullish outlook for gold is the gold to SPX ratio. “This event has only happened three times in the last 100 years, and what I'm talking about is gold breaking out versus the S&P and also, at the same time, the S&P breaking down versus inflation.”
“That happens very, very rarely, and in an average investor's lifetime it happens just once or twice.”
“If we take a look at the Gold versus SPX ratio, you can see very clearly that it picks out very, very accurately the time to hold equities and the times to hold gold, you can see the buy gold sell gold indications that that chart gives. If we zoom in at that little bit on the right-hand side of the chart, we can see that gold has broken out of the downtrending resistance line versus the SPX, so we have the first embryonic stages of the confirmation that we're looking for to tell us that gold is in a strong, long-running, full-on bull market.”
“When we get gold valued at 50 per cent of the S&P, once we push through that barrier that's when the floodgates open.”
Karim said that investors and traders who pay attention to short-term charts can’t see the forest for the trees, and could miss out on once-in-a-generation price moves.
“Everybody, when they go on Yahoo Finance, what do you see? Six months of data, daily candle charts! It's useless, it doesn't help anybody,” he said. “You have to zoom out 100 years to see these macro tidal waves. So when SPX, those growth stocks, start underperforming real assets in real terms, gold, oil, silver, and those huge pension funds or whoever's allocating their assets, they're seeing that inflation is going to start destroying their margins, they're going to have to start piling on to the correct direction, and it just piles on and piles on until we get a blow-off top.”
“When gold is worth half of SPX it's like a threshold where the money starts piling in, and when gold is worth two thirds of SPX, everything's going to go bonkers.”
And all of this assumes a steady and incremental progression. If markets are rocked by a major unforeseen event such as a 2008-style systemic banking crisis, these major established trends will only be magnified and accelerated. “If we do start to see some kind of financial crisis breaking out, it wouldn't worry me at all in terms of precious metals. What it probably would do is result in stock markets going absolutely nowhere for 20 years. It's not as outlandish as it sounds, any more than gold going up 600 percent, which is exactly what it did between 2000 and 2011, over 600 in fact, which of course would give us [gold] in excess of $10,000.”
Karim and Wadsworth also insist that the U.S. dollar is far weaker than it looks in isolation, which has been masking gold’s strength, and they expect further declines for the greenback.
“Let's consider the US Dollar Index versus inflation,” Wadsworth said. “Now that might sound really strange because the US Dollar Index is a number that represents the US Dollar's strength versus the Yen, the Euro, the British pound… versus a basket of other currencies. But what if you just start considering the real world? What is all that currency actually doing?”
“I'll tell you what they're doing, they're all losing purchasing power at a frightening rate.”
“If you look at the chart for DXY versus inflation, and we're using the Producer Price Index for all commodities as a proxy for inflation, you'll notice something that jumps out very quickly, it just goes all the way from the top left corner to the bottom right corner,” Wadsworth said. “What is that telling you? It's telling you that that number versus inflation is a constant loser.”
“But let's just think about it a little bit more carefully. The key takeaway from this chart is highlighted in green, four periods of time, three in the past and one that's taking place now, where the US Dollar Index has broken down from a consolidation pattern or a rising pattern.’
“These rising patterns and consolidation patterns are always bearish and they're always going to be bearish as long as we have inflation and increasing producer prices,” he said. “And when it breaks down, that marks the start of a precious metals bull run. The US Dollar Index versus inflation has broken down from a clearly identifiable consolidation period with a clear support line, it's broken down below the four-year moving average, and it's also broken down below the Ichimoku cloud.”
“So there's a whole load of technical reasons to suggest that what is happening now is comparable to what happened in the early 2000s.”
To see Karim and Wadsworth’s technical analysis of tech stocks and the bond market, and to learn their critical levels for silver, watch the above video.
