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Today's "Gold Convergence" Is Your Best Buy Signal Yet

We've been recommending gold shares for months now, ever since prices collapsed in April. But timing's getting critical, because now the market is telling you gold is set to surge…

The first piece of evidence hit my radar on August 1st, moments after Barrick Gold released its $8.7 billion "news." (More on that in a minute.)

The Commitment of Traders report – perhaps the best leading indicator for gold prices – delivered the second piece of evidence: a staggering 70% spike in "red flag" futures trading. And the third and fourth pieces of evidence just arrived.

But before we look at each of these events in detail, here's what you need to know:

Any one of these indicators is bullish on its own. So when all four signals flash at once, please don't wait.

A "Gold Convergence" like this hasn't happened in 12 years…

Indicator No. 1: A True Bottom

Calling market bottoms – and tops, for that matter – is typically a 50/50 proposition… unless, of course, the market hands you an overwhelming element of proof, just like it did on August 1st…

On August 1, the world's largest gold miner, Barrick Gold (NYSE:ABX) said it was writing down $8.7 billion on a single project, Pascua-Lama, located on the border between Chile and Argentina. 

Barrick's market cap is just twice the hit it's taking on Pascua-Lama. 

What's more, on that same day the company announced it was cutting its quarterly dividend, and would defer expansions and divest certain assets to reduce costs.  Things could hardly look worse for a gold miner.

But the amazing thing is, in the wake of all this awful news, Barrick's stock hardly budged.

And that can only mean one thing…the bad news is already priced in. Price action in a number of other large gold miners has been similar.

Indicator No. 2: Record Short Positions

One of the best indicators of the direction of the gold price is the Commitment of Traders (COT) report for gold. Because they tend to move in herds, speculators are almost always wrong at extremes.

According to recent COT reports, speculators are so bearish on the gold price, their short positions are 70% higher than they have ever been throughout this 12-year secular gold bull market.

Given the massive leverage many futures contracts are traded on – up to 16 to 1 – just a 6.4% rally in the gold price would obliterate all the capital of those fully leveraged contracts.

Just a small percent rise in the gold price can lead to a massive short covering, which would feed on itself, pushing gold still higher and faster.

Short covering rallies can lead to violent upside surges.

And right now, gold hasn't been this hated since its bull market began in 2001. After the extreme bearish sentiment of 2008, gold rallied 70% in a little over one year.

Indicator No. 3: Gold Stocks-to-Gold Ratio

Join the conversation. Click here to jump to comments…

About the Author

Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most popular and highly regarded investing articles on Money Morning. Peter is headquartered in resource-rich Canada, but he travels around the world to dig up the very best profit opportunity, whether it's in gold, silver, oil, coal, or even potash.

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  1. Jerry C | August 14, 2013

    I'll go for GDX they actually have the shares behind them and look good. I wouldn't trust GLD with my old sneakers. I opt for the actual metal for my gold holdings.

  2. Jeff Pluim | August 14, 2013

    I keep returning to a chart that I viewed that tracks the price of gold to the current interest rate. As interest rates have climbed or dropped over the last 30 years, gold has done exactly the opposite, regardless of the price of oil or any particular gold miner's moves in the market.
    The simple explanation could be that money moves to where the greatest returns are. So as interest rates rise, money moves from gold to interest bearing investments. And as interest rates drop, money moves out of interest bearing investments and into gold.
    That would mean, if the history of gold vs. interest rates holds, that the upcoming rise in interest rates will cause the price of gold to drop. It is a very simple indicator but it is uncannily accurate over the last 30 years. I know that it is a simple explanation and could put a lot of analysts out of work if everyone only went with this simple indicator, but it's a fact. Check it out.

    • Chad Rash | August 14, 2013

      Didn't both gold and the benchmark interest rate rise through the late 70s?

    • Conrad | August 14, 2013

      Then why as intrest rates have been at record lows that past couple years has Gold been in a down trend. Every thing I have read says to protect yourself from inflation(intrest rates going up) buy PMs.

    • fallingman | August 16, 2013

      I guess you don't read replies to your posts. I've tried to correct this common and simple-minded misconception you've offered (not a personal commentary…a lot of people hold it, because they simply haven't really dug deeply enough) that rising interest rates are bad for gold a couple of times, to no avail. 3rd time the charm?

      Go back 40 years and what do you see? Interest rates rose relentlessly during the 70's…and so did gold, so how could that be? Something must be wrong with the theory if it showed exactly the opposite results from what was expected during an extended period.

      You're close to being correct, but you're looking at the wrong measure. It isn't nominal interest rates that count. It's the REAL RATE…the nominal rate minus the % rate at which the currency is losing purchasing power, commonly known, incorrectly, as the "inflation rate."

      Gold pays no interest, so you're right that if the real rate of return an investor is getting on fixed income is rising, gold holds less attraction, at least in theory…all other things being equal…and you could expect it to languish or fall in price.

      But it's not as simple as rising nominal rates = pressure on gold. If the bond yield goes to 10%, will that be a drag on gold? Depends. If the inflation rate's at 12% and rising, absolutely not. If it's at 8% and falling, almost certainly. This is the situation that obtained in the late 70's. Volcker pushed nominal rates ABOVE the inflation rate as it was cresting and that's what did gold in in 1980-81. But nominal rates can rise a lot and for a long time and gold can still thrive in that environment. Don't think it can't.

      As for today's situation, real rates are still negative by any honest measure of dollar depreciation. That's gold positive, but they're getting less so with the recent spike in yields. The absolute percentage that real rates rates offer an investor at any moment, positive or negative, may not matter as much as the direction the real rate is moving and the speed at which it's moving. The "second derivative" is pretty important.

      Last thought. That "all other things being equal" thing … they never are, so while gold will be influenced quite profoundly in most situations in which there are changes in real rates, it won't always be and it won't necessarily react in a predictably linear way.

      While the level and direction and rate of change of real rates IS important to gold…quite important…especially in times of relative calm in the markets and the world, what matters far more are manipulation of the Comex futures market by JPMorgan and their bullion bank pals, and how much phunny money the Fed is conjuring from nothin' … and the rate at which they're increasing or decreasing the flood of new money…again the second derivative. They're always inflating the money supply. It's what they were created to do. The question is how furiously, and how furiously relative to the recent trend?

      When the Fed is on tilt, as it currently is, there's actually very little downside risk in gold. What you saw in April-June was pure, unadulterated market manipulation. Looking for other explanations will simply lead you astray.

      Can we please put this myth to rest now?

      • fallingman | August 16, 2013

        By the way…as if that weren't a long enough reply…what happened to gold as rates were steadily falling during the 80's and 90's? It wasn't going up, I assure you, so the idea that there's been a negative correlation is incorrect to begin with.

        The actual story is that gold has risen along with nominal rates and fallen along with nominal rates. But again, do an overlay of real rates and gold price and you'll see a meaningful negative correlation. They actually paid you something to have your money in the bank in the 80's and 90's and the dollar wasn't losing its value at the same rapid clip it had been in the 70's.

        That hurt gold, but what hurt it more was two revolutions in the industry…the advent of heap leap mining , which allowed low grade open pit deposits to be mined profitably (or so they thought when they commissioned them) and the practice by Barrick…spit in disgust now…of selling production forward to lock in the price. Throw in central banks selling their gold for peanuts for non-economic reasons and it was a triple whammy.

    • Gravlore | December 9, 2013

      Depends on why the interest rate is rising. Both strong economies and failing ones (Some Euro countries) can have rising interest rates. There is a case for weak gold in a strong economy but the opposite is true in a weak one as there is nobody wanting government debt.

  3. sammyivg | August 15, 2013

    one year ago MM was telling us that silver was going to hit between $50-$75 oz. by Dec.2013,
    as it went from $$35 oz. to $19 oz. Why will gold be any different ?

  4. Brad M | August 16, 2013

    Speculation in gold can be a crazy game. Gold's primary purpose as an investment is to be a hedge against inflation. And do not ever underestimate the effects fear or greed or over exuberance can have on any market. Since gold is an inflation hedge, rate of inflation and REAL interest rates are better indicators for its price. Nominal benchmark rates affect housing and bond markets more. Over mid 70s thru early 80s gold prices soared along with interest rates ( the massive inflation of this time was the driver ), also during interest rate hikes during the 20s, gold prices remained stable to slightly higher. Sometimes inflation and interest rates move together, but not always, its the inflation that drives gold. Why has gold been up so much during these low interest times? inflationary fears and demand. Some believe this long period of Fed interest rate manipulation will lead to serious inflation. Short term I think gold is a sideways market ( no major ups or downs ), long term is harder to call of course.. if the genie gets out of the bottle ( the massive excess reserves create by Fed become velocity ), then the sky is the limit on the medal, however, if things improve and the Fed can taper and even begin to pull some of this excess out of the system ( this would cause higher i rates ), the price will fall as fears subside.

  5. Pretty | August 23, 2013

    A weeker USD = stronger Gold.

  6. Fearsome | August 24, 2013

    I would love to transfer my IRA's and 401K into gold IRA's as I advance in age (now 75). But, gold pays no interest and is really unpredictable as to real value. Buffet frowns on gold…..

  7. yngso | November 12, 2013

    I don´t own much gold stuff, and after reading this I´m gonnna keep it. Also I´m not a genius like fallingman – "phunny", is that pun and "funny" combined? – and brad m, but I do understand that: India and China contain a big chunk of humanity,and the whole world economy is doing better. Even Greece is, so the demand for jewelry should rise worldwide.

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