Precious metals charts look positive

PLAYA DEL REY, Calif. (MarketWatch) � In what has certainly become an environment of constant and steady quantitative easing by central banks around the globe, what might properly be termed, the �Age of QE,� the action in precious metals is often seen as a barometer of the trend in fiat money-printing.

When the U.S. Federal Reserve Board released members� projections of interest rates out to 2014 in their most recent policy announcement in late January the market took this as a clear sign that the QE spigot remains at the ready, if not necessarily wide open.

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In a nutshell, the Fed indicated that its members� believe interest rates will by necessity remain between 0% and 0.25% until at least mid-way into 2014, and the Fed Chairman, in his interview following the policy announcement, confirmed that the Fed intended to remain in an accommodative posture for the foreseeable future.

This can only mean continued quantitative easing with some, among them Fed members themselves, speculating about the Federal Reserve�s willingness to engage in outright purchases of mortgage-backed securities in the not too distant future as a way of injecting further liquidity into the financial system and hopefully provide some assistance to a faltering economy.

Some would argue that QE has already proven to be relatively ineffective in jump-starting the U.S. economy, and that such operations amount to little more than the stealth printing of massive amounts of fiat currency.

However, another crisis in Europe could spur more quantitative easing out of Europe, or Euro-QE. While quantitative easing in general is not good for the long term health of the economy, central bankers are politicians first and foremost. The price of gold is a clue here should it continue markedly higher. But remember, there are many crosscurrents with gold. For example, another crisis in Europe tends to create a weak euro and a strong dollar which acts as a headwind on the price of gold.

Meanwhile, reports point to increased physical demand out of China on gold which serve as a tailwind on gold.

All in all, if central bankers on both sides of the pond are willing to print dollars, pounds, and euros, then the price of gold and silver will have no choice but to trend higher, and this is confirmed by the recent technical action in both gold and silver, as represented by the SPDR Gold Trust Shares GLD � and iShares Silver Trust SLV, respectively.

Chart 1 shows the GLD on a daily timeframe, and we can see that since the top in late August/early September gold has spent the last five months building what is beginning to take shape as a possible double-bottom type of base or consolidation.

At the extreme lows of this formation in late December 2011, investors� love affair with gold had flamed-out, and many were quick to make proclamations of a final popping of the �gold bubble.� As we�ve seen throughout the past decade, whenever investors have become thoroughly disenchanted with gold that is often the low. And it is notable that a spike in bearish gold sentiment occurred roughly at the same time as the second low in the GLD�s double-bottom formation held and the yellow metal began its rally back to the upside.

In December we were concerned with the GLD�s breakdown below its 200-day moving average, but in January 2012 it has decisively retaken that critical moving average, and most recently issued a clear buy signal as it broke out through the 50-day moving average on the upside. In our view, if gold can hold its 50-day moving average on any pullback, then we would look for a breakout through the mid-point of the double-bottom formation at $1800-an-ounce as confirmation of a new uptrend in gold.

Meanwhile, silver is confirming the strength in gold, as we see in Chart 2, the daily chart of the iShares Silver Trust SLV �. The SLV in fact broke out through its 50-day moving average three days before the GLD did, as a comparison of Charts 1 and 2 shows, and the white metal ETF looks primed to make a run at its 200-day moving average in the 35 price area. As with the GLD, we would look for the 50-day moving average at the 30 price level to serve as support on any pullback from current levels.

We think that the current technical action in silver and gold means that the lows in these key precious metals have been put in. And so with a bottom likely in place in the precious metals, the odds are that both metals are in the process of sprouting nascent uptrends as they potentially begin to work their way up the right side of these large consolidations or bases they have been forming since topping earlier in 2011.

Gil Morales and Dr. Chris Kacher are both principals and managing directors of MoKa Investors LLC and Virtue of Selfish Investing, LLC, cofounders of www.selfishinvesting.com and co-authors of �Trade Like An O�Neil Disciple: How We Made 18,000% in the Stock Market� (Wiley, August, 2010).