Tight Gold & Silver Markets To Spark Massive Breakout

Today James Turk told King World News, “I had the chance to read John Embry’s comments today on KWN about the tightness in the physical gold market, and I wholeheartedly agree with him.” Turk also said, “This tightness is further evidence of the backwardation in the gold market I spoke about in our last interview.  The most powerful rallies are the ones driven by a tight gold market, and that is exactly what we see right now.” 

Here is what Turk had to say:  “Both gold and silver don't appear to be doing much since we last spoke, Eric, but appearances can sometimes be misleading.  The action in the precious metals over the past couple of weeks has been very constructive, and here's the important point.  Slowly but steadily gold has been pulling away from $1580, while silver has been pulling away from $27.  As I have been saying, I think those prices are history.  We won't see them again.”

“The precious metals at the end of last week again approached the top end of the huge bases they have been building since May.  Gold and silver dropped back a little today to take a breather.  Nevertheless, they are ready to probe the top layer of overhead resistance that has been keeping their price contained.

The next step is for gold to break above $1630 and silver to break above $28.30, and when it happens it will signal their long awaited breakout from these 3-month bases.... 

“Hopefully these two hurdles will fall on the same day.  If they do, it will signal real strength because both precious metals are confirming each other by breaking out of their base at the same time.

Clearly the precious metals will soar if the Fed or ECB announces more quantitative easing.  But gold and silver don't need QE to move higher.  Given all of the financial uncertainty out there, there are numerous problems that we know about which could be the trigger lighting the spark to send the precious metals higher.

All we then need is for the mining shares to break out of their base too. I expect they will, but the metals are closer to a breakout. So look for the metals to move first.  Though this pattern has prevailed in recent years, it used to be that the mining shares usually led the metals.  Anyway, the key points to watch for the shares, Eric, are 170 on the XAU and 465 on the HUI.

I think the important point to focus on here is the threat of higher inflation.  Energy and food prices are moving higher in major uptrends.  They signal that more inflation is coming, which of course bullish for the precious metals.  Right now I am watching the yield on the 10-year T-note, which has jumped from its record low near 1.40% last month back into the 1.60s.

That's a big move, and not surprising given what's happening with energy and food prices.  With more inflation, higher interest rates are to be expected, and here's the important question, Eric, can the Fed stop interest rates from rising?  The Fed has done a pretty good job of it so far, but with trillion dollar federal government budget deficits as far as the eye can see, the Fed cannot stop a tidal wave of new debt.

So one of two things has to give, either interest rates have to rise to reflect the growing inflationary pressures, or the federal government has to bring its fiscal house in order, which looks highly unlikely.  Higher interest rates could be the wake-up needed to focus attention on the dollar's problems, and not just those of the euro.

Some people are concerned that higher interest rates will be bearish for gold and silver.  They seem to forget that gold and silver prices moved higher in the 1970s along with steadily climbing interest rates.  It was only after Fed Chairman Paul Volker raised real interest rates - interest less the inflation rate - to extraordinarily high levels did the precious metals start dropping.

That won't happen this time around because the federal government can't afford the high level of interest rates Volcker needed to quell inflation.  Remember, back then the US was the world's largest creditor nation, and now it is the biggest debtor nation the world has ever seen.”

Turk also added: “I had the chance to read John Embry’s comments today on KWN about the tightness in the physical gold market, and I wholeheartedly agree with him.  This tightness is further evidence of the backwardation in the gold market I spoke about in our last interview.  The most powerful rallies are the ones driven by a tight gold market, and that is exactly what we see right now.”