Gold Trader: “We’ve Got All The Conditions Necessary To Trigger A Bubble Phase In Gold”

During a week of sharply rebounding precious metals and mining share prices, Gary Savage, technical gold trader and publisher of the Smart Money Tracker, was kind enough to share his comments. Gary’s trading calls have outperformed most of the world’s hedge funds during 2011 and 2012.

Here are his interview comments with Bull Market Thinking’s Tekoa Da Silva:

Tekoa Da Silva: Gary on Monday the 22nd, gold exploded higher to about $1334 an ounce. In your commentaries you’ve been speaking about $1300 being an important psychological level. What are your thoughts?

Gary Savage: Sure, Tekoa. I told everybody in my weekend report that early this week I was expecting gold to gap through the intermediate trend line which was right about at $1300, maybe a dollar or two above $1300, and that’s what it did Monday morning.

In my opinion, that has confirmed that June 28th was indeed the yearly cycle low and we’ve got an intermediate degree rally ahead of us which should last probably until early November, maybe mid-November, and the reason I am expecting that is because I believe the dollar has begun moving down into an intermediate bottom and the timing band for that dollar bottom comes in right around the first, second or third week of November, somewhere in that time zone.

So if gold maintains its inverse relationship with the dollar, then gold should generally rally as the dollar drops into that intermediate low.

TD: Gary in terms of your work and the terminology that you use, when you speak about gold coming out of its yearly cycle low, what what does that mean?

GS: Well, it’s just a higher degree cycle than –  for example, the first degree is a daily cycle and the gold’s daily cycle runs usually about 18 to 28 days and it seems like most of them come in around 23 days, somewhere in there.

The next higher degree cycle is the intermediate cycle and that runs generally on average about 18 to 25 weeks and the next higher cycle is the yearly cycle and that’s usually about 12 to 13 months and then the biggest cycle is the eight-year cycle---and the last eight-year cycle low bottom was in 2008. So the next major eight-year cycle comes due in 2016. What I think we put in on June 28th, was a yearly cycle low which means that we shouldn’t go below that level for the rest of the year.

That should be a bottom that will hold into 2014, and in my opinion, I don’t think the secular bull is done and if that’s the case, then gold needs to make a higher high before it starts down into that 2016 eight-year cycle low. If the secular bull is intact, then it should not only make a higher high but it should make another leg up in the secular bull market which in my opinion means at a minimum probably $3500, maybe $4000 and if we’re starting the bubble phase, then I don’t really expect the top until we get to a Dow-gold ratio of 1-to-1.

TD: Gary, coming out of these types of bottoms, does the market usually offer pullbacks or quiet periods for people looking to position? Or does it simply keep going and not look back?

GS: Well, that’s dependent on whether or not this turns out to be the beginning of the bubble phase. When assets enter a bubble phase, what tends to happen is the market quickly recognizes that it was positioned wrongly and you get a lot of shorts that have to cover and so it just never pulls back. It just goes right back up to the old highs very quickly, race through them and then the sentiment reverses to where everybody starts to chase and then the bubble phase unfolds.

So, it depends on whether this is the beginning of the bubble phase or whether this is just going to be another C-wave advance. If gold goes back and tests those $1900 all time highs very quickly in the next three, four months, by November, let’s say, if that happens, then I would say the odds are probably pretty good that we are entering the bubble phase.

TD: Gary, did you expect this two-year consolidation in the metals and miners to be so tough?

GS: No, and I don’t think this was a completely natural move. I think when Germany asked for their gold back and we (USA) obviously didn’t have it, I think forces were put in play to create a selling panic that would bring that physical gold – a lot of it came out of the GLD ETF – back on to the market and moved physical gold from west to east and then once that trend was established, the hedge funds jumped on that trend and exacerbated it until we just got a completely irrational selloff that has from all indications drained a huge amount of physical from the bullion banks and the COMEX.

Sentiment is at multi-decades low and we’ve got all the conditions necessary to trigger a bubble phase in an asset market and that’s where I’m coming from when I say I think we are starting the bubble phase in gold.

TD: Gary, do you expect a raging return of inflation, commodity prices and a potential loss of confidence in the dollar as this bull market in the metals continues to play out?

GS: I think we are going to have a currency crisis at the next three-year cycle low in the dollar. It has always been my theory that this contagion that began with the tech bubble in 2000 would work its way through the real estate and credit markets, into the sovereign debt markets and it would end in the currency markets.

So I think yes, we are going to have some kind of maybe a mini currency crisis this fall as the dollar works its way down into its yearly cycle low, and I think some kind of major currency crisis in the dollar next fall when we get to the major three-year cycle low. Common sense tells you there’s no way Bernanke can print trillions of dollars and not have something bad happen to the currency.

He can get away with it for maybe a year or two but something bad is going to happen just like it did in 2008 when he tried the same thing and we had a mini currency crisis in 2008. Commodity prices spiked, oil went to $147, and gas went over $4. It collapsed the global economy. We ended up sinking into the second worst recession since the Great Depression. This time the Fed is following the same game plan. So we’re going to get the same result.

TD: Gary, circling back around to gold, what do you need to see over the next seven to ten trading days to confirm this new move?

GS: Well, we did get confirmation on Monday. So we have confirmation that June 28th was indeed an intermediate cycle low and a yearly cycle low. So anyone that wants to trade the metals or the miners at this point, you can put a hard stop right below $1179. If that gets violated, then the odds are somehow the Fed or whoever has managed to abort the secular bull market and you might as well get out and be done with it. But I don’t think that’s going to happen.

I think that yearly cycle low is not going to get violated for the rest of the bull market and I think we are starting either another C wave advance or we’re starting the bubble phase. So I think you can trade the market from the long side from here with a hard stop below $1179.

TD: What typically comes with a C wave move in terms of the total size? Is it 50% to 75% moves for the bullion and maybe twice that for the mining equities?

GS: I think much bigger than that because we’re much later in the secular bull market. Each one of these C waves is getting bigger and bigger. The last one I think did 170% from the D wave bottom to the C wave top. This one should be bigger and especially considering that in my opinion we had some manipulation in the market.

So an artificial move down should make the move up that much more aggressive and go that much further. So if the last one did 170% and the miners did a little over 300%, this one should be bigger. So I would say we’re probably going to see 200% or more in gold and 400% or 500% in the miners if this is a C wave. If this is a bubble phase, then we’re probably going to see 300% to 400% from the bottom in gold at $1179 to the bubble top.

TD: Gary Savage, technical trader and publisher of the Smart Money Tracker daily gold commentaries, thanks for sharing your comments.

GS: Anytime, thank you.