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Last week, we did a preliminary study about why the precious metals market is in for a major bull run in Gold & Silver Are In For A Major Bull Run. If you haven’t read it, I suggest you do so, as we’ll be doing an in-depth study in today’s post. Right now, we are going to examine some important charts to accurately predict how high gold and silver prices are going to reach, and when this is likely to happen. For the safest investing option for gold & silver, we recommend buying and holding at least 10 - 30% of your net financial assets in physical gold or silver bullion, e.g. gold coins, bars or ingots.

First off, we’re going to look closely at some charts. The first chart we will discuss is the three-year daily Gold Prices chart:

Please pay close attention to the similar chart patterns in the circled portions. Also we see here that after the May 2006 rally and then in March this year, Gold Prices entered a consolidation period that took the form of a descending triangle. This is also reflected in the Moving Average Convergence/Divergence (MACD) Histograms in the bottom part of the chart.

Also note that in Mid-April 2006, gold proceeded to break out at $625 per ounce and rallied to a 60%-plus gain. We could be in for such a rally again soon.

The other major point about this chart is the extremely strong underlying support given by the 200-day moving average (red line) – roughly the average price over the last year’s worth of trading sessions. In rare instances, such as following the 2006 peak, gold briefly broke below its 200-day moving average, but it didn’t stay there for long.

The next chart we shall examine is the three-year weekly Gold Prices chart:

You will notice that this chart has some strong similarities to the daily chart. It has the same descending triangle formations following intermediate peaks. Even more so than the 200-day moving average in the daily chart, the 50-week moving average (also the 12-month average) has been pretty much unbreakable during this bull rally.

Although we are getting close to an entry point in this market, I don’t think we are quite there yet. We have entered a trading period where the spot price is trading between the 50-day and 200-day moving averages. They will continue to squeeze together until something breaks. This is a signal that a strong move is near.

In the weekly chart, we would like to see the 50-week moving average fully catch up to the spot price. Again, the 50-week moving average has acted as unbreakable support, and we recommend you get your money in, at or near those levels.

So we’ve made our argument for the possible beginning of a new bullish phase in precious metals, and the next question to pose is how high will the next rally take us? This is a difficult question, especially with the ever-changing atmosphere in financial markets.

We are going to use the various charts (as well as the three-year daily Gold Prices:Oil Prices chart below) to make an educated guess as to how high the next rally will take us as well as to come up with some specific numbers:

Remember here is a strong correlation between the price of oil and the price of gold (and silver). The last time the Gold:Oil Prices Ratio dropped to current levels, it rallied sharply.

Of course, nothing is guaranteed. But let’s go ahead and assume that we’ll move back to 12 barrels per ounce. Let’s also use current oil prices of $135 per barrel. That gives us a target price for Gold around $1,620 per ounce.

Now let’s say gold rallies amid an oil rally to $150 per barrel. With a gold:oil ratio of 12 and $150 oil, we’ll get an approximate price of $1,800 per ounce.

Let’s refer back to the three-year daily Gold Prices:Oil Prices chart. The percentage rise in the price of gold between the 2006 breakout of $625 and the peak of $1,025 per ounce was approximately 60%. If the next rally moved another 60%, we would be looking at gold around $1,600. This is almost consistent with the figures we’ve derived using the gold/oil ratio.

Using all of the above data, we believe that the next interim high will be in the neighborhood of $1,700-$1,900 per ounce. But there are some things we have to keep in mind.

In a gold bull market, like the one we’ve had since 2000, each consecutive bullish phase tends to move by a higher percent than the prior one. For example, although the rally to $1,000 gold was approximately a 60 percent rally from the last intermediate high, the next rally could result in a 70 percent move. This is a result of the “Johnny-come-lately” investors entering the market. Each rally simply has more investors than the prior one.

There’s another item worth noting. Although the 2007/2008 gold rally was spectacular, it didn’t sprint out of the gates. You can see that at the end of 2006 and in the first half of 2007, gold just didn’t move much. After a brief rally, it kind of puttered around. But looking more closely, you can see that the chart was actually making higher highs and higher lows, building a solid base. We may have a period like that in the following months.

All in all, I think we are close to a really great entry point in precious metals. We recommend buying gold & silver and getting comfortable with their price action in order to determine a proper entry level.

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