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Gold may have declined in the last two weeks but I remain as bullish as ever, for reasons old and new. I will explain all, but first an apology.

Sorry I disappeared for eleven days. For those of you who wait with baited breath for my next missive, I hope you survived the suspense! The reason was medical: I had to have my thyroid removed, along with a malignant little bugger growing off of it, and the surgery took more out of me than I expected. But all is now well (or getting there) and I have good reason to believe no more treatment will be needed.

It seemed a pity to remove my thyroid, a perfectly functioning organ, because of something attached but exterior to it – but that's how things often go, isn't it?

Take gold in 2012. After the price soared to overbought levels in August 2011 it had to correct and it did, falling 19% by mid-2012. Gold stocks fell multiples of that, with the Market Vectors Gold Miners ETF (NYSE: GDX) sliding more than 40%.

That might have been that. Gold staged a double bottom in May and started to rebound…until the Federal Reserve announced QE3.

That massive monetary move was gold's malignant bugger: an external but related problem. The stock markets, as we all know, shot upwards and investors ditched gold in all its forms to ride the markets up. Paper market speculators ditching their ETF holdings hammered the price of gold; generalist investors abandoned falling gold stocks in favor of any number of rising alternatives.

That seismic shift drained gold's reasons to rise of their strength and, without that support, a gold market that had been operating rationally was rendered dysfunctional.

But there had been reasons for gold to rebound back then…and those reasons did not disappear. They were sidelined, to be sure, but while awaiting their turn to play they grew stronger.

Now, with QE over in the United States, those reasons are reasserting themselves. And investors are responding.

Take this chart, which shows the capital volume of GDX over the last four years. Capital volume – a share's trading volume multiplied by that day's closing share price – represents the amount of cash actually changing hands around GDX shares. Total traded capital incorporates the fact that a GDX trade in 2011, when shares were worth $60+, was more significant than a GDX trade in 2014, when shares were worth less than $20.

The blue line is GDX's share price. Red is daily capital volume. Yellow is the one-month moving average of GDX's capital volume.

What matters here is the upward trend in capital volume since mid-2012.

Price is the most important technical indicator, but volume is second. Trading volumes – and capital volumes even more so – reveal traders' belief in the staying power of a price movement. Low volume price moves generally fade out quickly because they lack conviction. High volume moves, on the other hand, often mark a real trend.

For GDX, capital volumes have generally climbed since mid-2012 despite a share price that has slid 65%. Think about that: the amount of capital traded around GDX shares increased notably while the price tanked.

The climb has not been consistent, but interestingly capital volumes spiked each time gold rallied. In that I see gold-interested investors buying in to each rally in the hope that it was the real rebound – and in the knowledge that a real rebound had to happen sooner or later.

That real rebound has now gotten underway: as I called in mid-November, gold bottomed in early November and will ascend from there (in fits and starts).

The capital volume response to the early stages of this rebound has been remarkable. In January, GDX capital volume averaged $1.2 billion per day. That's higher than the cash trading hands in August 2011 when GDX was heading into its record high.

There are two reasons this kind of capital volume right now matters.

First, volumes usually grow gradually during turnarounds. First contrarians enter; traders come next, followed by generalist investors, all lured by rising prices. If volumes are this high now, imagine what they could be when the bull market is truly running.

Second, high capital volumes require both buyers and sellers. In late 2014 GDX was trading below $20, a level not seen since the worst days of 2008. Gold stocks were ridiculously out of favor. But in the depths of that disfavor, when one would expect no interest in gold trades, capital volumes were actually growing. Why? Because the last of the weak hands were capitulating, selling their holdings, and the first of the strong hands – the contrarians – were moving in.

As I've said before, those strong hands won't sell until they've made some good money, something they know will happen because mining in general, and gold in particular, moves in cycles – low lows set the stage for big runs. Their presence in and understanding of the market establishes a strong foundation for gold's rise.

The capital volume chart of GDX's younger sibling, the Market Vectors Junior Gold ETF (NYSE: GSXJ), shows just how many dollars are being bet that it is time for gold to cycle up.

The surge in capital volumes in the second half of 2014 started with renewed buying interest from investors watching the price of gold sneak close to $1400 per oz., but then shot up when paper market speculators had their last hurrah and shorted gold all the way down to $1140. That price decline was a final kick-me-when-I'm-down to investors who had been holding out and the capitulation was massive. Just look at that spike – capitulation on that level is a clear bottom marker.

Since then GDXJ has acted accordingly. It lagged GDX in January but still gained 15% - and maintained major capital volumes.

( A shout out to Adam Hamilton, whose article on Seeking Alpha inspired that discussion. )

That's great, but what's up with gold right now?

That capital volume story is great, but I'm sure many are wondering about gold's more recent moves to the downside. To that, a few comments.

First and most importantly, this is Chinese New Year. Chinese individuals have been crucial to gold's rally – and will continue to be – but right now they are all off celebrating, not buying gold. That is a short-term situation and when the celebratory week ends I expect a surge of Chinese gold buying to lift prices again.

Second, every rally gets corrected to some degree. Gold went on a pretty grand run in the first three weeks of the year, rising from $1170 to just shy of $1300. Gold stocks multiplied the effect, some (like Maven holding Iamgold) gaining as much as 60%. Gold companies capitalized, closing a whack of financings ($900 million and counting).

That kind of momentum was not sustainable at this point the cycle. Later, when the bull is truly running, such moves can last, but in the lull between bear and bull there is not yet enough conviction to solidly support big moves. So a correction is no surprise. A strong US jobs report did not help gold, nor did the aforementioned coincidence of the Chinese New Year. But this is a short-term retraction, not change in the long-term, bullish outlook for gold.

The positive correlation between gold and the US dollar is also weakening, though it has not broken down. After gaining 18% in six months, the greenback has traded sideways for the last month. Gold joined the rising dollar in January, gaining 8%, before giving up much of that gain to today stand at a few percent gain on the year.

Much was made of gold's link-up with the dollar, and rightly so: the last time the two correlated positively was in 2009, just before gold's great run. Now the connection is weakening, but that is not necessarily a bad thing.

I have said it before and will say it again: when gold goes on a bull run it does so because of its own fundamentals, not because of what is happening with the dollar. And those fundamentals are strong right now. Central banks are aggressively buying gold. Demand is set to outpace supply. Geopolitical risks and currency questions abound.

Meanwhile the fate of the dollar is hard to predict. It rose partly because of strength in the US economy and largely by virtue of being the best of the bad lot, preferable to the Euro or the Yen or most other global currencies. That contrast will continue – neither the Euro nor the Yen is going to strengthen anytime soon – but the dollar's inherent strength depends on continued economic growth at home, something less certain.

The thing is, whatever happens with the dollar, gold can rise. If the US economy continues to make progress the dollar will continue to climb, putting downward pressure on gold, but sustained Asian buying will keep gold in a good range until supply issues rear up and add upward pressure. In addition, a stronger gold price could well attract some of those US investment dollars – many of which need somewhere to go now that oil is down and out – into commodities, creating concurrent US and gold market runs.

On the other hand, if American markets top and turn down that would be even better for gold, which almost always runs when the S&P is in a long-trend bear trend. There are some indications such a change is in the works, but the signals remain unclear. It is my belief that US markets will stutter soon – consumer spending has been weak and the strong dollar is importing deflation, in the context of a bull run built on meager real economic gains.

Forces such as those are precisely why I do not believe the Federal Reserve will raise interest rates any time soon. Interestingly, minutes from the last Fed meeting, released this morning, made for more confusion than clarity on that question. Take this key statement:

"Many participants indicated that their assessment of the balance of risks associated with the timing of the beginning of policy normalization had inclined them toward keeping the federal funds rate at its effective lower bound for a longer time."

What does that mean? It could mean either of

  • Keeping rates lower longer than markets currently expect
  • Keeping rates lower for longer than they would normally keep them down, which is already the situation and suggests (especially because of the tense "had inclined") that mentality is over and thus a rate hike is pending.

How did the market respond to this confusion from the Fed? Gold, which had been slipping through the day, jumped $10. The dollar, which had been trading sideways, stayed its ground.

So you see, gold goes up regardless. I realize that's an oversimplification and extrapolates a situation too far, but the essence is true. Gold has many reasons to rise, regardless of the dollar.

This idea has widespread support…even from gold bears.

Most gold commentators these days are bullish on the yellow metals, but even the remaining bears generally have targets not far below where we are now, and over pretty short timelines.

You see, most gold bears know the price of gold cannot go below the average all-in sustaining cost of production, which sits somewhere between $1100 and $1200. If it does, miners will stop producing gold – but that's a self-correcting problem because demand exists, so the price will correct to put mines back into production.

Since the price hasn't run much above that floor yet, the most bearish forecasts are for the price to take one last dive, down perhaps $150 below current prices, before rebounding and then running.

All in all the outlook for gold is pretty rosy, from every angle.

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