Following a week of explosive 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.

Gary in your writings you’ve indicated that as of last week, the metals and miners have now completed what you call a “1-2-3 reversal”, which I’m wondering if you can talk about and explain the gravity of to people reading.

Sure. A 1-2-3 reversal or some people call it an A-B-C reversal, it’s just a change from a pattern of lower lows and lower highs to a pattern of higher highs and higher lows, and silver, platinum, palladium and the miners have all completed that 1-2-3 reversal within the last week. We were just waiting on gold to do the same thing and confirm that the cyclical driver of the sector was also in line with the rest of the metals and gold did that last Thursday.

Gary, a popular question over the past week, is if there will be another pullback for people to add positions after this explosive move. What are your thoughts there?

Well, it has been my opinion that the last eight months was not a completely natural move. I think the precious metals were manipulated to a great extent into an artificial bear market. But I think the manipulation for the most part is done, other than maybe a little short term stuff around options expirations.

So I think the big money is now trying to get in on the long side and I think this move up out of this bear market bottom probably isn’t going to behave like a normal rally. The market is breaking the manipulation and it’s going to have a violent regression to the mean for the secular trend to slam back into control. My earlier theory was that we were going to see a pretty strong V-shaped rally out of this bottom and if you look at a five-year chart of gold that appears to be what’s going on.

So it’s very possible we could see gold retesting the September 2011 highs in the next three or four months depending on how hard the dollar falls. If the dollar is testing the 2011 lows, I think gold is going to be testing the all-time highs.

What were your thoughts last Thursday when we saw the explosion take place in the metals and miners and at the same time the general equities market moved down strongly? Further, if the equities markets collapsed 10%, 20%, 30%—how would you expect the miners to perform?

I don’t think the stock market is ready to collapse yet, but we’ve got a big problem in the bond market. The bond market is starting to come unraveled and the Fed in my opinion is going to have to increase QE to try and reclaim control. It’s puncturing the eco bubble in housing.

So I think the Fed, at the very least, is going to continue to flood the market with $85 billion a month. That $85 billion has to go somewhere. I suspect the decline in stocks is pretty close to being over with. Maybe a few more days but I think we’re going to go back up. We’re going to make at least marginal new highs. If not, maybe a push to 1800.

But I also think that stocks are in the last leg of this cyclical bull market and I believe that once we top, I believe probably later this fall, that stocks are going to enter a really volatile trading range for the next year and as that process progresses and as liquidity comes out of the bond market and the eco bubble in housing, I think that liquidity is going to find its way into the commodity markets.

So I think the big trending moves from here until late 2014 or late 2015 are no longer going to be in stocks, bonds or real estate. I think it’s going to be in the commodity markets. Specifically I believe it’s going to be in the precious metals markets. It’s where the really big gains are going to be made.

Is there a point in your opinion where the traders and funds will catch the scent of blood in the dollar and begin piling on shorts or looking to make money with its potential currency crisis?

Yeah. I think there is. We’ve been in this megaphone topping pattern for about four, five months now in the dollar index and that is an expanding volatility pattern. It’s a sign of extreme stress. So I believe when the dollar breaks below the lower trend line of that megaphone topping pattern, the route will become very aggressive and we may even see the 2011 lows tested by October, November of this year.

What’s the most common psychological mindset you’re seeing right now from people looking at the precious metals space?

Well, I think the psychology right now is that people are still nervous. They’ve watched for eight months while this thing has dropped and bounced and then dropped again and on and on and on.

So a lot of people don’t believe the move yet and I believe they’re going to get left behind. In my opinion it’s pretty clear that we’ve put in a yearly cycle low and we’ve begun an intermediate degree rally, and I don’t think this is the time to be trading in and out of the metals market. I think you need to get in and stay in at least until this intermediate cycle tops and I don’t expect that to happen until the dollar cycle bottoms and that isn’t due until the end of October or early part of November at the earliest.

So I think people need to enter and then sit tight until later this fall at a very minimum. We will get some sense after the next intermediate correction as to whether or not the bull market is ready to continue or whether we’re going to continue chopping sideways.

Is this mental challenge typical of major long term bottoms where maybe a lot of people say, “Well, I will just wait for the next low,” and then it simply comes and goes and never returns, leaving the person behind, so to speak?

Very typical. When you have a bear market like we did, people are very nervous and as we come up off that bottom, they’re afraid to buy because they’re nervous and then they get into this mentality of, “Well, I’ll buy the dip.” Well when the dip comes, it looks like the bear market is resuming. So they can’t buy and they wait until we start going up again and exactly like what has happened this time, we go up very aggressively so we get overbought very quickly and then they can’t buy because it’s overbought.

So they’re back into that mentality. “Well, I’ll wait for a dip”. Again, as soon as the dip comes, it looks like the bear market is starting. They can’t buy again and so they continually miss the move, and then what happens is they start to become convinced that they’re buying at tops and they end up selling at bottoms.

So that’s how the bull continues to knock people off even as it goes up and that’s what produces these very aggressive moves. All of these people are chasing at the wrong time and then getting knocked off in corrections.

Like I said, I think at this point, it’s pretty clear we have at least a yearly cycle low and an intermediate degree rally. We need to get in, not worry about daily wiggles and just sit tight until later this fall.

Gary, what kind of time frame do you think big pools of capital (tens or hundreds of millions)—How much time does that money need in order to get positioned? Can they do that in just a couple of days or do they need weeks or months to fully accumulate whatever it is that they’re buying?

I think they positioned themselves during the bear raid. I think that was the purpose of the bear raid, for big money to not only knock the sector down, but to get a better entry. Let’s say if the next leg of the bull was to start at $1600 and go to – I’m picking a number out of the air but let’s say $3200. That would be about a typical leg up in the secular bull, about 100%.

So if you entered at $1600 and got out at $3200, you made about 100%. Well if you can manufacture a bear raid to move the market down and enter at $1200, and get out at $3200, now you’re not making 100%. You’re making 200% and you’ve knocked a lot of people off and allowed yourself an entry into big positions at a much lower starting point. I think that’s what happened over the last eight months.

So Gary, what are your thoughts here on performance going forward for mining shares, as well as silver? The mining industry faced a borderline extinction event over the last year. What are your thoughts when you look at those two groups?

I believe that both of those are going to be the biggest gainers over the next two years, simply because they got beaten up so badly, much more so than what the fundamentals were calling for. So I think the regression to the mean is going to be most violent in those two sectors.

To further ask you a speculative question—what kind of numerical expectation do you have for those two groups?

If gold tests $1900, I think silver could get to $40. In the miners, that one is kind of a toss-up. If gold is testing at $1900, the HUI could be testing between 500 and 600.

As a final question for people reading, over the next couple of weeks is there anything that people should be doing or thinking about?

I think the best trading strategy at the moment is just to buy and sit on your positions until we get some signal that the intermediate cycle is approaching a top and we’re not even close to that at the moment.