Debugging Gold for the Gold Bugs

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Fibozachi

 

In
our latest piece (within a series of analyses that detail both the
technical and fundamental landscapes of gold, silver, copper, oil, the
CRB (Commodity Index), the US Dollar, the EURO and the remaining major
currencies of the G8 in relation to one another), we at Fibozachi present an initial look into the technical composition of gold.

Tuesday morning we wrote,
“As participants of all stripes across the global financial marketplace
continue to chatter on incessantly about the topic of “runaway
inflationary pressures” and the, allegedly imminent, “collapse of the
US Dollar,” we at Fibozachi … bond markets and the $DXY (US Dollar
Index) each seem to be anticipating many far-reaching implications from
Uncle Ben and Co. about the winding down of QE (Quantitative Easing),
essentially the open spigot force providing full fire hose-like
liquidity the world over.”

Yesterday’s FOMC statement told us that:

“… With substantial resource slack likely to continue to dampen cost
pressures and with longer-term inflation expectations stable, the
Committee expects that inflation will remain subdued for some time ...”
-    Read: while effectively taming the yield curve in the process of
monetizing much of our recent debt, the strong undertow of deflationary
pressures continue to abound across not only the short-term horizon but
also well into the intermediate future.

 

The full release, reproduced here, went on to conclude that:

 

“… In order to promote a smooth transition in markets, the Committee
will gradually slow the pace of its purchases of both agency debt and
agency mortgage-backed securities and anticipates that these
transactions will be executed by the end of the first quarter of 2010.
The Committee will continue to evaluate the timing and overall amounts
of its purchases of securities in light of the evolving economic
outlook and conditions in financial markets. The Federal Reserve is
monitoring the size and composition of its balance sheet and will make
adjustments to its credit and liquidity programs as warranted.” 

When we copy and paste the last paragraph into
Microsoft Word, a single noteworthy grammatical structure within the
prose appears to employ a “Passive Voice” that Word continually
implores us to “consider revising.” For those who will take our own
word on it, the phrase is “will be executed.” Certainly, the fact that
this grammatical “error” (or Freudian slip) escaped the keen eye of
Uncle Ben and Co. may prove to be not only hilarious but also
ultimately insightful as the Fed continues the tedious task of steering the
battleship that is monetary policy back toward the tighter waters of an
increased discount rate in the months ahead. 

For a thoroughly insightful synopsis of yesterday’s Treasury Minutes,
we highly recommend reading the entirety of an article written by EB,
entitled “Treasury Minutes Suggest Fed to Remove $1 Trillion in Excess Reserves by March 2010,” that is available at Zero Hedge.

 

Before presenting our initial examination into the technical
composition of gold, please allow us to preface our singularly
technical work with a few links to some of the most insightful fundamentally driven research articles of the past few
weeks. While, we at Fibozachi predicate our work upon almost
exclusively technically oriented research, we certainly appreciate the
importance of well-written fundamentally driven research
pieces; in this vein we direct your attention to a handful of some
of the finest such pieces.

 

To understand why “[the]venerable institution … of the Federal Reserve
… must be insulated from political influence and intimidation”, please
enjoy the brilliant prose of Marla Singer, whose article, “On the Populist Capture of the Central Bank(s) in the United States”,
takes the “opportunity to offer a pair of novel and contrarian
theories”, into the political accountability of the Federal Reserve
System itself.

 

Similarly, Tyler Durden thoroughly details the Fed’s accounting machinations in a masterful piece, entitled, “A Rare Glimpse into the Fed’s Discount Window Courtesy of the Brewing Lehman–Barclays Scandal”, which helps us to understand why:

“... [there are] over 300 members of Congress who already support Ron
Paul’s “Audit the Fed” Initiative [and to] consider the implications of
what the Lehman fiasco has taught us, and how this unique look into the
Fed’s balance sheet should be a very critical reminder of just how much
risk the Fed is willing to take on with taxpayer capital when bailing
out a financial system that, absent ongoing accounting gimmickry and
endless Reserve Banking System subsidies, is still rotten to its core.”

 

Lastly, we direct your attention to a recent interview by Laura Crigger, of / available at HardAssetsInvestor, in which Jon Nadler, Senior Analyst at Kitco,
comprehensively details the fundamentals of gold from a distinctly
bearish vantage point.  In what we consider to be the single best
bearish synopsis of the basic fundamental drivers behind gold, Nadler’s
comments have become nothing short of a lightning rod for gold bugs who continue to respond with increasing derision to any data point or
point-of-view that does not effectively proclaim future gold prices
that reach into the exosphere.

 

Having noted the breadth of detail within these top-notch research articles and
position pieces to which our fundamental analysis could add very little, our personal opinion at Fibozachi is that after a very
sizable correction, gold will eventually reach parity with the Dow
Jones Industrial Average at either 2700 or 3800 sometime in the not too
distant future.  That said, this is only our personal opinion and bears
absolutely no reflection on our comprehensive technical analysis which
suggests that while the short-term (1-3 month) bull market in gold may
have already exhausted or will soon exhaust itself, that the outlook
over the intermediate horizon (6+ months) is decidedly bearish due to
various technical metrics that we detail below.  We hope that you
enjoyed our most recent analytic works, “Silver: Hangin’ on by a Sliver”, and, “FCX: Inflationary Goldmine or Deflationary Pyrite?”,
which, in collection with today’s initial examination into the
technical profile of gold, simply strive to spur further debate about
the argument of “inflation versus deflation” from a decidedly technical
vantage point.

 

As legendary strategists and tacticians of all stripes from David
Einhorn and John Paulson to Jim Rogers and Paul Tudor Jones publicly
proclaim that the pedestal of gold prices will increasingly escalate
alongside mounting inflationary pressures in the years ahead, we at Fibozachi are left to wonder what Paul Montgomery would think.  David
Rosenberg recently added himself to the list of high-profile gold bugs
by proclaiming that yesterday’s IMF sale of gold to India “…certainly helps establish a floor!”

 

While Tyler Durden summarizes the points within Rosenberg’s recent note here,
we would like every inflationista to please note how Rosenberg references the price of gold (pog) in
not only a $USD denomination but also that of the EURO, which is not at
a new nominal high in price.  Moreover, only the pog denominated in $USD is at such new, nominal
highs.  This is an extremely insightful technically oriented fact with
far-reaching implications for the intermediate / long-term direction,
which has been seemingly overlooked within the fundamental short /
intermediate term analysis of most mainstream analysts.  We at
Fibozachi will address this inescapable fact alongside much greater
technical detail within these pages in the weeks ahead.

 

Possibly, just possibly, there very well could be a new floor under the
price action of gold at the current price area, when denominated in
rupees.  That said, at its Socionomic
core, the Indian CB / gov't is no wiser or more foolish than that of
the US Fed, ECB or BOE, who infamously dumped all of their gold a
decade ago at prices c. 25% of today's.  And in the same Socionomic
vein, the Indian gov't is buying when their very citizens have become
net sellers of scrap gold, creating an undeniably marked
non-confirmation of the trend itself if not an outright negative
divergence within its final throes.  Reproduced below is a chart that shows gold denominated in US Dollars, Aussie Dollars, Euros and Yen; with the help of TradeStation, we hope to exhibit updated versions of not only the charts below but also gold denominated in all G8 currencies, in a future installment to this series.

 

 

 

 

Gold's Bullish Pennant Breakout

 

Reaching new nominal highs denominated in US Dollars, gold, as measured
through the trading vehicle of the GLD ETF, is highlighted in the first chart below.  After noting the simple pennant pattern, please
examine how volume decreased as the pennant developed and how the breakout
was accompanied by increased volume.  Various technical guidelines
from The Encyclopedia of Chart Patterns are freely available for the pennant pattern here, at Thomas Bulkowski’s website.


 

From the inception of the symmetrical triangle that developed within
the pennant formation, there were approximately 139 trading days (TD’S)
from the 2/20/09 high to the point of the upward breakout on 9/02/09. 
If, from its inception to its very apex, price action had remained
within the boundaries of the pattern, it would have spanned 176 trading
days.  Therefore, price broke out at 79% of the full depth of the
triangle.  As discussed within the last installment of this series, the 75-80% depth range is a frequent and healthy breakout point for patterns of various shape, size and variety.

 

A
possible measured move target of 14.06 from the last bar of the pattern
at 93.90 presents an anticipated profit target of 107.96.  With
yesterday’s high of 107.68, GLD registered a perfect Evening Doji Star,
with a close that was just 1 cent below its open.  Today’s price action
will complete an Evening Doji Star candlestick pattern if it opens with a downward gap and closes below the opening print.

 

 

 

Thanks to the bi-annual, “Free Week”, that Elliott Wave International currently provides anyone who clicks here,
we borrow a chart with full Elliott Wave labeling and quote below from the 11/04/09 edition of EWI's “Short-Term Update”,
written by Steven Hochberg.  As clients of EWI, we at Fibozachi highly recommend that anyone with an
interest in learning more about the Elliot Wave Principle take
advantage of their limited 'Free Week' by visiting EWI or simply clicking here.

Elliott Wave International Gold Wave Count

 

“… Yesterday’s strong gain carried the Daily Sentiment Index
(trade-futures.com) to 91 percent gold bulls from 83 percent the day
before. The single day 8 point jump in optimism is the largest daily
increase since an 11 point jump from 75 to 86 from March 18-19, 2009,
one day prior to the March 20 gold high ($967.95), which remained
intact for two months. In addition, each of gold’s prior short-term
highs coincided with optimism pushing above 90 percent, which it now
has … With silver still failing to confirm gold’s push and with
optimism back in the range of prior highs, odds favor that gold’s surge
is in its latter stages.

 

Anecdotally, the depth of belief in gold’s unlimited upside potential remains strong, as our office is still receiving emails claiming that
the U.S. Dollar is on the verge of being “devalued,” thereby resulting
in an immediate doubling of gold’s price to $2000. The U.S. dollar
cannot be devalued because it’s not linked, backed or convertible into
anything, which would allow it to be devalued. Such was not the case
back in the 1930s, when President Roosevelt devalued the dollar by
raising the price of gold from $20.67 to $35.00. But back in 1934, one
could, by law, convert their dollars into a set amount of gold. No such
linkage exists today, making devaluation impossible.”

 

Put in other terms, allow us to whimsically ask: how much credit card debt do you have that is denominated in Euros?  Is your 2nd mortgage denominated in Yuan?  Any remaining fixed interest student debt that is denominated in gold or pounds?  How about car notes denominated in silver, oil or the Amero?  You see, the simple inescapble fact about fiat currency, particularly the $USD (with $52 T of USD denominated debt, of which half is personal), is that damn near all our collective debt is denominated in the all-encompassing power of its "value;" where value is an entirely notional metric that is dependant upon the whims of our collective thoughts, feelings, emotions, insights, outlooks and interpretations into the collective future valuation of human enterprise.

 

When measured against the backdrop of this $52 T number outstanding and an undeniably deflationary landscape that has witnessed a sharp and unprecedented contraction in the velocity of the money supply, $2 T in targeted Fed credits to financial intermediaries who have hoarded much of the "money" into the relative safety of various Treasury spreads begins to seem rather paltry.  For a complete explanation into the tenets of Socionomics, please see Robert Prechter's groundbreaking work within, Pioneering Studies in Socionomics, and, The Wave Principle of Human Social Behavior and the New Science of Socionomics, which are collectively entitled, Socionomics: The History of Science and Social Prediction.

 

HUI: The Gold Bugs Index and Fibonacci Cycles

 

Kitco describes the $HUI Index and lists its components, here, stating that: “The AMEX Gold BUGS (Basket of Unhedged Gold Stocks) Index
represents a portfolio of 15 major gold mining companies.  The index is
designed to give investors significant exposure to near term movements
in gold prices – by including companies that do not hedge their gold
production beyond 1 ½ years.”

 

Much like the CBOE Gold Index (an equal-dollar weighted index composed
of 10 gold miners further detailed here), the $HUI’s inability to
eclipse its old highs at 520 combined alongside the fact that silver, precious metals, oil and the CRB (Commodity Index) are
nowhere even close to ploting new nominal highs, serves to significantly
support the primary Elliott Wave count for gold.   It is extremely important to examine the chart profile of the $HUI because it contains a price data series that extends at least one full cycle from the 2000 low; whereas the GLD ETF and the @GC, the continuous contract for gold futures, each do not contain such far-reaching price series data, since they were each respectively introduced into the marketplace on 11/18/04 and 5/14/01.

 

In
examining the monthly chart of the $HUI Index below, it is extremely
interesting to note that there exists a perfect alignment of monthly
Fibonacci cycles that has remained accurate thus far. Measuring from
the closing low of 2000 to the closing high of 2008 creates a Fibonacci
89 months; gold now finds itself 20 months from that same March 2008
high.

 

Due to this ‘naturally harmonic cyclicality’ within the $HUI, we at
Fibozachi remain on high alert to the heightened possibility that
sometime within the next month may mark a significant inflection point
for gold.  While we anticipate that this month will mark a significant
high in the $HUI that will kick-off its next down leg, we must
remain vigilant to the possibility of a rapid acceleration during this
period; ushering in yet more new nominal highs in very rapid succession.


 

While this initial look into the technical composition of gold is by no means meant to be complete, we at Fibozachi would like to thank you for taking the time to examine this initial technical profile of gold with us today.  The next upcoming installment within this series of analyses (that strive to comprehensively detail both the technical and fundamental landscapes of gold, precious metals, oil, the CRB (Commodity Index), the US Dollar, the EURO and the remaining currencies of the G8 in relation to one another) will be published here on Zero Hedge Monday morning.  We hope that you have enjoyed our work and look forward to spurring further insight about the comprehensive technical profiles behind the debate that continues to rage on about “inflation versus deflation” over the days and weeks ahead.

Disclosure: no current position

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