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Is Gold Crash Proof This Time Around?
I’ve been
receiving quite a few emails regarding the topic of Gold and how it will
perform if another Crash hits. The following are my thoughts on this matter.
The first
thing that needs to be said is that IF we have another systemic meltdown like
that of Autumn 2008, Gold will likely go down along with everything else. There
are simply too many big players (hedge funds, investment banks, etc) with heavy
exposure to Gold who would be forced to liquidate their positions during a
systemic collapse.
I know this
is not what the Gold bugs want to hear, but during systemic Crises, just about
every investment on the planet plunges while the US Dollar and Treasuries
rally. Of course, this time around if another 2008-type event hits, it will
undoubtedly involve or be focused on sovereign debt. So this raises the
potential that Treasuries, particularly those on the long-end of the yield
curve, could be hammered as well as all other assets outside the Dollar. This
is worth keeping in mind for those who view Treasuries as a safe haven.
So if we go
into a 2008-type event, Gold will fall.
It will likely fall much less than other assets (stocks and industrial
commodities), but it will still go
down at least at first. This forecast is confirmed by the market action in 2008
as well as the market collapse from April 2010-July 2010. Both times Gold took
a hit, but both times it came back quickly.
So if you’re
heavily exposed to Gold, you’re going to need to think “big picture” or have a very
strong stomach when the market Crashes.
Now, let’s
take a look at the charts.
For
starters, the number one metric you need to focus on in terms of determining
Gold’s market action is the 34-week exponential moving average. Since the Gold
bull market began in 2001, this has been THE support line for Gold.
As you can
see, Gold has only broken below this line ONCE in the last ten years and that
was during the 2008 systemic collapse. So take a note of this line and always
watch where Gold trades relative to it.
Indeed, a
significant break below this line that DOESN’T occur during a system Crash
would be a MAJOR warning that the Gold bull market is in trouble. Remember, the
ONLY time we took this line out before was during the systemic collapse in 2008.
So a break below it WITHOUT a Crisis would be VERY bearish.
And if Gold
breaks below this line on its own (without a Crisis) and then fails to reclaim
it… well, then it would be SERIOUS time
to reevaluate the Gold bull market story.
Because of
its significance as THE support line for the Gold bull market, the 34-week
exponential moving average also serves as an excellent gauge for determining
when Gold needs to take a breather or correct.
Indeed,
anytime Gold has stretched too far away from this line to the upside, it has
usually staged a pretty sharp reversal to re-test this line. I’ve circled the
most significant episodes of this from the last seven years in red on the chart
below.
These are the BIG picture gauges and items
to take note of: the points to remember in terms of determining where Gold is
in its bull market and whether it’s an asset class you want to “buy and hold.”
Now let’s
move into the more intermediate gauges and items relevant to determining Gold’s
action from a trading perspective in the past and today.
Gold’s bull
market of the last ten years has largely taken place within the confines of
several very clear upward trading channels. Indeed, each “leg up” has featured
Gold breaking above the upper trend-line of a given channel at which point said
upper trend-line became the lower trend-line for the next trading channel (see
below).
As you can
see, the first “leg up” in Gold’s bull market took place from 2001 to late
2005. At that point Gold broke out of its old trading channel and entered its
“next leg up” which took place from 2006-until early 2008 when the Bear Stearns
crisis blasted Gold into yet another trading range.
The systemic
Crash in Autumn 2008 brought Gold back down into a former range (the only time
this happened in the last 10 years), but the precious metal bounced back
quickly. It DID have some difficulty breaking into its final “leg up” and
staying there this time around, but by mid-2009, Gold was again on a tear
entering its highest trading range yet where it remains today.
You’ll note
that the clear significance of these various trend lines have made for some
great trading: virtually every test of a trend line to the upside or downside
made for a good exit or entry point for a short-term trade.
As I write
this, Gold is trading in a well-defined range between $1,150 and $1,300. Going
by Gold’s action of the last 10 years, we could see the precious metal continue
to trade in this range for a while without breaking out either way. This, of
course, assumes we don’t have another systemic meltdown AND that the Gold bull
market has plenty of more room to run.
The major
indicators that could nullify this forecast are:
1) A
break below the lower trend line WITHOUT a Crash
2) A
break above the upper trend line that held
Regarding
#1, if Gold broke below its lower trend line without a systemic “episode,” it
would represent the first time Gold broke to a lower trading range without
systemic risk. That would be a MAJOR red
flag to watch out for if you’re a Gold bull.
Conversely,
a significant break above $1,300 would signal yet another “leg up” has begun
and would a MAJOR sign that the Gold bull market has plenty of more room to
run.
A final
significant move to watch for would be if Gold were to collapse into a lower
trading range as a result of a Crash and NOT break out again. Even during the
2008 disaster, Gold was back to re-testing its upper trend line within a few
months. So if another systemic Crash hits and Gold doesn’t bounce back quickly
that’s ALSO a major warning sign that the Gold bull market is in trouble.
We’ve
covered a lot of ground here, so I’ll close this article by listing the main
points of this article:
1) “buy
and hold” Gold investors MUST focus on the 34-week exponential moving average
(currently $1,158). A break below this level WITHOUT a Crash is BAD NEWS.
2) Traders
should focus on Gold’s trend lines for determining entry and exit points.
Currently the trend lines are $1,300 on the upside and $1,150 on the downside.
A break below $1,150 WITHOUT a Crash
would be a MAJOR warning to the bulls. So would a break below $1,150 WITH a
Crash that wasn’t quickly followed by a strong bounce back and re-test of the
upper trend line.
Good Investing!
Graham Summers
PS. to get more in depth market analysis and find out about a proprietary "buy and hold" trading trigger that has caught both major "legs up" in Gold AND avoided the
2008 Crash, you can join me at www.gainspainscapital.com.
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Congratulations to all the comments. Nobody seriously said that you can't eat gold.
See how reasonable (and of less useless length) the comments get when Johnny Bravo is out delivering pizzas.
I suspect that JohnnyB is going to have some serious 'splainin' to do to his handlers for having missed out on trashing an entire ZH gold thread! I think that might just be a first for him.
(1) Another liquidity crisis will cause gold to drop, IMO, because when you get a margin call you've got to sell; it's not about panic, but rather necessity.
(2) I don't see why gold is such a tough chart to read; it has marched forward for a decade. I would take out my ruler and extend the line until something tells me to stop.
(3) I see nothing in the land of fiat currency to tell me this bull market is over; the central bankers of world seem determined to print.
(4) I read the prospectus for GLD and, although I own a little for pragmatic reasons (CEFs premium got so high I decided to do a little arbitrage), my paper gold is in CEF and my physical gold slowly grows. I think GLD was designed to absorb demand. Anybody who thinks they won't default is dreaming. If GLD goes to the comex for delivery, are they going to be given shares of GLD? The fact that GLD is a susbstitute for physical tells you that it is not physical.
(5) I buy physical with cash in small increments to stay off radar. Get receipts in case you have to sell it on radar. Think of it as a Roth IRA. The fact that you invest to overcome the consequences of inflation and the they tax their inflation irritates me to know end (and motivates me to mitigate this damage.
(6) My dad used to say (in the context of corporate bonds versus treasuries), if you want to get to safety, make sure you get to safety (buy treasuries). Physical is safer than CEF is safer than GLD is safer than paper currency is safer than RIMM and AMD.
(7) Short of various Mad Max scenarios, my biggest fear is that they successfully shove us to a cashless society. The banks will then be able to dictate the terms of every transaction. Physical would be hard to sell off radar. Of course, we have seen what happens to the fees on ATM machines: The technology skyrockets, they are on every street corner, yet the fees go from 50 cents per transaction to $3. WTF? Free market in action?
(8) I am finding myself pondering increasingly aggressive acts. It is feeling very 1775 to me.
I have to agree with others who have said it depends on the substance of the next crisis. If the energy crisis accelerates, having gold won't matter much. If you can't grow enough crops because fertilizer isn't available, you can't eat gold either.
Ifs and buts, candy and nuts.
I tend to not pay attention to analysts who FEEL the NEED to CAPITALIZE for EFFECT.
Why 34 weeks? Because it fit your thesis? Besides, it did fall below that line before 2008, as you can clearly see in your graph.
And yes, I fully expect a sell-off during another "event". Then I'll be buying more, thanks.
If the paper value of gold and silver crashes like in 2008, just try to get your hands on physical.
The time to get out of gold is when the mainstream press (the 'red tops' as they are known in the UK) carry full front page stories about it and exhort people to buy, and not before.
I remember it happening here in the UK when gold was at $880 in the early 1980s and The Sun was all over it - the price tanked.
DavidC
I suppose, if you're trying to trade. I really couldn't care less what the headlines say, good or bad. I hope that the same stash of PMs we have now will be hidden away in the homes of our children and their children and their children....
This article is sooo 2008.
I don't know...His tone is bearish on gold, I think.
"So if we go into a 2008-type event, Gold will fall. It will likely fall much less than other assets (stocks and industrial commodities), but it will still go down at least at first. This forecast is confirmed by the market action in 2008 as well as the market collapse from April 2010-July 2010. Both times Gold took a hit, but both times it came back quickly."
How can someone claim this when gold went up from 1120$ to 1260$ between april 2010 and July 2010? Are we f.cking looking at different charts, or can some people not read charts at all? I am seriously fed up with this bullshit, LOOK AT GRAPHS please..The markets plunged between November 2008 and March 2009 as well, and what did gold do? Go up from 750$ to almost 1000$...The only time, but the ONLY time it SIGNIFICANTLY went down along with the markets is between September 2008-November 2008, while noone understood what was happening and was liquidating just EVERYTHING!!
Well, mac, I think you pinpointed the big question. Will the PM market have wised up or is it set up to panic again? Just when I think people are starting to figure it out they fall back to old habits. All this money in Treasuries makes me doubt how many have learned anything.
Dangerous to think that the next crisis will look exactly like the last one.
The last one was triggered by liquidity problems in the banking system. This will not happen again - the Fed/ECB have created new system to prevent this.
The sharp break in liquidity caused the huge Dollar run up the last time around.
What if the next crisis -is a fear of the Fed overdoing the stimulus. Fed is focused on unemployment in the US ( has to for political resons). This unemployment is likely structural and unlikely to improve any time soon. So - ignoring everything else the Fed stays too loose.
Commodities/oil - spike - trigerring fears of stagflation.
This could be the shape of the next crisis.
agree, that's a very plausible scenario.
Ye guys are way to USA centric in your views and assume when the more serious leg down occurs that the world will remain on the dollar system.
There is a limit to everything and to be under the assumption that Continental Europe will accept more pain via printing of US treasuries is dangerous.
Europe is struggling to pay its debts at the moment and in the next leg down will find it impossible to hold Europe together.
The ECB will in extremis bid up gold to protect German and French treasuries from the coming defaults on the Periphery and this could happen at any time as too much energy as gone into this project to dick around when the time is right.
Also Italys fiscal debt postion would be solidified and smaller countries with size able gold positions such as Greece can reduce their real debts.
Not everything can be seen in the charts - gold has always been a political weapon as well as a holder of value.
Essentially the same warning, minus the chartology and the specific numbers, is made by Bill Bonner over at Agora.
Bill Bonner has exceptional writing skills and he made a great call on gold in 2000. In Jan 2010 Bill made another 'call of the coming decade'...buy gold on dips and buy stocks of big Japanese firms.
James Kunstler has exceptional writing skills and he made a disasterous call regarding Y2K prior to 2000. Now Kunstler is living in the boonies and growing carrots while continuing to publish a weekly blog.
My point is...great writing skills in no way insure the author is making the right asset call at any given time...but, great writing skills combined with out of the box thinking and knowledge of history/economics can equal great book sales...and great book sales can help a guy that is a financial advisor.
Just sayin...
The only guy I listen to on that site is the great Mogambo Guru. A man of exceptional wit, class, and taste.
The Great Mogambo mentioned Tyler/Zero Hedge yesterday in "China Enters the Gold Market"
http://dailyreckoning.com/china-enters-the-gold-market/
Talking of charts- u can have a gold and silver chart running maybe 5000 years. Tell me which currency chart can one run for more than 240 years!
The dollar is to oblivion - sooner or later.
The next systemic crisis will be when foreigners dump their holdings of USD and a few trillion $ come back to the U.S. looking to buy anything at any price
Gentlemen, get your Dow 100K hats ready, which incidentally will also be the price of a nice cup of coffee
Every chart that would say gold is thrash... I expect to see. Only thing is those are manipulated manufactured charts and Gold is real money. Get It?
Clearly...he doesn't get it. I don't think he even knows what Planet he's on!
Complete and utter rubbish and not to mention Government propaganda!
- 29 billion
Can you use this 34 ema and or a crash and the paper gold market to protect wealth? How about buying some puts on GLD at the right time?
Have you read anything above your comment/questions?
Weak hands might get shaken out.
But isn't the bigger picture that there will be more $ chasing matching physical?
Yeah, LeP, gotta agree that's the big picture. There's a lot of paper out there. Anyone selling metal would be really desperate. I'm assuming the big players are building their real money stashes while they play the paper game. We could see a down elevator for paper, quickly followed by a moonshot chasing real money. And I'm assuming with all the low volume trading that a lot of cash is already on the sidelines waiting patiently. Some who got burned last time are sure to have wised up.
US$ & Treasury Rally!
Oh yes in yester years they had some value.
Only fools and colluding politicians/bribed govt officials in other countries think the way you do.
Phoenix Capital Research should also research how long a fiat currency like the US$ can exist
The whole point of the gold ETF's is to provide a vehicle for hot money to bet on gold. The more hot money is in gold, the more it acts like a stock, subject to runs and crashes, forced liquidations, etc. This plays into the CB's strategy, to undermine the sheeple's faith in gold (too risky!), to destroy the public's understanding that gold is money. The more the cartel can make gold's 'price' jump around in sudden and unpredictable ways, the less it is viewed as money. This is a strategy to scare the sheeple into having faith in fiat (or at least to destroy their faith in the security of opting out of fiat).
Those of us who understand that gold is money are not concerned about the cartel's efforts to create sudden, frightening price movements. There is enough hot money in paper gold now to cause a large, fast, scary downdraft in the 'price' of gold during any significant market drop, but the move is almost meaningless, as small investors will not be able to buy physical gold at any sudden beaten down price, and gold will recover faster than the commodity or stock markets. The ROW CB's have basically put a floor under the POG, because they are all accumulating now, and on any major price drop they would step up and call BS on the paper gold game. The Crimex is close to default now, and must have higher prices to attract enough gold to cover the small fraction of paper gold contracts that stand for delivery. In fact, the Crimex rules now allow gold contracts to be settled in GLD shares, which can be turned into actual physical delivery, but not without lots of delay, huge share requirements, and reduction of actual physical against the gold contracts tendered. All this means that the paper gold game is rapidly parting reality with the physical market, but the cartel will not give up without a fight.
Summers comments show that he is either a shill for the cartel, or is so focused on TA that he can't see (or refuses to see) that the cartel is intentionally setting up the paper gold market to instill fear and create volatility.
Two years ago, geopolitically, China, Russia, India, Brazil where NOBODY. Not any more.
Just wait another two years. I am sure China will "Call" the fiat US$ bluff!
As for the Middle East, 20-30 years ago, it was populated by beduins living in a desert. Now, there are well over 500 millions of them.
I do not think, following a crash of the fiat US$, the USA will be able to dominate the region any more. Then, the USA will have to pay in real money for their oil.
10 year traded at 52 week low of 2.75% today. Ben's 'unusual uncertainty' drives treasury yields lower, commodities higher. Announcement of 'baby QE', using MBS interest to buy more treasuries, caused gold to spike up, equities down.
Gold is real money and any future financial crash might push down price of gold short term but financial fear plus attempting to inflate the money supply will drive gold back up, just as in 2008. Interesting that while the Fed throws all the electronic money into the black hole of deflating MBS gold has been steadfast.
I am not buying Summers analysis. In fact, technical analysis has no place when all markets are being manipulated by CBs plus investors must wait for the latest bs from the fomc. If the big four commercial shorters lose their grip the gold spike will blow your charts to hell and gone.
Buy and hold physical...it will not go to zero but all paper eventually does.
TA no, fundamentals yes.
Marty Armstrong thinks gold is going north. Also that we wont have a Mad Max. So no worries ;)
Given the well-documented manipulation of gold going back decades, how could one rely on TA, and not only with gold?
For me, the only question is whether to have fiat monolopy paper available to buy more physical gold if and when the gold price takes a hit ... IF IT DOES. And, to my mind, that's an credible IF. And, moreover, there is the risk of holding fiat.
I hold enough dollars so that I will not be forced to sell gold into what could be a temporary dip in gold price...and I never use leverage or buy paper gold. You have the right idea...have enough dollars to buy if gold price dips and don't get shaken out of your gold to raise dollars...Not advice, just sayin what I do.
God I hope it goes down and stays down in a crash, so I can load up with any excess cash have. It probably will, though depending on the nature of the crisis we might not see a run into dollars. This gold bug is rooting against gold...if gold win it means the dollar loses and I kinda like my dollars still buying things. I only have it to make sure I don't get destroyed by Zimbabwe Ben and the Magic Printing Press. I'll hold onto my gold till America is on firm financial footing, and if does just blow over I'll chalk up any loses to insurance and a learning experience. God knows I've wasted money on all manner of entertainment and foolishness, in the scheme of things it could be one of my less costly blunders.
+ $1200 as usual for smart thinking Shameful.
Best get cracking on bringing in some FRNs. WIll gold go to $900 soon? Will it go to $$1500 soon? I don't know.
BBut I sure know what I want if TSHTF. Physical gold.
I'd rather have food and beer to ride it out. Food and alky is not as cheap as it was two months ago when priced in gold but it is still very low.Two ounces of glod will buy decent food for one adult for year right now.
If you truly believe that things will get as bad as your posts suggest you should heed the arses that say, "you can't eat gold".
I'm sure DCRB has his food and much more. Most gold-bugs are well stock with food, water, plenty of guns, bullets and buckshot. What good is storing wealth in gold & silver, if you don't have food and water for up to six months.
That is the first step IMHO. Then build your PM's if your new to the game.
Good luck!
You got it right. Holders of gold work within a mind set, a life style. It encompasses more than holding some otherwise useless metal. If one has the presence of mind to hold gold, he also is smart enough to hedge it with a little lead and Spam as well.
Paper gold is very liable to crash if there is another crisis. I would think the spread between paper/physical will move even further apart. The further the spread, the closer it is to game over.
Paper gold is created just as easily as Bennie Bucks. There will be plenty to go around during the next crisis.
Ounces go for $1300+ all day on Ebay and most dealers seem willing to sell Eagles for a $50 premium only if you buy in bulk. Let alone, fractional ounces trading at an insane premium now to paper.
Correct, Alfred. Folks tend to poo-poo eBay, but it's a good proxy for the development of a bubble, should one occur. It's the every day buyer who will be the canary in the gold mine. Watch those spreads. I'll be there selling one ounce at a time when the spreads get too wide. That will be the day I have to keep my Ruger mini-14 on the kitchen table.
+1
how's this for a bet:
If the S&P hits 700 or lower, I will guarantee to sell, and anyone who cares to take me up will guarantee to buy, an ounce of physical gold at $900 USD (real fiat money!)
of course, internet bets are nonsense, but would any of you seriously take the other side of that bet?
This sounds like the pontificating of a man who doesn't actually own an ounce of gold.
not one ounce at the moment.
but don't worry, I am curently a 10 minute drive from scotiabank's head office, where i can walk in and buy all the physical i want.
in the meantime i am happy to short stocks and play GLD, always from the long side.
You ought to try that run to buy physical just to be sure the path is clear. It might be more difficult that you thought. Especially if the availability of physical gold gets tight. Always run your traps before you settle down for the night.
But the Fed has already shown they will launch more QE if deflation hits. The banks would probably not be even able to pretend they are liquid in pretend world if the SP hits 700.
I read an article back last year that Bennie was comfortable expanding the Fed's balance sheet to $9.5T, if need be. If that is what he is comfortable with, no telling what amount would make him uncomfortable.
The Fed's only job is to make sure the Fed member banks stay in business and maximize their profits. The only way to ensure that is to prop the system constantly until it doesn't need/want anymore.
yeah i think no one doubts ben would expand the bs to any amount, I wouldn't even put a limit on it (no pun intended)
but I'm still trying to picture the scenario...
what i do think is possible is gold initially falls as the USD jumps, but it is very short lived and maybe then gold takes over as the safe haven as banks fail...
that sounds like a replay of the last crash though...I dunno, i'm still on the fence
There is no fucking deflation outside of the hugely inflated real estate market.
Just look at agriculture prices, oil prices, medical inflation and etc., Please visit a local supermarket. Before long, oil prices will be well above $100/g and many people here in the USA will be able to afford bread on a table.
The real problem is that the US ruling oligarchy is trying to preserve a status quo ruining the entire country along way.
People, you are brainwashed living a fantasy land. Get real. It is about a time.
It is quite possible that we are seeing a breakdown of the long run up pricing and value. There is deflation in some products, inflation in others. In a normal market, this is exactly what we would see as consumers begin to exhibit their preferences.
Previously, consumers bought everything! Now, they are making choices and the market is responding accordingly.
To the author, the initial assumption is flawed. In troubled times, the world may have run to treasuries and the dollar, that may not happen next time. The central banks have created a fiat monster that encompasses every currency on earth. Further, people are becoming aware- especially the people that invest. These same investors are going to place their wealth in the instruments best able to protect their wealth.
With a distrust for the tyranny of all governments operated by CB's, people will just as probably opt to invest in wealth instrument outside the control of government. This will include assets in safer countries that allow foreign investment, gold, investment grade diamonds and other assets.
Finally, why the curious fascination with the "price" of gold. As the dollar and other currencies have NO real value, why worry about the price of gold in dollars or anything else? The value of the dollar is perception and perception is in the fantasy of the believer. When the belief changes (see the stock market and dearth of participants), the fantasy becomes but smoke on the wind.