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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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"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?"
Timing for further purchase of physical gold which is held is all.
Exactly.
I am sick and tired of this pro-establishment nonsense about the "threat of deflation"!
To paraphrase the Bible: Why beholdest thou the (potential and inconsequential) deflationary mote in thy brother's eye, and not the real inflationary beam in thine own?
Yes, gold IS crash-proof, at least in the long run --- to believe otherwise is to suggest that all the factors that have led gold to rise 400% in the last ten years no longer apply or are no longer in effect. Is ANYONE seriously suggesting this?
Only daytraders worry about what would happen to gold in any putative repeat of 2008. And anyone hoping to bounce back and forth between currencies and gold in such an event will only confront the same high premiums and/or lack of physical supply that happened in late 2008 as well. Jesus, people, stop with the ADD and think big picture here!
You are correct, of course, but pissing up wind. How in the world are you going to convince those who have thrived on immediate gratification that a long term view is worthwhile? They will end up either losing what they have or not having any accumulation of wealth in the first place. I don't worry about those folks any longer. Most of them are either frothing-at-the-mouth adversaries to gold (it scares the crap out of them), or they just get a deer in the headlights look due to lack of comprehension.
In a one word answer, "No". Nothing is crash proof. But that's the beauty of holding physical gold -- at least you have something pretty to look at.
april to july of this year includes some gold price volatility but not what is clearly a price correction (to me).
But why do treasuries (USU0) keep making new highs when the market keeps going up? Today during the FED ramp, ES goes from 1111 to 1124 while US goes from 129 to 130-22
One of the best posts on ZH yet.
Put not our faith in things on earth that corrupt, rot, rust or are stolen away.
Because of debt deflation, long Treasury yields are targeting 3.4% after hitting 2.519% in December 2008 after the first market crash of many more to come.
http://stockcharts.com/charts/gallery.html?tyx
The once almighty dollar ran from 70.70 to 88.46 in November 2008 with the crash.
It is currently targeting 115 relative to other fiat currencies as China and other markets collapse...
http://stockcharts.com/charts/gallery.html?%24usd
Gold meanwhile, not a debt deflation hedge, first targeting 1050, (then $525) until Treasuries and dollars default some time in the hazy distant future.
http://stockcharts.com/charts/gallery.html?s=%24gold
Then barter and food may rule more...
unless the frn itself crashes, treasuries have nowhere to go but up. if everything is bound to deflate around the "dollar", how would you choose to hold your "dollars"? in frn with a built in dollar denominated debt service to the fed, or in treasuries where the fed services you? neither is perfect but one is certainly better than the other
And there's assumption that technical trading works for gold.
A friend of mine (recently deceased) was a GOOD technical trader. I asked him to look at gold for me, offered to pay him for his tech analysis. He told me that gold (for him) had the most unreadable charts for him. His specialty was Live Cattle Futures. He said that for every investable asset, that each one had its own technical "DNA", and he could not figure out gold.
Good observation. Commodities markets have natural cycles. Gold is so heavily manipulated by the cartel for political reasons its cycles are distorted. I doubt if many will sell their real metal, it could quickly be hard to find more. It's the miners I worry about. Maybe the next rise above 1260 is a good time to cash out and watch from the sidelines. The next crash may be the ski jump landing and headed for the parking lot.
If memory serves me right, the author is the same whiny guy who wrote his regrets for having voted for Obama. We rightly trashed him.
I'll take the other side, but in physical only.
I call Bearshit on you Mr. Summers!
"during systemic Crises, just about every investment on the planet plunges"
So many fuck-ups in just a single sentence. WOW!
"a collapse of the US economy will lead to a collapse of US$ as a world reserve currency resulting in a hyperinflation in the USA."
That would seem to be key. If the dollar holds its safe haven status during the next crisis, gold will go down (somewhat- say 20-30%, possibly more if it's a real twister). But if confidence is lost in the dollar and a currency crisis occurs (resulting in a currency hyperinflationary event), then gold becomes the safe haven and rallies the way treasures rallied during '08-'09. That amount of fictional fiat currencies rushing into gold should spike the price of gold in fiat dollars seemingly endlessly (treasury market much larger than the gold market.
Moreover, if treasuries don't hold, how is the dollar going to remain as a safe haven?
Bond market appears to be telling us that treasury crisis is not on- yet, and tanking market likely results in a (somewhat attenuated) reduced gold price.
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Exactamundo... Things may be similar but they will not the same this time around. The gig is up on the dollar me thinks...
Too much printed and digital money around the world compared to real assets
so when every body wants to liquidate their assets again which would you let off first ;
Ones that no one else has much and so won't cause further panic sales and further reduction in prices
Ones you hold more would be sold slowly and gradually just to give a sense of normalcy
That's why PMs go up and down so much
and central banks have an open war against their price
So PMs are speculative at best not as trading hedge against anything
Keep some physical PM as insurance against 'hit by thunder' odds and forget it
I'd sell the shit!
Thank you for your insightful analysis.
Looks like you're about ready to take one.