Gold: What's Next?

Gordon_Gekko's picture

via Gordon Gekko's Blog

 

GOLD: WHAT'S NEXT?


So, predictably, Gold was hammered ahead of the “G-20” (nice little acronym for a criminal ruling elite, isn’t it? – more like mafia family heads getting together if you ask me) meeting in Pittsburg, Pennsylvania this weekend. What didn’t help matters (for Gold bugs i.e.) was the fact that 24th September was the expiry day for options with a large amount of open interest near the $1000 level, which BTW, were in the money on the 24th morning prior to “the attack” at 10 a.m. EST. The big banks who wrote the contracts pummeled Gold in order to pocket the premium of whoever was complacent/stupid enough to hold them into expiry thinking that the banks were about to let go of an opportunity to pillage the little guy. 

 

 

Since we are at a critical juncture in the Gold market with what appears to be a volcanic explosion building beneath the surface to take Gold once and forever past the $1000 level, I’ll try to figure out where we are and where we are headed so we Gold bugs can navigate the shark infested waters that is the Gold market with some confidence. 

 

Where We Are

Take a look at the triangular consolidation pattern that has been developing since February this year (Fig 1). Price broke out of that pattern forcefully in the beginning few days of September sporting heavy volume in both GLD and GDX (a proxy for Gold stocks) combined with a large increase in Comex open interest which gives us confidence that it was not a false breakout. Price went on to make several daily closes above the $1000 mark, including two consecutive weekly closes. Absent manipulation, I think this would have been THE breakout above $1000 that everybody had been waiting for so long and price would have just tested the $1000 level on subsequent declining volume as seen in GLD, GDX and other major mining stocks such as NEM – only now that Gold has broken through $1000 on the downside it will retest lower levels of support. No big deal – this has been happening all throughout this bull market and yet they have not been able to stop it from rising. They can delay its rise, but they can’t stop it. The real key is the paper market’s link to the physical metal. As long as shorts have the fear of delivery, price will rise. If and when they don’t, the futures market will cease to matter (or exist) anyways. Your best protection in these heavily manipulated markets is to not be over-leveraged and be able to take a hit at least upto 200 DMA (during price uptrends).

 

Gold 25 Sept 09

Fig 1. Gold Daily Chart 25-Sep-09. 20 DMA is in Blue, 50 DMA is in Red and 200 DMA is in Green

 

What Next?

The price has now closed below the 20 DMA which means that the 50 DMA is likely to be tested next (See Fig 1). Now, the 50 DMA is of quite some significance during bull moves as the price usually more often than not bounces off of it (just take a look at previous uplegs during this Gold bull so you know what I mean). The price may also test the top trend line of the preceding triangular consolidation pattern. What is interesting is that both the 50 DMA ($966.19 right now) and this trend line level are in the $960-$966 area. Also there was a five week period during the preceding consolidation where the price was basically stuck at $950, so this is another significant level. Hence I believe that we may see price retrace to $950-$966 before the next upleg, and hopefully rocketing past $1000 for good, but remember that we’ll need to see expanding volume in both Gold and Gold stocks to confirm it’s the real deal as opposed to last time around. This retest to lower level will give a chance to the bullion banks to reduce their short positions somewhat in anticipation of controlling the next upleg (I’ll do a brief update on the COT situation shortly). Also, this will coincide nicely with the Gold Bugs Index (HUI) retesting the recent breakout at the multi month resistance line at around 375, which is also its 50 DMA! See, everything is lined up so perfectly and nicely! There are two more scenarios, although less probable IMHO, but nonetheless we should be aware of:

1. There is massive almost unlimited demand beneath the $986 level (tested on Friday) and therefore price starts to rocket beginning next week without retesting any lower level. Shorts have to cover on rising prices causing a price explosion. This is also possible in case of geopolitical dislocations (e.g. Iran etc.)

2. A mini panic is precipitated causing a sell-off in all “risk” assets such as stocks and commodities (apparently, in our upside down world, Gold is a “risk asset” while the dollar is a “safe haven” – LOL!) thus causing Gold to fall below the 50 DMA and test the 200 DMA. If it does, it’ll be a God-given opportunity to acquire Gold at bargain basement prices for the last time. Let me make this as clear as possible – if Gold tests the 200 DMA, IT NEEDS TO BE BOUGHT. I don’t care if you beg, borrow or steal – JUST BUY GOLD. Period.

 

Let’s look at a few of more indicators which will provide us with some extra clues:

 

1. The Golden Cross Situation

 

Gold already put in a “Golden Cross” (50 DMA rising above the 200 DMA) sometime in the middle of February this year (See Fig 1). Of course, as with any technical indicator, nothing is 100% guaranteed, but the golden cross usually signals a sustained phase of price rise. We see that Gold has not made any major highs since the cross occurred, but we also note that it has remained well supported (flat is more like it). The fact that the Golden cross is still in place and all three moving averages (20, 50 and 200) are now steeply rising should give us confidence that a major bull run is about to ensue.

 

2. The Gold-Oil Ratio

Gold Crude Ratio

Fig. 2. Gold-Crude Oil Ratio 25-Sep-09

Historically, the Gold-Oil ratio has been about 15, which is where it is now – all hunky-dory, as Benny Boy would like us to believe, only, IT’S NOT. The ratio rose steeply during the depth of the crisis at the end of last year and beginning of this year reaching a peak of 26.43 in March. The ratio has now undergone a “green shits” correction – BUT - since we are in a MASSIVE deflationary depression (in terms of Gold i.e., not fiat money) we can expect this ratio to be in a bull run throughout this crisis reaching new peaks, probably into three digits. There is now a massive bullish divergence between price and MACD on this chart signaling that the ratio is about to resume its uptrend – in a MAJOR WAY. This might mean three things (in dollar terms i.e.):

1. Gold will fall less than oil 

2. Gold will rise more than oil

3. Gold will rise and oil will fall

My money is on the third outcome, and at some point on the second (when the helicopters really get going), but we shall see. The right strategy in March was to sell Gold (not necessarily short) and buy crude; now it’s time to buy Gold again.

 

3. The Gold-SPX Ratio

Gold SPX Ratio

Fig. 3. Gold-SPX Ratio 25-Sep-09

As expected, this ratio is also in a bull market reaching a peak of 1.39 in March and correcting thereafter. This ratio also looks ready to resume its uptrend as evidenced by the bullish divergence between price and MACD. In fact, being long Gold is a very nice way to be short the stock market, since stocks will fall (and have been falling) more in Gold than in nominal terms. A look at the Gold-denominated SPX chart since 2000 will convince you of this, as also of the fact that we have been in a deflationary depression since the tech crash. Those looking for S&P 200 will be sadly disappointed as the Government devalues the fiat scale we use to measure stock values thus propping up the stock market nominally, or at least not letting it fall too dramatically. 

 

4. The US Dollar Situation

We are consistently hammered over the head with the “fact” that a drop in USD (what is meant is the dollar index or DXY really – a flawed and misleading indicator since it only measures relative rates of currency debasement) causes rise in Gold prices. “Gold prices closed below $1,000 an ounce for the first time in nearly two weeks on selling triggered by a dollar rebound” the Wall Street Journal noted recently, and “Gold ticked higher on Thursday, supported by recent dollar weakness” chimed in Reuters helpfully. Oh! I get it - Gold rises WHEN Dollar falls…right…ummm…so what the hell is this then?

Fig. 4. USD-Gold Relationship 2009

It is clear that that’s NOT what always happens. Sometimes Gold is positively correlated with USD, other times inversely, and sometimes not at all. What should be clear to everybody though is the fact that a rising Gold price ITSELF represents “the drop” in USD (if you mean the purchasing power i.e. – the DXY really means NOTHING if that is what you are measuring). Gold is not volatile, the value of the dollar in which it is denominated is. In fact, as this crisis deepens and capital accelerates its flow down Exter’s liquidity pyramid, I expect more and more occurrences of USD/DXY (since USD is still the reserve currency of the world) moving higher together with Gold.

Exter's Liquidity Pyramid

It is only and only a bull market in real money i.e. Gold – the correlations with equities or USD – real or imagined - will keep changing, reversing or completely falling by the wayside according to whatever favors Gold at the moment as this bull fully expresses itself in due course of time. 

As for those of you who are still debating whether we are in a bull market in Gold, I just have one question to ask of you:

“Who will you entrust your life savings to?” 

 

THIS


OR THIS?

Obama Geithner Bernanke FAIL



 

 

 

 


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Anonymous's picture

I've heard everyone loud and clear regarding "don't buy gold ETF" but buy the physical bouillon, so where do you get it? Who is the most reputable dealer? Kitco? Just need as much logistic help as possible.

Renfield's picture

Anon, this is an old thread and I don't have much hope that you'll see this reply, but FWIW:

1) Buy locally if you can. If you live near a large city, buy from a local dealer where you can just walk in and pick it up. There are many 'goldbug' blogs where you can probably correspond with other posters as to their best buying experience. Word-of-mouth on dealers (from someone who has bought & sold for awhile) is invaluable.

2) RESEARCH your bullion dealers, including such factors as WHO recommends them and how long they have been in business. Some have been around for decades. Going with the well-established ones may be a bit more expensive on premium, but is far better to ensure good product. Hopefully there is a reputation to research - even try the Better Business Bureau.

3) Research prices. Get a yellow pages, get on the phone, and start calling. Ask if they have bullion on hand, in what quantities (1-oz. bars are easiest to manage and common for trade) and at what price. You'll soon see any 'price gougers' sticking out like a sore thumb. Sometimes you'll find a great bargain that way too.

4) If a dealer has an online presence, make sure they have a physical office as well. (Address and phone number.) Better, see point #1 above.

5) Most important of all, TAKE DELIVERY AS SOON AS YOU PAY.

6) You can buy bullion on ebay too - it's a valid way to find deals if you have some experience, but dealers are really the safest.

 

MsCreant's picture

So I am curious. I hear some say they usually have 15% pm exposure in their protfolio. Some 10, some 3, some are up to 50% in this crisis.

Not counting that I own my house and I am debt free, I am a little under a third, myself. My logic is that it is happening mostly because I don't know what else to do. I will hear others throw out their numbers, but they never say why. I am hopeful that Gordon would not mind me bringing up this topic on his thread for discussion.

Specifically, what percent of your portfolio do you keep in PMs, and why?

Gordon_Gekko's picture

Not at all. If you don't trade/speculate, I would recommend keeping 100% (plus some cash for ready use based on personal preference) of your assets in physical Gold (some Silver too) at this point because the upside is tremendous with very limited downside - at least for the next decade. Thanks to CB manipulations, Gold is THE most undervalued asset on the planet right now. Plus it is a disaster insurance - which I'm 100% sure everybody will need. It will be the only thing that survives the coming (continuing?) Armageddon in paper financial assets. The only thing you need to worry about Gold is theft. That you can hedge by diversifying the way you hold it. Keep some at home, some in a bank locker (abroad if possible) and some with excellent third party services like Goldmoney. Do not - I repeat - DO NOT under any circumstances buy ETF's like GLD. It is a COMPLETE FRAUD. I'm not sure I can fit in everything in this response, so I'll try do a detailed post on this topic in the near future.

Personally, I keep about 50% in Gold/Silver and 50% I use for my speculative activities. If I were not trading the paper markets, I would keep 100% in Gold.

Edit: Because of what I have realized (sort of an enlightenment, if you will), I have zero hesitation in giving this recommendation to everybody who asks me. In fact, I have put all of my family members and relatives (those who will listen) into physical Gold.

Nathan Smith's picture

Great post above, great advice on the allocation model.

Nice to see that TD and company have given you an opportunity to contribute to the ZH community. 

djchill2's picture

Great Job GG!  I agree with you and other commentors that Gold is the ONLY way to protect your wealth and avoid the Inflation Tax...Since I have a significant position in physical Gold/Silver/Palladium I am just kicking back through all of the manipulation and waiting for the endgame.  I suggest grabbing some guns and ammo with your physical PM's to all those that are thinking about picking some up.  If the scenario gets as bad as I think it might, then it will be better to have the Guns/ammo w/your PM's and not need them than to need them and not have them.

Apocalypse Now's picture

Bravo GG-

Gold has no liabilities, does not have a P/E of 100+ like the index, can not be printed to increase supply (except paper gold), does not require fine  print, and every central bank has a significant portion of their reserves in gold. 

Of course if you put your wealth in it, they can't take an annual percentage of the value and can't loan out 9/10ths of the value you have in the bank - that's why they would rather control the goods and have the peasants play with derivatives of their hoard.

I personally would love to rely on a fiat currency, but that requires faith in monetary discipline when 95% of the value of the dollar has been wiped out since instituting the federal reserve.  As you said, inflation is a poorly understood tax, and AARP should focus on these issues since it hits those on a fixed income (elderly/retirees) the hardest and destroys our wealth (if in paper).

SWRichmond's picture

Also, gold does not require men with guns to enforce its value in commerce.

Anonymous's picture

It's all about the timing. There will come a time when gold loses value quickly. That will be when growth resumes, price stability returns, currency is a relatively stable medium of storage, and securities hold real confidence and aren't goofy articles riddled with central bank and fraudster gameplaying.

Last year we had the untenable positions of fractional banking begin a collapse. It took down "legitimate" bank creditors and Ponzi pyramids. From then to now has been a cloak-n-dagger game of extend-pretend and paper shuffling to obscure the lack of true value.

Gold will be the "flee-to" assets as every other risk asset is subject to the whims of the Federal Reserve and their wealth assassins embedded in the system.

It is a choice, and a simple one at that. Choose paper instruments that are claims on business and production that is severely contracting globally, or upon interest payments by large corps/govt's which are having greater difficulty in harvesting taxes and have huge default risks, or on depreciating assets with declining cash flows and large maintenance, tax, and servicing costs. Lastly currencies backed by the same operators who have so thoroughly soiled the well from which we all drink. The future may have us look upon greenbacks and all paper currencies like losing chits at a rigged parimutuel.

Gold can be hidden away from the predations of all men to be resurrected when the robbing hordes and plunderous locusts are extinguished and driven away. It is less likely to be taxed, suffers nothing by passage of time, retains its value better than all other alternatives, is highly mobile in the event wealth needs instant transport when the holder is in imminent danger.

Signs and heralds abound that some wealth must be removed from the mischief of the monetary systems of mankind. Those bankers cannot properly manage their own affairs and presume to make the common man the creditor to cover the magnitude of their errors.

Show them they are wrong. Refuse the bill. Hoard your gold and put wealth beyond their reach.

SWRichmond's picture

Yes it was.  Being a goldbug myself, sometimes I forget that it is important to clearly and repeatedly state all those reasons so that the non-bugs might begin to understand.  All you need say to another goldbug is: "Gold is money."

Anonymous's picture

Ahem....

For those of us living in Pittsburgh, we spell the city name with an ultimate letter "h". Only during the period from 1890-1911 was the city's name spelled "Pittsburg", and then only because some pinhead in the United States Board on Geographic Names decided in a fit of taxonomic uniformity to drop the "h" from all cities in US spelled in that manner. Locally, we never complied (except for the Pittsburg Pirates of the era). Ever since 1911 we are back to Pittsburgh.

Ok, I'm done now. Carry on.

Renfield's picture

heh...you just resolved one of those 'spelling bug' questions that sit in one's mind for years. (Well my mind anyway.) What funny things I learn from the comments to these posts.

Anonymous's picture

Confirmation bias. Gold is going down (then up?- maybe not).

Deflation is here, inflation is not. Why can't you 'goldbugs' (aka another investing herd mentality) just see it and stop trying to make the easy trade that the whole world thinks they are about to get rich off of.

Gold holds it value, not necessarily it's credit-inflated price.

TumblingDice's picture

Good article. It is definitely useful to look at it from the various perspectives provided here.

If I were a trader of gold (and btw I very well could be if I see a technical buy or sell signal that slaps me in the face) I would use 945 as my stop if I was to go long right now. A lot of the stops are clustered around 950 since it is the apex of that months long triangle. They will be gunning for it with this latest downtrend and if they get it then they could take that momentum to plough through the 200.

If you were to invest in gold I would buy physical bullion and hold on to dear life. It is definitely going to appreite against the dollar long term.

gookempucky's picture

Ah yes the barbarous relic AU-hmmm used as a mediun of exchange for 6000 years--alloys with many other metals--lubricants for aerospace vehicles--sunvisors for astronauts helmets--medicine--making of glass---electronics---dentistry-corrosion proof-the list goes on and on------------------------------what a worthless metal;;;;;;;;;;;;

There will never be another like it.

Thanks for your work GG

mkkby's picture

You lost me at the pyramid. How can gold be the most liquid, when you can't buy anything with it, and it can only be traded by shipping to a dealer? On the liquidity meter it's more like diamonds and gem stones.

The technicals are strong. But I respectfully disagree on the fundamentals. It goes up, down or sideways vs anything else you can name -- USD, oil, spy. This analysis proves that.

TumblingDice's picture

I am pretty sure there has ever been an instance where someone was unable to utilize gold's purchasing power.

I cannot say the same about other forms of money, such as paper money. Hence, gold is the most liquid form of money.

Anonymous's picture

I am fairly certain that I cannot buy gas with gold. I cannot pay for a dinner and a movie with gold. I cannot buy a shit and shoes with gold.

I can probably buy a rifle or handgun at a gun show or pawn shop for gold but not likely at any sporting goods store or other similar shop.

If I want to actually take advantage of my physical gold (or if I NEED to) I will have to find some way to redeem it for paper currency, barring Mad Max or Zombie Apocalypse (equally likely).

Anonymous's picture

To paraphrase what Sir Larry once famously said in that immortal film you starred in, "Buy it lightly on the way down, and at 920, buy it all"

If we're right, eighths and quarters won't matter...

Ich bin ein whatever's picture

Nice post Gordon.

I'm trusting Gold, not the triumvurate of "Moe, Larry, and Curly" you posted at the end.

Excellent job.

MsCreant's picture

Nice job darling!

My avatar will put her gun down and have a martini waiting for your avatar.

Seriously, I got freaked last night hearing the G-sters were going to deflate 50% over the next 14 years and were trying not to panic the cattle by having them run into gold. They want to ease us into it oh don't you know. So is that what they are doing and they are announcing it straight up, or is it manipulation.

Gordon, their greed is NOT good.

SWRichmond's picture

The precious metals markets are very tiny.  If a small portion of available "fiat-money-thingies" try to get in there will be a mad price spike.  That is what TPTB must avoid, by disparaging gold and anyone associated with it.

http://www.youtube.com/watch?v=qE2Vdcv9Q_o

MsCreant's picture

I keep waiting for a dip. I don't think 990 is it...

Liked your tune..

Hephasteus's picture

It's still being hammered down by their awesome might of "we are not really hammering anything".

It's down/up to 993. It could go $858 if they crash the market and you could stand 0 chance of being able to buy any of it.

Anonymous's picture

Help support your local car dealer, buy a big SUV.

deadhead's picture

Well researched and excellent job GG. 

ivant's picture

GG i am not so sure that Gold will continue moving higher past 1000 if there is to be a correction in the equities. That is assuming that the negative correlation between the EUR/USD and S&P continues to play out. Gold has been a losing trade for us in AUD dollars since its pop above $1000 the first time in November (?). In addition, wouldn't you think psychologically that $1000 level is playing mind games? I think scenario 1 is the more likely one, but then again, I've been bearish on the equities since April. In any case, great analysis and I hope that the trade works well :D

ivant's picture

Or I could have just looked at your chart and said March, hahaa

Anonymous's picture

Grifter, check the historical charts (for example, a one-year Yahoo Finance chart of gld and slv): gold and silver are highly correlated: they move pretty much together. You don't have to be a millionaire to buy some silver dollars and "junk" silver dimes, quarters, and half-dollars.

Grifter's picture

Thank you for taking the time to pull this together, Mr. Gekko.

EDIT: One question, do you see any sort of spill over effect in silver?  I ask as it seems that, at some point, most people will be priced out of gold, yet, demand for a store of value vis a vis collapsing fiat will remain. 

Anonymous's picture

I agree with your perspective, in that backwardation will make gold hunker down as it rises to its true value. Silver, being available will rise with the new J6P demand, and yet will not hide, as it is a readily tradable PM in a currency crisis (due to 90% junk silver still being around, etc). Note that in Argentina it wasn't so - "junk" gold jewelry was more widely used because silver wasn't as widespread as here. I'd guess there are tons of pre'65 coin stashed out there in flyover country.

Gordon_Gekko's picture

Well, there seem to be two schools of thought among PM aficionados on this. One believes that Silver will rise (or perhaps even fall) but not as spectacularly as Gold, i.e, Gold:Silver ratio will be in a bull market as well throughout this crisis. Evidently, they believe that Gold and Gold alone is money. The other believes that Silver will rise much more than Gold in percentage terms - since it is more heavily manipulated and there is a lot less Silver than Gold around plus CB's don't have any - so the Gold:Silver ratio will be in a bear market tending to the historic ratio of 1/15, may be even undershoot a little. I am not 100% convinced, but I tend to agree more with the latter school of thought. Since silver is pretty volatile acting in a leveraged manner to Gold on both the upside and downside, I don't play with it in the futures market but buy physical only. Gold is a lot less volatile than silver, so I can lever up a bit more confidently in it than I would otherwise in Silver. That said, I would like to remind you that best guess is all this is; not gospel.

Gunther's picture

Gordon
I made a chart of the gold/silver ratio back to 1968.
High values,  > 70, happen typically during a bear market or at a major bottom.
Low values ~ 15 mark a top, except for 1968.
From the gold/silver ratio we are closer to a bottom (or start of a move) then a top.
The last time we had a gold/silver ratio as high as now was 2003.

Gordon_Gekko's picture

Thanks for your input Gunther.

fireangelmaverick's picture

GG,

Maybe they will remake the movie with the line

"Gold is Good."

 

Renfield's picture

HAW! Funny.

"The new law of evolution in corporate America seems to be survival of the unfittest. Well, in my book you either do it right or you get eliminated. I am not a destroyer of companies. I am a liberator of them! The point is, ladies and gentleman, that Gold -- for lack of a better word -- is good. Gold is right. Gold works. Gold clarifies, cuts through, and captures the essence of the evolutionary spirit. Gold, in all of its forms -- gold for life, for money, for love, knowledge -- has marked the upward surge of mankind. And gold -- you mark my words -- will not only save Teldar Paper, but that other malfunctioning corporation called the USA."

 

You're right, that works.

Anonymous's picture

for those who think that gold price suppression by central bankers is a fringe view held by the tin foil club, cnbc had this interesting guest....he may never be invited back but it slipped through the censors.....

http://www.gata.org/node/7835

Narcolepzzzzzz's picture

Very interesting video, thanks.

"When you own gold you're fighting every central bank in the world."

Ain't that the truth!

whopper's picture

You got it GG

Bud

I need more cowbell's picture

I have never owned physical gold, but only recently bought a chunk ( 15% of my liquid wealth ). I have always thought goldbugs to be more like religious fanatics than most other traders, too emotionally attached to the shiny metal.

The "China Syndrome" changed me to a convert.I believe I can see a mega-trend when shoved under my nose.

Gordon_Gekko's picture

"I have always thought goldbugs to be more like religious fanatics"

Or so the MSM would have you believe. Gold bugs *might* seem that way to some probably because they see through the government and Wall Street deception; they realize the fraud that the paper money system is; the constant lies and BS being spewed out by our authorities to fool the Joe public and they realize the protection that Gold provides from government theft and pillage (which is what the seemly benign "inflation" is really).

"The "China Syndrome" changed me to a convert."

You can never be wrong following the smart money.