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Gold: What's Next?
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).
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
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
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?
»
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Nice work Gordon!
I must have an incorrect memory from one of your comments some time ago, because i thought you were a permabear on gold?
So, when, do you think the gold futures market will shut down? Or what do you think the ultimate last straws will be to cause this market to explode and collapse at the same time?
Thanks agrotera. I'm sure other readers of this blog can assure you that I am anything but bearish on Gold :-)
I'm sure that paper markets will implode at some point - IMO, that point will be reached when Gold goes into permanent backwardation, i.e., Gold is not available for sale at any price in exchange for paper money. I am in NO position to say when this will happen. All I can say is that this will coincide with the world at large realizing fiat money for the scam it is. When this realization reaches a critical mass, it will mean a Gold corner, hyperinflation and currency collapse all at the same time. If you are playing the paper game in the Gold market (or any other market for that matter), you will win in the end only if you keep converting your paper profits into Gold on a regular basis.
I do love your comments Gordon, and must have just misread something months ago...
the permanent backwardation issue looming on the horizon is like the twilight zone, or a little like waiting for a tsunami....
excellent article, great graphs, good pictures....i would have put dunce caps on the 3 stooges....
the various gold ratios are excellent ways of evaluating inflation / deflation....
i hope you are able to provide more of these articles....
Great article but why no mention of China? At this point, aren't their movements vis-a-vis gold more relevant than the USD? I reckon that with Hong Kong/Beijing seeming to put a floor under the gold price (in all fiat currencies) and telling the peasants to buy some gold, China will be performing the leading manipulations from here on in, with the so-called 'G7' or 8 or 20 or whatever it is, reacting along the way to what China decides.
I doubt China would allow a breakout too high and rapid, as that would put their newly-favoured metal out of the reach of their peasants too quickly. A slow rise, with lots of pullbacks along the way, to allow their peasants to accumulate and 'buy the dips' in order to introduce a gold-backed currency perhaps next year? Does it really matter what the G-xx decides or intends for gold these days?
I agree that buying by the Chinese (and Indians - although not for strategic reason a la China) has been a major force propelling this bull market in Gold, and will only increase in importance going forward. Chinese buying is sound policy and in alignment with fundamental factors supporting Gold but the cartel manipulations are not - they are CRIMINAL actions - which is why I focused on them. Also, I doubt China is the one manipulating Gold downwards. Pummeling Gold would be the worst way to increase the investment appetite for Gold. Mainstream investment money is always attracted towards things going UP, thus reinforcing a positive feedback loop.
"Does it really matter what the G-xx decides or intends for gold these days?"
Not in the bigger scheme of things, but they CAN cause minor fluctuations short term.
Agreed that actions of current cartel are criminal (both anti-social and illegal).
I agree that China's buying for sound reasons just now (this year, next year, the year after?) but I don't trust them either. The 21st century may even belong to China and they're managing their rise wisely. I agree they're moving gold up, but I would still call this manipulation in that it's government interference and therefore undermines a free market, regardless of the direction.
The enemy of my enemy is my friend and yeah because it will set us free from the G-blah cartel, I'm glad they're doing it. But long-term they are giving gold back to us peasants only because it suits them right now to (gradually) bring down the established cartel, if that makes any sense. Playing nice would do nothing but lock the Chinese forever into toiling to make goods which they also supply 'the west' with the money to buy; nobody is stupid enough to stay in that position for long.
The Chinese are allowing us peasants to buy gold, because they need to create a *real* market, and that just isn't the 'west' anymore.
Your article about the cartel manipulations, and the trends within those manipulations, is spot on of course. We need these short-term analyses to make money and buy up all we can while we can. I would also be interested in a long-term perspective (another article?) on what happens when it's time for a new currency. How long will it take the new Boyz (Chinese?), a new cartel, to take us back to pure fiat again. The peasants are never allowed possession of *real* money for very long. And certainly not in China. :-)
Yeah, yeah. Even my underwear is tinfoil.
I warned of an impending stockmarket crash back in early 2007.
My USD INDEX long term indicator continues to give *bullish* warnings.
more:
http://www.zerohedge.com/forum/market-outlook-0
New post by FOFOA out tonight (with an awesome picture at the start!).
http://fofoa.blogspot.com/
some good points in the article especially about
the majority of americans bringing about the
crisis which we suffer...
his most astute point is that substances become
money as a sociological process - not as a
command performance ordered by the hierarchy...
I will always keep a significant portion of my savings in gold because I believe that we are going to reach a critical mass sometime in the not too distant future of people who have woken up to the fact that government/bank money creation ("inflation") is a back door tax at best and outright theft of purchasing power at worst. Once this critical mass is reached, the dollar, the euro and all the other humpty dumpty currencies will be shoved off the wall by the people of the world and will never be tolerated again.
Right on.
Oil will climb 5% this week, maybe 7%. These dips are great for corporations to stock up on oil futures reserves to hedge against inflation or lock in prices. Speculators will carry it the rest of the way. Keep in mind that oil below $60 makes it nearly impossible for drillers to keep staff on to continue. Massive layoffs would ensue if oil fell below $60 so the GS prop desk is likely to keep it in range 60-75 for Q4. That was the handshake deal albeit oil should be trading at $58.74/barrel. Oil is going higher.
Perhaps it dropped because everyone and their uncle are looking at the COT's and are waiting for the usual washout. Maybe this time it will be different. One day the boyz are going to find a way to be long as large traders to offset their known short position as commercials. China is the tape and as they say " don't fight the tape ".
I swear I didn't see your comment before posting my own (below). Yours is more succinct though.
Great minds and all that.
OUTFRIGGINSTANDING stuff Mr. GG!
"MARK IT ZERO,DUDE"
Thank you spekulatn.
for the small percentage of the population with millions to protect, maybe -
for the rest, however, gold as currency is only to be held if you are fully retired and divested, or planning on global economic catastrophe/warfare -
for the if the latter circumstance i submit: it would be more productive to be long guns and ammo on a nice rural piece of property -
Anon, okay, but at least make yourself a few silver bullets. :^)
for the small percentage of the population with millions to protect, maybe -
for the rest, however, gold as currency is only to be held if you are fully retired and divested, or planning on global economic catastrophe/warfare -
for the if the latter circumstance i submit: it would be more productive to be long guns and ammo on a nice rural piece of property -
it is precisely those with limited assets who
need gold most in perilous times....
even the most skeptical financial advisors
recommend about 10% gold holdings for "the rest."
gold will trump guns and ammo and if it really
gets that bad then gold will make a nice way
to buy that property and firearms for what
will be fire sale prices...
everyone in all circumstances will need money and
gold has no competitors...
good analysis Gordon,
We need more informed investors to gold's true story and not the foolishness put out by CNBC or mainstream news outlets.
cheers
Thanks Anon.
First let me say that I'm a friend of Gold and I have been acquiring significant positions in physical bullion since early 2006. I'm still of the opinion that with each passing day this whole economic imbroglio is morphing into a currency crisis. Gold in this scenario will do well as a "wealth preserver".
Having said all that however, if I wasn't concerned about a US dollar collapse, I would be hard pressed to maintain my enthusiasm in the shinny metal. It is too easily and too badly manipulated by the BB's for a rational investor to stay interested in owning gold.
Just my opinion.
as a trading vehicle i agree that it is risky
especially in terms of short term trading...in
the long run however the gold terrorists will
not be able to maintain the suppression and thus
gold becomes an excellent wealth preserver...
technical analysis in the short term becomes
problematic as do any ratios given the extent
of gold price manipulation....
but, the long term is a far different story
especially with many other countries showing
a favorable disposition towards gold...with 1.3b
chinese getting into the game the gold
cartel will have substantially new problems...
Caught between the present ('if I wasn't concerned about a US dollar [free-floating fiat] collapse') and the past ('too badly manipulated')...
Manipulated in fiat terms, yes - but only in those terms and now we are reaching the end of a pure-fiat era. There will be others, but not for a long time I think. With fiats collapsing around the world (the US is only the most dramatic as 'world reserve') a reset of some sort is inevitable within the next few years, perhaps sooner.
I see no way a reset can be achieved without asset backing, this fiat collapse being global.
Exactly.
Really? If you trade gold arbitrarily based on moving averages against Fibonacci waves...do you have the right to blame the Conspiracy??
I'm saying they can cause short term fluctuations in price via manipulation but they cannot change the larger trend. You can still use the analysis of various indicators (over the long to intermediate term) to guide your trading/investing decisions.
FWIW I don't think gold was 'hammered' for those reasons. Gold is both money and a commodity, as money it remains elevated vs. other currencies. As a commodity it's inputs are falling (crude is down and labor is cheaper); crude is off well over 10% in two weeks I would expect gold to give up a little bit of it's gains, after all it's only down ~3% from it's most recent high.
I think you might be 'digging' too deep on this one.
You ignore the evidence at your own peril. Do you remember what happened during the G-20 in April this year? Please don't misunderstand me - I'm not saying ALL G-20 countries pummeled Gold in some kind of synchronous conspiracy - only the US, trying to pretend how "strong" the dollar is and how US is still a "superpower".
gold inputs are not going to show up that quickly
in output price especially labor - in fact what
evidence is there that labor is lower? the
south africans are on strike and i am sure it
is not for lowering wages...
there are strong fundamentals holding gold up on
an investment and currency basis such that
the options expiration and associated price
rigging seem reasonable explanations....the coming
weeks will confirm or contradict that view....
You're right labor wouldn't show up that quickly but crude prices sure would since you can see that reflected instantly in prices daily.
And labor prices are down worldwide, that's a function of a recession, the supply of labor is now ample so the price gets driven downward as a result. Doh!
As far as gold goes, I buy will continue to buy, I was pointing out that this movement down is inconsequential to the longer term trend. Basically I think it's noise that is reflecting lower input costs and nothing else.
my point is that you were attempting to apply
macro generalities to the specifics of a certain
industry and you failed to supply evidence....
until someone can show that oil prices play a large
part of gold cost and price and that pricing
is such that cost would trade with price then i
see no rational basis for your claim....
one reason is that oil is less than half what it
was last july yet gold is about the same...i don't
see the correlation or the causality....
and applying macro labor generalities to the labor costs
of the gold industry is also spurious to put it
politely....
even if labor were somewhat lower for the producers
it in no way overcomes the general cost factors
of gold production which i know are higher than
price....which is why production has been declining
world wide....
i think opex is a greater factor for the rather
mild decline in gold...(along with general
technical factors)
I bought last week
Not crazy about those who resort to vulgarity as a
substitute for insight or intelligence.
Gold commercials the most short they have ever been.
Big4 15.6% long and 28.8% short per our most recent
Report.
Gold Bugs who confuse prophets with religion may
suffer martyrdom...
http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID3251493