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The Prechter Gold "Buy" Signal Has Been Triggered
The recent decline in Gold has not only caused mayhem in goldbug-land (especially those holding mining stocks), but also brought deflationists of all stripes – with, not surprisingly, Prechterites at the forefront - out of the woodwork shouting $400 Gold from the rooftops. Funny, all I remember is a deafening silence at $1200. Emboldened by the recent decline, Mr. Prechter has predicted a 40% decline in Gold prices from here. For those not in the know, Bob Prechter has been forecasting declining prices for Gold all throughout its decade long bull run. For example, in March of 2006 when Gold was about $560 he said, "Gold is in the final stages of a speculative surge…technical factors, in conjunction with a complete wave pattern and sentiment, point directly to a decline to at least $460 and probably close to $400". It reached $730 in May and closed that year at around $650. In 2003 Alf Field – who beat Prechter at his own game forecasting Gold prices much more accurately than him using the Elliot Wave Principle – wrote, "In mid 1999, when the gold price dipped towards a low of $253, Bob Prechter forecast an extended rally in the gold price that would be followed by a final decline to below $253 to a low point approaching $200…he forecast (at the start of the move) that the peak would be about $360 and he recommended short sales in gold after the price moved above this level in February 2003. He now believes that the market is on its way down to new lows below $253". Gold closed that year at around $430. What would have happened if you took his advice and shorted Gold at $360? You would have gotten reamed, that’s what. Ironically, for all his blathering about "sentiment" and being "contrarian", Mr. Prechter has become a great contrary indicator for the Gold market. His long term stock market forecasting isn’t that great either (yeah, I know he’s made 4-5 correct predictions in the last 40 years), but we’ll leave that aside for now.
For those with a long-term horizon, the picture hasn’t changed at all and should keep buying the dips no matter what. But buy physical only and in your personal possession. I cannot stress this point enough. Even if you are a short term investor and like to trade/speculate you should keep a stash of physical not-for-sale and keep adding to it regularly. Think of it as taking profits in Gold instead of Federal Reserve Notes a.k.a. dollars. Now, for those of us inclined to speculate on the POG (Price of Gold), let’s take a look at the evidence and try to figure out where we are and where things are headed in the short term.
Is the Present Upleg Over?
Gold has had two major uplegs since its bull market began in 2001. Both have occurred during the seasonally strong period of September – May timeframe. Both occurred after long periods of consolidation lasting more than an year. The first one took us from about $450 to $730 – a gain of 62% and the second one took us from $700 to $1030, a gain of about 47%. The 50 DMA was barely breached in both of those uplegs. This present upleg has occurred in the same timeframe, but has given a rise of only 22.6% so far. It has also breached the 50DMA as well as the 100 DMA, although the latter has been breached only by a blip so it may be a false breakdown. In the past breaching of the 50 and the 100 DMA has signaled the sure end of the upleg but this time I suspect it may be different. “Why?”, you may ask. Well, first of all the rise has been piddly compared with the huge preceding 18 month consolidation. In fact, it’s barely visible in the log chart, when in fact the fundamentals have never been better for the Gold price, especially with Central Banks becoming net buyers instead of sellers for the first time. Secondly, I think too many people were looking at the past uplegs just like we are and were expecting the 50 DMA to hold, which is probably why it didn’t. Thirdly, the $1000 level was a huge resistance level, so the price retesting it should not be much of a surprise. Fourth, the US government has a record amount of debt to sell this year, which is why – as also speculated on ZH recently – it appears that they have green lighted a (what they hope will be) a managed selloff in all risk assets so as to hold down interest rates. They are playing the "Bonds-Stocks yo-yo" again, or at least they think they are. What they are forgetting is that Gold is increasingly becoming a wild card. Instead of going to either bonds or stocks, capital may flow into Gold – the real money - thus causing the "yo-yo" to collapse and trashing Treasuries, the dollar and stocks – all at the same time. Also, too many people are expecting a repeat of 2008 where everything went down including Gold and the dollar/Treasuries rose which is also a strike against the same exact scenario happening again.
Gold Daily Chart:
The bull run envisaged in the last update materialzed, but is far from over in my humble opinion. As evident from the chart $1075 which was resistance previously has become support now, as happened with the $1025 level. Gold appears to have put in a double bottom at $1075, if it holds i.e. Option expiration shenanigans definitely have a lot to do with many of these unexpected “corrections”. From what I have observed while trading futures, I gather that there are some pretty huge buyers/buyer at that level. When the price reached $1075 during Friday’s trading, the buy orders just kept coming and coming. Also, my sources indicate that there is heavy physical buying interest in Asia at these price levels and premiums have surged.
RSI and MACD are pretty much at the same levels they were when the price hit $1075 back in December, so no bearish divergences there albeit the Slow STO is exhibiting a small positive divergence. The Golden cross mentioned in the last update remains intact, a plus for higher prices.
The COT Situation:
This Friday’s Gold futures COT Report is definitely positive. Commercials covered a lot of shorts. They reduced their short positions by 22,734 contracts in futures for a net short position of 248,618 contracts. The last time we saw a lower net short position than this was at the beginning of September when it was 216,708 contracts, and has declined by almost 20% from a high of 308,231 when the price was $1226. The current net short position might likely even be lower since this data is as of Tuesday and the price has fallen even lower since then. Apparently, the bullion banks…er…”commercials” know something we don’t.
Also, small speculator net long positions reduced – always a plus since they tend to reach their lowest levels at bottoms - by a substantial 15,484 contracts from 52,178 to 36,694, a level last reached at the beginning of September when it was a net long of 32,207 contracts. This represents a decline of 31% from the peak. Interestingly, the small speculator net long positions reached a peak not at the high of $1226 (49,167 contracts), but at the January high of $1160 (53,146 contracts).
The US Dollar Situation:
The US Dollar has mounted an impressive rally, and if we look at the weekly chart the technicals definitely look positive with a rising RSI and MACD along with price (as they do on the daily chart). It has breached the 200 DMA resistance level accompanied by increasing volume in the US Dollar index bullish fund UUP. The 78-80 is also a significant long term support/resistance level, so until the dollar convincingly breaks past 80, we should look at it for what it is – a countertrend rally in a bear market. All the major moving averages are sloping down which is definitely a negative.
While the dollar could easily go either way from here, contrary to popular wisdom, even if the dollar rises, it does not automatically mean that Gold will fall as we witnessed at the beginning of ’09 when they both rose together. It was not a one-off event either. It has happened previously at the end of 2005 when Gold broke out of the $450 level. To be fair though, the decade long relationship between the US Dollar and Gold is definitely inverse. In my opinion, the issue is not as cut and dried as “Dollar up, Gold down” as the deflationists would have you believe. The dollar index can be a pretty misleading indicator as it can go up both on account of world capital flooding into the dollar as a “safe-haven” trade as well as other countries debasing their currencies faster than the US. In the latter case everything (i.e. stocks, commodities, Gold, etc.) can keep going up right along with the dollar as I believe was the case in 2005. Moreover Gold and the dollar are not the only assets competing for capital. We have stocks and commodities as well – the so called risk assets. In 2009 we saw Dollar going down, risk assets going up whereas Gold remained essentially flat. If and only if the dollar and Gold are the only two assets competing for capital we can say “Dollar up, Gold down”. To add to the confusion, most people tend to lump Gold with risk assets and when they say “Dollar up, Gold down” what they really mean is “Dollar up, risk assets down”. What they don’t realize is that Gold is in a separate class by itself. In fact, Gold is what people think the dollar is today i.e. money. The dollar is just a poser - a mass delusion, if you will. As more and more people wake up to this reality we can expect old correlations breaking down accompanied by increasing volatility as is happening now.
Capital today is trying to find a safe haven as we move along this deflationary depression. Initially of course some capital is expected to flow the dollar’s way since it has been the world reserve currency for so long (thus causing a rise in the dollar index), but as more and more people realize the sorry fundamentals behind the dollar and discover Gold as the true safe haven, Gold’s rise will in no way be impeded by the dollar. In fact, at some point, I expect even commodities to outperform the dollar (but still underperform Gold) as the illusion of dollar being “money” breaks down.
Gold:SPX Ratio
The bullish divergence highlighted in the last update played out (although not to the extent expected) and after rising from September through November to reach a high of about 1.10 it fell to around 0.95 in December. It has started rising again signifying that Gold is set to outperform the stock market once more. RSI and MACD are rising again and supportive of such a move. As we progress through the Gold bull this ratio will be in an uptrend. The 1.0 area which was resistance previously has turned into support. The ratio broke out of 1.0 at the beginning of 2009 and after an year long consolidation/retest and looks set to resume the uptrend.
The Gold-Stocks (Non)Correlation
Now after watching Gold rise along with stocks through the better part of 2009, many people believe that it will crash along with it as happened in 2008. What most people forget is that Gold completely decoupled from stocks from November 2008 till April 2009, at one point even moving inverse to it. What happens is that there are two sets of people buying Gold – strong hands and weak hands. Weak hands just play momentum and buy whatever is going up. They don’t really know much about Gold’s fundamentals and sell at the slightest sign of trouble. All the correlation junkies ala “Gold goes down when the dollar [index] goes up” also fall in this group. Thus during the initial downdraft in stocks weak hands panic and sell outnumbering buyers therefore causing the price to fall. As price reaches bargain levels, strong hands who are aware of Gold’s fundamentals i.e. know exactly what Gold is and why they are buying it, step up to buy whatever weak hands are selling putting a floor under the price. In fact we saw signs of such a floor (and Gold decoupling from stocks again) on Friday as the stock market got pummeled while Gold held its ground at $1075, even moving up towards the close of the session due to heavy buying at those levels. Now while it may not have bottomed out yet, this indicates that we are not very far away from one.
Gold has its own fundamentals driving the price having nothing to do with the stock market. In fact, I believe that Gold will see some of its greatest gains when stocks are being pummeled. People will see Gold holding its own amidst crashing stocks (and other paper assets, even commodities) and panic into Gold and out of stocks as happened in February ’09 when stocks were crashing and Gold was rocketing. The price will not really rocket (no, what we saw in November ’09 wasn’t it) until the bullion bank shorts ala JP Morgan get crushed and in their fear the herd might just run over them. Never underestimate the power of fear.
Gold:Oil and Gold:CCI Ratio
Although Gold has not really outperformed crude since February’09 and the ratio has remained in a tight, albeit historically normal, range of 13-16, it has started to rise again. MACD is rising and supportive of such a move. Although the ratio did rise to above 16 in Dec’09, I believe that the bullish divergence between price and MACD referred to in the last update has yet to play out fully. Another spike up is definitely in our future. Let’s also take a look at the Gold:CCI ratio which compares Gold to other commodities in general. After spiking from Sep’08-Feb’09 it has been consolidating till date and looks ready to spike up again. MACD and RSI are rising steeply now, after having remained in a sustained uptrend through the long period of consolidation thus supporting such a move.
Since this is a deflationary depression in terms of Gold (and NOT the dollar) and we should look for Gold to not only significantly outperform crude and stocks but other commodities in general and hence both of these ratios to be in an uptrend. In fact, if you zoom out on these ratio charts, you’ll see that MACD has been in an uptrend all throughout the “Hope ’09” rally. Also, the spike up and ensuing consolidation looks suspiciously like a bull flag. What this tells us is that Gold has been quietly consolidating against all the “Hope” and “Recovery” assets such as stocks and commodities ready to rocket up again. The spike to $1226 in November was just a small taste of things to come. In fact, I think that the coming spike in Gold will be a sight to behold and will surprise even the most hardcore gold bugs.
Strategy
Long term the strategy remains buy the dips as Gold is in a bull market which is far from over. Short term we can expect volatility but $1000 should hold, although we are seeing increasing signs that we just might be at the bottom (including sentiment in the PM community which appears to be terrible right now – at least from the comments I’m seeing on various blogs) and just doing a second retest of the last breakout at $1075. If you are not leveraging, buy at will. If you are, make sure you have enough margin to hold your position even if price dips to $950-$900 just to be on the safe side since the bullion bank gold manipulators are adept at performing "bucket shop drives", as the famous Jesse Livermore called them.
The $1000 area - where we are right now - is a great risk reward point for those who are leveraging as you are only risking a possible $100-$180 move against you compared with almost unlimited upside potential. From being a massive resistance zone, it has turned into an equally massive support zone now that the price has broken out. Consider it a gift from your government.
Mr.Prechter wants you to choose this:
Over this:
What's it gonna be?
Disclaimer: Long Gold. What did you expect?
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Gord:
I think you're a smart guy, and I appreciate your comments here.
But whenever I hear " but this time I suspect it may be different", I get very suspicious. Isn't that the telltale of every top?
OMG-that image of the dollar on a roll-it's worth the depression. Hahahahahahahaha
I saw the word "Prechter" and stopped reading.
i dont think things are clear at all regarding gold. Like silver and many other "risk assets", its most recent up swing from nov 2008 was in the form of a wedge, with a throwover right at the end, and we have now boken the wedge to the downside. I know logically gold should part ways with stocks etc but the charts are not showing this. Also, if gold was going to do its own thing, the PM stocks should not be breaking down so severely with the rest of the market. It looks to me like for now gold is being considered a risk asset, and the wedge would call for at least a return to the 700 level. Also, we are in a descending triangle recently, and those most often break to the downside. I don't think this is the right time to be telling people to back up the truck. Caution is warranted. USD is the place to be probably until mid 2011.
I was talking mad shit at the gold peak, remember? Deafening silence indeed.
I was like "gold is about to decline" while all you people were like "gold bitches" back when it was in the 1200's. Now it's at 1070, and I'm still talking.
That descending triangle on the gold chart and the bull cross on the USD MACD looks pretty ominous.
You might consider paring back some of those gold reserves, homey.
Remember I told you this when gold is sub 1000.
This has been a public service from Master Bates.
Have a nice day!
Looks like somebody is short Gold - and quite a bit it seems.
He's short gold and long annoying. We get it, he
doesn't like gold - so many posts saying the
same damn thing.
it is always the same people that are massively long gold that try and justify why gold will hold up at certain levels especially in response to a strengthening dollar. I know, this time is different.
And it is often Anonymous "Keyne Toads" who constantly croak "fundamentals don't matter". This time is different indeed. Fundamentals, hell - math itself, be damned!
+1
Damn few gold bugs out there that aren't just balls to the wall gold bulls 24/7/365.24218967, why I don't bother with 'em.
There are not 365.24218967 weeks in a year
This incorrect reading of Prechter's Elliott Wave calls on gold has been spread by so many for so long that you've all come to believe your own lies. Please, please, please, pile into gold with all your money aka Gordon G., buy now before it goes to $5000 an ounce. Please buy it!
There is nothing I enjoy more than seeing idiots parted from their money!
In the last decade: Value of "money" down 40% and value of "gold" up 400%.
I see what you mean...LOL
So you're a short-term speculator of gold? Or were you trying to make a point? The "value of money"? What does that mean? I can buy more today than I could 30 years ago because the supply of money grew faster than the cost of goods. Why? Not because the value of money went up or down (the value is fixed to be at face value). It's because the money supply grew while price of goods stayed flat or went down (adjusted for inflation) due to importing. But gold has not kept up with inflation over the last century. Gold is just hitting the previous highs during the 1930's! So if you think gold is an appreciating asset, by all means keep buying. But gold will never be currency again, nor will it ever be a backing for money. Why? Because it's a limited resource. Think about that and maybe you'll figure out why you can't use gold as money. Hint: the world population is growing, but gold supply is not.
Which is why there is yet another price discovery due for gold. Think about it, as a wealth asset of titans and nations, it can only be allowed to assume its actual value when the fiat game is becoming exhausted. That will occur after a major currency crisis opens a lot of still sleepy eyes to the fact that "full faith and credit" ain't nothing but words in the printing press era. CBs and Old Money™ being accumulators sends a loud enough signal for me.
Gold shouldn't back transactional money at a fixed rate - agreed, but it should replace fiat as a means for ordinary people to save and accumulate, being freely exchanged for shelter, retirement etc. at an inverse value in accordance with the sanity and stability of a nation's treasury.
if Prechter is so wrong as i keep reading why even people keep referring to his work or his predictions?
This is not really about Prechter per se. The million dollar question here is whether we are hitting a deflationary depression or an inflationary depression. No one knows for certain which one it is in the medium term 6-12 months. All this government printing hasn't really transltated into cheap credit for the masses which is the end game for the FED here. Until that happens I believe we remain in a deflationary depression in the medium term.
I think it's dangerous to be fanatic about this US Dollar vs Gold debate. In the end, both camps could very well end up being right. It's possible that the Dollar surges and Gold drops in the intermediate term and Dollar falls and Gold surges in the long term.
In the intermediate term, I'm definitely leaning to the 1930s style deflation. But in the long term I think we will have no choice but to print our way out of debt which will be hyper inflationary.
It's both! A massive deflationary collapse (surely), while at the same time a currency crisis. The deflation will gut the economy, and all governments printing money will send gold to the stratosphere. I do hope gold gets cheaper though so my shorts pay and I can buy more physical before the whole things comes down.
+1
+1
Deflation... Then inflation. Why is this so hard to understand?
Even if the deflation doesn't kill gold, it will hurt it's price appreciation, and that $ could be used to short stocks...
Support is at $1080 and showing massive strength.
It's definitely got it's grrr face on.
"showing massive strength"
What does that mean? How does one arrive at that conclusion?
It looks more like a descending triangle to me. It may be a pennant, and if it is, I'll eat my words.
Still, it looks a lot more like a descending triangle.
My guess is one more run up to the 1100 area, and then it plunges through the support to make new lows.
Remember I told you this!
USD bitchez! (for the short term, at least.)
I love how your message got flagged as junk.
I love gold. I'll just love it a lot more if it sells off hard with equities in deflationary wave.
Right now the most money looks like it will be made shorting stocks rather than going long physical gold. After the shorting is done, *then* it's time to buy.
If the gold bugs thought about it for a minute or two, they would love this scenario too, because it means they could buy more of their favorite element at a discount. But some people would rather be right than rich.
ROTFL...
You're delusional if you think there will be any physical to be had after "the shorting is done"
I love how all the dollarbugs have this fantasy of getting out of the FRN "at the top" and then moving their entire fortune over to gold and oil "at the bottom."
It got junked because everyone knows 'Bates is more basher than technician. Even your advice is more towards the gold market player than physical holder. There will come a time when sentiment says unequivocally "time to buy" - are you going to count on delivery then? I wish you luck.
I'll take the Gold, physical please. Yum, yum kilo gold bars. May I have a half-dozen?
Nice to see you do a long article GG, I have followed your comments for some time around here in ZeroLand.
‘Everything that could go bad, did not’
When the crisis escalated and went global with the failure of Lehman Brothers in September 2008, the dollar rallied – but Mr Paulson had to grapple with a firestorm of financial failures.
He feared Goldman Sachs and Morgan Stanley would go down along with Washington Mutual and Wachovia.
Lloyd Blankfein, Goldman Sachs chairman, told him that Goldman would be “next” if speculators succeeded in bringing down Morgan Stanley, the former Treasury secretary said.
“If they go, we’re next,” Mr Blankfein told Mr Paulson, a former Goldman chairman who had recused himself from decisions relating to his former company.
Although a Republican, Mr Paulson found it harder to deal with John McCain than Barack Obama – raising the interesting (and unanswered) question of which candidate Mr Paulson voted for.
http://www.ft.com/cms/s/0/772748d6-0e94-11df-bd79-00144feabdc0.html?ncli...
Prechter buy signal.....absolutely classic!
Don't Forget the Suzie Orman "SELL" signal whenever she say BUY.
Perfect TOP caller, a master really.
Worked in 2001 NASDAQ, Housing in 2006 too, I call it the Suzie Orman PUT.
(Suzie says Go long USTs now, what's that tell ya?)
When Suzie is LONG gold, it will be time to sell, else BUY BUY BUY for unleveraged physical
Who is Suzie Orman?
Bob Prechter wrote in his book Conquer the Crash that if gold ever got above $400 that he would "...have to reconsider his view of deflation..." I have repeatedly attempted to get an answer on The Elliott Wave International Message Board from the King of Snakeoil, but after many years of trying I have all but given up.
I'll be laughing when I buy your gold with my toilet paper at the end of the year.
Watch the 4 wk ema cross down the 10. Not a bullish sign
Plus, the STO are up on the CCI and WTIC gold charts, and the regular gold chart shows a clear descending triangle.
GG is so gold bitches that the charts could have a 45 degree angle downward and he'd be like... it's bullish, cause I own some!
Gold sub 1000, like I've been saying since it was 1220. I thought it might hit 1300 first, but it couldn't even do that before the plunge.
Poor Bob... I'll buy gold on the dips.
(I really like the guy, don't get me wrong!)
Can't wipe your butt with gold bars.
forget prechter get back to goldman...
Did you really think they were that more talented than the rest of the street?
31 January 2010
Front-Running the Markets And the Sickness Unto Death
From James Rickards, The Frog, The Scorpion, and Goldman Sachs:
"Now consider another example of data mining, not done by retail firms, but by giant investment banks such as Goldman Sachs. These banks have thousands of customers transacting in trillions of dollars in stocks, bonds, commodities and foreign exchange daily. By using systems with anodyne names like SecDB, Goldman not only sees the transaction flows but some of the outright positions and whether they are bullish or bearish. Data mining techniques are just as effective for this market information as they are for Google, Amazon, Wal-Mart and others. It’s not necessary to access individual accounts to be useful. The data can be aggregated so that the bank can look at positions on a portfolio basis without knowing the name of each customer.
http://jessescrossroadscafe.blogspot.com/2010/01/front-running-markets.html
GG writes an article, gold goes up $25. Coincidence?
Just good ol' fashioned research bitches!