Guest Post: Has Gold Unwound its Overbought Status?

Tyler Durden's picture

Submitted by Chris Capre of Second Skies LLC

Has Gold Unwound its Overbought Status?

One of the biggest questions being written about which is on traders and analysts minds is whether Gold has moved into bubble territory and is about to start a major reversal, or is going to keep on truckin’ Blind Boy Fuller style.  While my fundamental hat suggests it’s likely to continue its trend (as a hedge against bad govt’s), being a quantitative price action and ichimoku trader, I have to see what the technical picture is communicating.

For looking at whether a market is in an extreme phase and is set to reverse, we often look towards our weekly 20EMA spread.  This model plots the distance from the weekly closing price to the 20EMA as a gauge of market extremes or whether the trend is likely to continue.  If a market is at an extreme level, it usually has a very large spread from the 20EMA.  Any abnormal spread from the 20EMA is likely to return to the 20EMA.

Looking at the chart below, you are seeing the weekly chart on Gold over the last 6 years.  In this chart, you can see price’s movement and its relationship to the 20EMA, along with the lower indicator/model representing the spread between the week’s closing price and the 20EMA. 

We have highlighted the key peaks which generally occurred around a 1258 reading, or price having $125.8 price spread from the weekly closing price to the 20EMA.  This generally led to a pullback minimally to the 20EMA within an average of 4 weeks and a maximum of 10.  We would like to note that historically, since April of 2005, Gold has spent only 43 weeks below the 20EMA (closing basis) out of 541 for a total of 8% of the time, statistically displaying its tendency to trend upward.  It also means should Gold break below the 20EMA, the chances of price staying below it for extended periods of time are unlikely.

What we do have to note is the most recent parabolic run away from the 20EMA created an abnormal spike never before seen in history with a reading of 2718 or price closing $271.8 away from the 20EMA.  So the next logical question becomes what do we make of this and is it the end of this massive uptrend?

Our view is this is unlikely, considering the historical relationship to the 20EMA as noted before (8% of time below).   In fact, we may consider a pullback to the 20EMA to be a healthy thing as it will put Gold through a re-distribution phase and allow the order flows behind it to start another run higher. 

But, the extreme nature of this suggests price is likely to pullback to the 20ema within the next 2mos or by year end.  Across most instruments, price rarely has this kind of extreme or unstable relationship to the 20EMA and usually means the orders behind such movements have to normalize a bit before starting another run.  Keep in mind, this does not have to happen with a violent sell-off and could be the result of price hanging around the $1700-$1900 range while the 20EMA catches up to current price levels.

In fact, to add any new positions, we’d rather wait to let the spread normalize and move back into the prior range which suggested a very healthy trend. 

We also do have to add to the bullish prospects how price had one of its biggest weekly drops from an open of $1860.92, to an all-time high of $1911.89, then shedding $209 to the weekly $1702 low to do what??? Bounce strongly and end the week at $1827.  This is highly suggestive of how the buyers were ready to stand up to one of the most violent and largest % based weekly sell-offs and send the metal within roughly $40 or 2% of where it opened the week.

Thus, although the short-term price structure may suggest consolidation or mild pullback to the 20EMA, our medium and long term technical view is still strongly bullish.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
LookingWithAmazement's picture

Of course gold is way overbought. Kick all the "paper gold" at the Crimex and LBMA out and the price will plummet to, say, 500$. Then the real buying starts.

Anonymous X's picture

so your saying i should wait till that happens? Or is it a bad idea to buy at that time...

Spitzer's picture

Buy now befor September and October. These chartists are never right about gold.

They will be giddy with some new chart and boom, some central bank will decide to buy  200 tons and the price will shoot up.

DosZap's picture

Spitzer,@18:18

Sounds good, where is the 200 Tons coming from?,no one outside f a CB or the IMF/BIS has 200 tons period,that they MAY (if their absolute idiots) be willing to let go of.

Spitzer's picture

The CB of Kazakistan is buying all of its domestic production.

Pladizow's picture

$500/oz.....and Blah, Blah, Blah

$750/oz.....and Blah, Blah, Blah

$1,000/oz....and Blah, Blah, Blah

$1,250/oz....and Blah, Blah, Blah

$1,500/oz....and Blah, Blah, Blah

$1,750/oz....and Blah, Blah, Blah

So we have to listen to some more.... Blah, Blah, Blah before we see $2,000/oz and much higher.

Ahmeexnal's picture

A planet five times the size of earth has been discovered....made out of SOLID DIAMOND.

 

http://news.discovery.com/space/diamond-planet-110825.html

 

I claim ownership to this planet, and also to the soon to be discovered planet 10 times the size of earth, made out of SOLID GOLD!

Prometheus418's picture

Bearish for DeBeer's, bitchez.

JW n FL's picture

 

 

Germany is failing..

which would have helped keep CONTAGION from Europe spreading to the United States.

The U.S. has a continuing Depression..

which NONE! of the Structural Issues have been reviewed and / or fixxed.. Think Investment Banks Gambling with CD's from the retail side..

China has just implemented a TRUE! Gold for Renminbi Settlement Window..

and the Chinese know thier World is faker than fake, thusly they have been moving money off shore and buying as much Gold and silver as they can find..

QE3 is on deck..

But Gold is going to trade down?

the only reason gold is down now is becuase the FED bought Gold Down with Tax Dollars like they always do.

How is this even a topic for conversation?

AND!!

You cant eat it, BITCHEZ!!

Party with Berlusconi's picture

Having lived in China for the past three years and having turned around a fraudulent Chinese acquisition (held hostage for a week but that's not too uncommon) I have to say you have hit on a very fundamental point "the Chinese know their World is faker than fake." Gold is the anti-Chinese ethic. So it would seem ironic, but not really, that they would know to flock to the hardest, hold in you hands, reality possible, gold and diamonds. Chinese have always been known to store wads of cash in their bras and under their beds. Now it's in gold or offshore investments and holdings. Just the well off mind you, as this is still a third world country. Forget what you see on your business trip to Shanghai. The supply chain cost is +18% of the GDP compared to <7% in Europe or North America. The food supply is disgustingly unsanitary and a risk to public health.  These are two of thousands of examples of the huge inefficiencies that exist in this have-not kingdom. I don't want to paint with a broad brush but there are hundreds of millions operating at the lower to mid tiers of Maslow's hierarchy. Don't fall for thinking that most are educated, cosmopolitan, or rational beings from "our world". Of course people are people and you will find kind and generous folks everywhere. But despite the differences in experience and thought all the Chinese know that if you can't hold it in your hand then there is a >80% probability it is fake. Retail gold is huge here. Not just jewelery but in bank and safety deposit holdings. China is hyper-duplicitous. They are building a fast train between Shenzhen and Honk Kong, replete with luxury condos on the HK side for rich PRC. Why?, for shopping and value add tax avoidance and for access to off-shore accounts and deposit boxes. Those boxes are holding gold and precious stones not chickens and pigs.

Right on JW

 

Sorry for the duplicate postings. It sucks being dyslexic.

Troll Magnet's picture

Chinese are filthy in general.  And they are obnoxious and overly aggressive.  I can't think of a worse country to become the next superpower to be frank.  

BaBaBouy's picture

.

Sorry Tyler, butt this is a Bullshit Post ...

 

GOLD AU don't trade on any "Moving Average" in the medium/long term, which is what counts.

 

ASIAN Physical buyers, (as opposed to dummy USA paper buyers/shorters), don't give a Shit about MA Charts, and thats what counts, Period end of story, for now...

nmewn's picture

"I claim ownership to this planet..."

I think you gotta sorta plant the Ahmeexnal flag on it first...when you get there, plant it next to mine ;-)

JW n FL's picture

You guys can have the planet!

but the sea's are MINE!!

I am Captain.. NO! Admiral!! Pirate!!! KING!!!!

LOL!!

chindit13's picture

That would make one heck of an engagement ring. Too bad Liz Taylor left so soon.

malikai's picture

The CBs are buying quietly, now.

The announcements come after they've made/completed their purchases. The jumps sure do look good for their new assets.

Ahmeexnal's picture

Methboy says it only costs 5 bucks to dig an ounce outta the ground. So maybe we should wait til price drops so we can exchange portraits of old Abe Lincoln for an ounce of Au.

When the SHTF you'll be able to sell that same ounce for a portrait of Ogolfer.  Inside sources say Ogolfer will grace the 100 trillion bills.

CrockettAlmanac.com's picture

Weird scenes inside the gold mine.

Nostradumbass's picture

-

Far be it from me to defend MathMan but he was referring to SILVER not gold with his $5 to mine it figure.

JW n FL's picture

AND!!

You cant eat it!

BUT!!

It will help purify your drinking water!

Ahmeexnal's picture

Methboy would not know the difference between gold and silver if it fuxored him in the ass.

And when it comes to Methboy and his ilk, there is actually no difference between gold and silver. It's just PAPER to them!

Yen Cross's picture

5 Dollars? Confused thank you. Current spot 41.32 and I'm more inclined to watch the SPX. Current Futures 1185 / Flat.

 

You know about the crossover Right?

Freddie's picture

+1

Hilarious seeing O Hussein the muslim voters junking you.

macholatte's picture

These chartists are never right about gold.

I have asked a few chart guys (Tech Analysts) the same question and never really get any kind of meaningful answer. The question is this: How do you factor government interference?

 

Any man who can drive safely while kissing a pretty girl is simply not giving the kiss the attention it deserves.
Albert Einstein

There is a theory which states that if ever anyone discovers exactly what the Universe is for and why it is here, it will instantly disappear and be replaced by something even more bizarre and inexplicable.There is another theory which states that this has already happened.
Douglas Adams

I tell you, we are here on Earth to fart around, and don't let anybody tell you different.
Kurt Vonnegut

MFL8240's picture

Paper currencies are about to implode so you may have missed one zero. $5000!!

midtowng's picture

Gold is a bubble. How do I know? Because Forbes Magazine told me so. Check out these quotes:

The size of the gold ETF screams bubble because it indicates that everybody and their dog have bet all on gold. The relationship between the price of gold and S&P 500 earnings also screams bubble.

The sheer size of the gold ETF virtually guarantees that sellers will not be able to find buyers at current prices.

It is anybody’s guess when gold will correct, but it is very likely that it will be ugly when it does.

RockyRacoon's picture

They only see gold as a paper trade.   Sure is sad.

Yen Cross's picture

 Rocky you could not be more right!  ~ nice post.

HoofHearted's picture

And when will they look at the size of the FRN bubble? Oh crap, now I'm gonna have to go back to the reeducation camp, right?

Yeah yeah yeah...I love Big Brother.

Chris Capre's picture

Hello Rocky,

Author here.

I do not see gold only as a paper trade.  I own physical silver and gold in a vault and will keep accumulating over time.

But being an investor, a holder or a trader are three different things and I relate to holding physical different than I do trading.

And when I do, I use the charts as a mechanism for finding precise entries and exits.

This article was not meant to provide a strategy for a holder of physical, but more geared towards the investor/trader group which is a different approach and not mutually exclusive.

Hope this explains it further.

 

zorba THE GREEK's picture

Re Forbes article on gold bubble.

I also read that article, and nowhere in it does it reference gold becoming

a currency which it has and has been confirmed by the fact that it no longer

trades in any relationship with commodities or equities or even the dollar.

Also nowhere in the article is there any mention of the financial crisis now taking place,

or do they mention the race by major economies to devalue their currencies.

The article only refers to historical behavior of the price of gold and fails to factor

in the change in the political and financial environments.

 

 

Soul Train's picture

a rally in the dollar is bad for gold. Not likely long term with expected interest rates at nil until at least 2013.

gold on the up and up.

buy coins.

Jack Napier's picture

Maybe you should consider the words of Adrian Douglas, and that the ETF's are 45 times larger than the physical gold they represent. Bix Weir says it's more like 100. You might not find people willing to buy into their fractional reserve gold ponzi scheme at these prices, but the physical metal is another story.

Freddie's picture

All of TV is shit and the print media is the same.  WSJ, Barrons and Forbes all fawning over crony kleptocapitalist Waron Buffert.  They are all lying and attacking gold to depress prices.

Shocker's picture

We can only hope gold goes down to $500 / oz

Tuco Benedicto Pacifico Juan Maria Ramirez's picture

It's unlikely as there is good support at $520:)  Seriously though,  in a deflationary spiral brought on by the unwinding of the $1,500,000,000,000,000.00 in derivatives worldwide gold could go to $500 or so.  Gold has done well in deflationary as well as inflationary environments in purchasing power terms.  Even if gold is nominally priced at $500 its purchasing power will probably be even greater than it is at the moment. In a deflationary environment cash and metals will be king.

The Luftwaffe's picture

Actually, gold went up in nominal terms during the great depression. Besides, in a real deflationary spiral today, banks will lose so much on bad loans that the sytem will collapes, in fact, its already happening with US real estate deflation. I'm convinced that serious deflation will produce a gold stampede

mayhem_korner's picture

Yes.  It's not how many $$$ buys you an oz of gold, it's what an oz of gold will buy you.

constantine's picture

LookingWithAmazement,

In order to kick all the "paper gold" at the CRIMEX, you would have to kick out the paper shorts along with the paper longs.  I think that price discovery in this scenario would lead to much higher, not lower prices.  This is especially true with gold since one can short the material with out having any inventory or ability to produce the material.  The concept of selling something that one doesn't own is idiocy that only Wall St. geniuses could conjer.

lasvegaspersona's picture

agree completely with Constantine

RockyRacoon's picture

True.   Traditionally it is the shorts who must deliver, but this ain't your traditional market.   JPM is screwed...

HoofHearted's picture

He who sells what isn't his'n...

Well, Blythe could be your prison bitch, I guess.

lasvegaspersona's picture

I'm betting that when the Comex is at $500 the physical will be unavailable. FOFOA has discussed such a breakdown of paper v. physical at length. Best to buy physical now. 

Also commented on at FOFOA: gold behaves differently. it tends to get scarce as the prices rises. Those holding it see this as an affirmation of their decision to hold wealth in this manner.

qqqqtrader's picture

More charts to look at, but, he's been pretty close to calling turning points... just saying

http://www.scribd.com/doc/63436058/Gold-Report-28AUG11

Soul Train's picture

Here we go again. EMA SMA call it whatever you want. But it is only trending and greater fool theory. Yada yada bla blah. I've been charting since the 70's and seen my share of reversals. Gold is one that WILL NOT REVERSE. Some hiccups along the way, but up and up.

Fact is fiat money is doomed.

Fuck the charts. Just buy gold, physical coins - buy silver coins too.

Just buy it when you have the cash. Keep your eyes off the trend lines and supports.

Invest and hold for the long term. You'll do very very well.

Physcial only,stay away from paper.