“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)


"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat


Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput






Tuesday, April 16, 2013

Long term Gold Chart

In attempting to discern a stopping point for this decline in gold, the best we can do is to take a look at the longer term chart. The extent of the selloff has been so swift, so severe, and unprecedented in terms of my own experience based on the percentage decline, that one would expect the selling to have played itself out for the time being. This does not mean that we should expect one of those "V" bottoms and an immediate resumption of the uptrend. Rather, I think what we will see is an intermediate bottom followed by a trading range as gold trader/investors attempt to ascertain what we can expect next.

From all the reports that I have been reading last evening and today, gold coin and bullion demand is soaring. A report on Dow Jones last evening remarked about the surge in demand from some of the bullion dealers in Singapore. Further stories about gold coin demand continue to appear today. The break in price has attracted a significant number of purchases by those scooping up what appears to them to be bargains.

Also, some industry analysts have been tossing around the number of $1300 as a sort of breakeven cost for the general gold mining industry. The thinking is that if prices were to move down below that level, mines would be sold off, closed down, etc. which would eventually begin to impact supply moving forward. Of course that is a much longer term perspective for short term oriented traders but it does go to show that at some point, the best cure for low prices, is indeed, low prices.

What remains to be seen is whether or not this strong physical demand can offset money flows of hedge funds out of gold and gold related items such as mining shares which are managing only the most feeble of bounces in today's session. The result has been that the ratio of the HUI - Gold price is now down to levels that it has not seen since April 2001, almost at the very beginning of the decade + bull market in gold. That is simply stunning.

My contention - until these pathetically weak gold mining share stocks begin to show some signs of life, it is going to be difficult for bullion to mount any sustained rally here in the Western trading session hours. Too many people here look at these shares as a forward indicator of where gold prices are going and trade accordingly. If they see sustained weakness and only the most feeble of bounces in price in the mining sector, they are going to sell gold rallies with impunity since in their minds, they have absolutely nothing to fear.


 Take a look at the following long term monthly chart of gold to get a sense of where we currently are. I have drawn in two different sets of Fibonacci Retracement levels, the first of which takes the entire rally beginning back in 2001 to the peak up near $1900 into account; the second which uses as its starting point, the 2008 level made during the depths of the credit crisis.


Note that gold has moved down very near the 50% retracement point of that entire rally off the 2008 low that came in close to the $700 mark. The HALFWAY point on any rally, is a major chart technical level. On this chart it hits at $1310. Gold made an overnight low near $1320 which is close enough for dirt work.

It makes some technical sense that it held at that point. 
If you look closely, you can see that BELOW that level, there is the 38.2% Fibonacci retracement of the rally that began in 2001. That level is near $1280. If gold were to be unable to hold above $1310, odds would favor it dropping down to this level.

I have also drawn in an Andrew's pitchfork. I know some guys like to use them on an intraday or shorter term basis; I personally do not. However, they have some value in my view for the longer term, bigger picture charts, particularly if their various lines happen to coincide with the Fibonacci points or horizontal support and/or resistance levels.

If you look at that big ugly black bar sitting on the chart for this month, you can see that the median line crosses it very near the 38.2% retracement level of the 2008 low (the dotted line in purple). That level is $1454.

What I would need to see to indicate at least the chance of some sort of turning point in this market, is a combination of strength in the mining shares AND a push through at least the $1454 level. That is doable but only if we see something to spark inflation fears on the part of market participants. The notion du jour is that the Central Banks have killed inflation in spite of their money creation binge. That will need to change, and we need to see some data that suggests it is changing, namely VELOCITY OF MONEY, to dissuade the broader investor world that inflation is upon us.

I was looking at some data on the wage growth today that pretty much sums up what the problem is for gold right now.... REAL EARNINGS, that is, wages adjusted for inflation rose a paltry 0.3% in March from a year ago. While that is up a tad the data revealed that they are down from 2008! In other words, real wages have gone nowhere since the credit crisis nearly FIVE YEARS AGO.

Some further analysis by Dow Jones on this data reveals something even worse, the peak was way back in 1973! That is a GENERATION ago! 

This is the problem - consumers are not gaining any purchasing power in real terms. They are being forced to raid their savings or retirement accounts or use their credit cards and head deeper into debt to try to maintain their standard of living. Some were once using their houses as virtual ATM machines by refinancing at successively lower and lower rates and taking the cash saved and spending that on "stuff". How long can a generation continue to do that, Fed policy or no Fed policy?

This is why I think and will maintain, no matter how high this equity market eventually goes, that it is nothing but an enormous bubble pumped up by reflation efforts of the Central Bankers. It is not build on a solid foundation but on a shifting house of sand. Again, as a trader I have to go with the tape and play the cards dealt me, but as someone watching this lunacy unfold before my eyes, I have to speak out against it as monetary madness.

Wall Street currently cares nothing about any of this. All it knows is that $85 billion a month is being alchemized out of air and fed into equities. Nothing else matters - terrorist attacks, increasing poverty, falling real wages, soaring food stamp participation rate, mediocre job creation, increasing government indebtedness, IMF reports about predicted slower growth in 2013 for the Euro zone in general, slower than expected growth in China, etc. Nothing!

Pavlov's dogs were so well trained that they salivated every single time a bell rang, food or no food. The Fed has so well trained the hedge fund community that they salivate every single time they see any dip in price, whether it is large or it is small; in they come with the buy programs. And why not? They keep getting rewarded for their behavior so they will continue to do so until they stop getting rewarded. Case in point - the S&P 500 has now managed to take back 2/3 of the losses from yesterday... Meanwhile, the gold stocks keep moving lower and lower and lower....

Oh by the way, don't forget, that we will also need to see the action in the bond spread market along the curve to suggest inflation concerns are mounting. So far, nothing doing there either.

What I am saying is that while it is certainly nice to see at least one day in which the enormous selling has finally let up some, gold has some serious obstacles ahead of it to convince those who have been very badly burned by this metal, that it is okay to come back into the water and get wet once again. For now, it is a spurned lover with competition from the younger, hotter, woman - the US equity markets.





15 comments:

  1. Dan, thank you for these words. It is good to have -- finally -- a bit of respite from the selling. My gut inclination was to flip all the way over into "bull market" mode -- "the bottom is IN." Your caution that we are not out of the woods is well taken. We must be careful here.

    It is a conundrum: the mining shares are not likely to improve until the metals show some upward momentum, but the metals won't do so in a big way until the mining shares turn. I guess they will somehow have to move in tandem. And what will that take - who knows?

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  2. Dan,

    Please update the Hedge Fund Silver short position chart and your thoughts on it. This is the one I think is a powder keg waiting to blow up.

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  3. Bankers Rule and they are not going to lend money until Ben charges overnight fees on excess deposits. It was a galaxy long time ago when the credit markets used to heal these types of situations. To me this is one long controlled stagflation with theft involved. I have been a longtime member of the commercial equipment finance world. Used to be when the Fed printed alot of money my kind were summoned and dispursed all over America to fullfill the need of delivering that money to qualified borrowers (small and growing business'), and sometimes not so qualified at higher pricing and stricter terms. Since the banks are the only ones left standing and they have euniched most of their equipment finance arms, claiming the ultimate entitlement of sole providers in the equipment finance world outside of manufacturer programs LENDING is NEGLIBLE, jobs sparce and many small business with challenging credit profiles are dying like our credit markets. RISK used to be a tool that was utilized substituting some of the 5 C's with risk adds/deducts (Increase down pay, price risk with higher rates, take additional collateral, guarantees, etc). Today, Bankers enjoy limited competition and you either can get a loan for equipment or you cannot. Grey area risk pricing has disappeared like quite a few small business'. Velocity of Money way down. Bankers control almost everything nowadays including prices of metals. My take is the banks know the pool of residential refinances push for more loans is getting limited everyday because everyone who is qualified under their terms has already refinanced. Pools of new mortgages being created is getting smaller due to payroll reduction, wage stagnation, and job tenure with no pensions and 401K's offered. They are driving business through deposits, and ..............Investment income and FEE INCOME. Wonder why they need this phoney balogny market. It is the only strong window they have open.

    I look around and see that the lending has picked up nill. Bernanke talks like he thinks credits are too tight, but in the everyday world, no one is increasing velocity.

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  4. For Capex (Capital Expenditure Budgets) See ZH Article..
    http://www.zerohedge.com/news/2013-04-16/collapsing-capex-intel-edition

    Not good news for commercial lenders looking for growth.

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  5. shouldn't the rally start point be around 900 where all the strong demand is. the 700 point is more a bounce.

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  6. I just have to ask, why did the bailout happen? Who profited? Who is slowly being destroyed one company at a time? One person at a time in America? When the private sector jobs disappear who pays the taxes? What does a Government job promise? What does a union job promise? How are their retirements different? Why are they special? What will you do when the pink slip comes? We need to eliminate much waste and let America get back to work. The Bankers have to be split up or, simply destroy the big dual banks. If they have to make money the old fashioned way then America wins. If we continue to let them destroy jobs and funnel all the $ into Investment banks who buy media then we are doomed. Too many people do not know what a real budget is and how to make money? Why for profit small business grow up to be big business'. Dan,
    sometimes your faith is stronger than mine. I am getting very sick of this and inability to affect change is killing me.

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  7. Thanks Dan - very nice analysis

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  8. Thanks Dan, for your daily work.
    Dan, I want to know, one reason, just one reason why manipulators will stop here.
    If they don´t want price gold surge, why they will stop here?
    No doubt about fundamentals, but they are winning now.
    What kind of guarantee have we that we cannot suffer another drawdown in the future?
    That´s the problem here.
    My view

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  9. Hi Dan, I think the wait is over for stock market to start some meaningful pullback. Yesterday was one of those 90% down days which usually start the correction process. I think 1590 will be the top for next few months. Not sure how PM and commodities will behave as stock market goes through this correction. They might rally while equities correct as they were correcting when equities were rallying for last 6 months.

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  10. Dan, many thanks for the recent updates!

    "gold has some serious obstacles ahead of it to convince those who have been very badly burned by this metal, that it is okay to come back in"

    Seems like the first logical place to hunt is the miners, not the actual metal. I am buying a tiny pool of small quality miners who have locked in financing and are within two years of producing, and small quality miners who are producing. Quality, for me, means quality management. I am going with the small guys for short term: buyout pop, start paying dividend pop. For long term, should appreciate much faster than metal price - long term - after 18+ months of base building which is desperately needed.

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  11. This is really interesting article.....these info will helping me for my own cards...keep it up...!!!!

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  12. Hi Dan,

    Same graph here.
    I think the first resistance will be the median of the weekly pitchfork in the 1420 $ area. (and before round 1400).

    If further weakness, I see we could reach 1200 $ in the middle of may where the mlh inf of the pitchwork and the 62% Fibo retracement meet each other.
    Why not, after all, consider further slow decline as a possibility, given that we are entering a low buying season (may to august included)?
    That would give time for all weak hands bulls still in shock to throw the towel, and for the "manipulators" Sinclair is mentionning, whoever they are, to replenish their physical stock smoothly, without creating a V bottom.

    Honestly, I'd love to see that scenario happen.
    At least a strong, good cleansing, a correction of 35-40% from the 1900 $ top, a real capitulation with the creation of a real long-term support because gold would be oversold. And 1350 is only 10% Under this huge previous range support zone at 1500, I don't know, but I don't feel that it's deep enough to give a strong impulse back to the market for the bulls who just took a huge loss.

    Since you mentionned the correlation, I'm follwing sharply COPPER about silver prices. If Copper should drop sharply just as gold did, then probably the panic about silver is not over either, and I target 20 $ and below, as the mlh inf of the weekly silver andrew fork goes by the 17 $ area!!

    Scary thing for long-term investors is to see what happened in 2008. Top of Silver was 22$. Then a second top at 20 $ only. And then, that was what Andrew McGuire's révélations about manipulations supposedly cost a "car accident"...they shot the market, forced the longs out and the prices bled down to 9$ area. Less than half the second top! Now let's consider that the last top of silver was the 35 $ zone, totally unbreakable. Well...17 $ pretty much looks like a 50% retracement to me. Silver is volatile. Silver follows copper. I won't be surprised to see silver at 17 $ before this downtrend ends.
    Now technically, I se that in middle of may as well (traditionally low season for PMs), the mlh inf of silver is at 17. More. If I take the range from my charts and report it symetrically down...the new support is at 17.
    And 17 zone was the support in 2010 from which (4 whole months testing it!) silver went all the way to 50$.

    So...1200 $ gold, 17$ silver, gold/silver ratio of 70 in middle of may is possible imho. I'm even hoping for it, so that I can buy once more aggressively for long-term.
    Here are the charts.
    http://s24.postimg.org/aapfjsb9x/gld_mt.jpg
    http://s11.postimg.org/5or2xnm4z/slv_mt.jpg
    http://s11.postimg.org/v15q7kwk3/slv_lt.jpg

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  13. Hi Dan,
    Thanks for your research and thoughts. I just wanted to make one speculation. Could this last year's weakness, (and the recent plunge) in gold just be a perfectly appropriate and logical signal of a developing world wide financial crisis? It seems like most of the ingredients are in place for such an event. And although I am biased towards gold and hold substantial physical, I also understand clearly that the bottom line is that we all need dollars, euros, etc to buy food, or pay bills, so it is not surprising that people sell anything that is readily liquid to obtain money. I hate to say this, but maybe Robert Prechter will finally be proven right! Best wishes.

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