"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

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Friday, April 19, 2013

Monthly Gold Chart

I wanted to see how this week's price action in gold would resolve itself so that I could do a bit of analysis on the market. Keep in mind that this is LONG TERM stuff. The nature of markets nowadays being what it is (they are run by hedge fund algorithms which do not think but just issue buy or sell orders automatically once certain trips are triggered) it helps to get a sense of where we are in the general scheme of things by looking at the larger picture to see if we can identify a long term trend.

I realize that the chart is cluttered but it needs to be in order to show the areas I have pinpointed that need some attention given to them. I have laid out TWO separate Fibonacci retracement patterns starting with the 2001 low and extending to the 2011 peak PLUS one starting with the 2008 low and running to that same 2011 peak up above $1900.



Then I have drawn in TWO separate pitchforks - one for use during the bullish phase and one for use during this now bearish phase.

I am interested in seeing the intersections between these various levels that are generated. Look at the area I have noted with an ellipse. It contains TWO Fibonacci retracement levels - the 38.2% retracement of the entire rally beginning in 2001 and the critical 50% retracement rally from the 2008-2011 rally. Can you see how those center around the $1300 level?

Now note the two pitchforks - the one uptrending, and the other downtrending and locate the intersection of the median or middle lines in both forks. Can you see how it come in right on top of the previously mentioned TWO Fibonacci retracement levels?

What does all this entrail reading denote? Simple - the area near and around the $1300 level is now critical for gold's fortunes as we move forward.  I believe it has as much significance as the former support zone back up near the $1525 region.

If this region fails for any reason, gold is going to fall first to $1200 and then possibly $1100 - $1092.  That would dovetail with the BEARISH FLAG FORMATION I have noted on a previously posted daily gold chart that would target another $200 drop if this week's low were to be violated on HEAVY VOLUME.

If the bulls can hold this market above this week's low but certainly above the $1300 level, then they stand a real chance of forcing a period of price consolidation or sideways movement. I believe it is too much to expect this market to ricochet sharply higher after the psychological beating that the bulls have received this past week.

While it is certainly encouraging to see the strong physical offtake that these lower prices are stimulating, it will require the return of the hedge funds to the long side of this market to take it sharply higher. for that to transpire, we must see fears of inflation displacing fears of deflation or slowing growth. Falling interest rates globally are showing that currently there exists no fear of inflation from Central Bank money creation at this point.

This week's Commitment of Traders report might be misleading to some because it shows Hedge Fund short covering occurring. Some might be tempted to think that they are abandoning the short side of the market. What needs to be understood is that gold plummeted over $200 in the matter of a couple of days. When it hit $1320, some shorts prudently booked some profits. The market then popped $40 off of that level. The next day, Tuesday, it fell back down to that $1320 level, but rebounded all the way back up towards $1400. That buying was SHORT COVERING on the part of the hedge funds. Once it showed that it was not going to break support, they rang the cash register on some short positions. They are however looking to sell rallies so they probably re-entered above $1400 during today's session (Friday).

We saw similar data in the COT for both silver and copper. Both of these metals showed that same short covering by the hedgies. In copper they covered some of their shorts below the $3.25 level on Monday and Tuesday. In silver, they covered some of their shorts on the steep fall towards $22. The trends in these metals are lower however and that means rallies will be sold by the speculative crowd dominated by the hedge funds.

To force some of these guys out of their short positions, it is going to take a concerted effort by the bulls to push price high enough to trigger their algorithms into buying. I am not sure where that catalyst might come from in the very near future. For starters I would need to see some sort of upside reversals in various commodity futures markets, notably copper and crude oil/gasoline and then the grains. In other words, the CCI would need to forge a bottom and show a definite upward turn with a trend change.

Fundamentally, we need to see a rise in real wages as well. Interest rates also would need to show a shift in the curve towards anticipation of inflation by the bond markets. They will pick it up long before the herd that looks only at equities figures it out.


3 comments:

  1. excellent, insightful analysis as usual, Dan.

    very appreciated here.

    ReplyDelete
  2. Dear Dan,
    Agreed once more.
    A few thoughts :
    - Sinclair is forecasting 50.000 $ on a prospect of the imminent collapse of the fractional gold system, and the physical gold being "freed" from the manipulation of paper gold, i.e bear manipulators with huuuuuge leverage.
    Do you have any idea yourself if this end of the fractional gold system is imminent?

    - GLD sales have been massive during last weeks. That alone sure helped the bears in their raid on gold prices, and more than compens√Ętes the "Frenzy" to buy physical gold all around the world through Mints, etc... but this has a limited time duration. Same for the delivery date (28th june) of the massive short contracts subscribed by the shorts during the raid (it's huuuuge once more, so they must buy back or show the phyz gold they don't have). Both ways, the clock is ticking. Bears have but a limited time to extend the panic to a greater level imho.

    - I'll look at what resistance they choose to hold, whatever happens. At the moment, I take into account the weekly median of the pitchfork, which (on my prt charts anyway) cross the 1410 $ level next week. As long as they can block any bullish attempt below this level on a weekly basis, I'll be still quite nervous about the solidity of the 1300 $ support zone.
    Wishing you all a nice weekend,

    ReplyDelete
  3. When using pitchforks, it's worth comparing them on arithmetic and log scale charts. The pitchfork on a log scale has been the more useful one as the price has remained largely within the fork.

    Price fluctuated between 38.2-50% until November 2009, then broke up to the 78.6% and stayed in the 50-78.6% range until the August and September 2011 spike up to 100% (with brief pokes above). Then back to the 50-78.6% range until May 2012 followed by the 38.2-61.8% range until February 2013 when it first broke hard below 38.2%.

    Right now, the low for this month (low price on Tuesday this past week) moved down to just below the -14.8% extension and yesterday closed slightly below 0%.

    With the log scale, there's no need yet to add a fork for the the bearish phase.

    Data from Gold Futures continuous contract.

    ReplyDelete

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