Monday, March 13, 2006

Gold Volatility

Well, it looks like gold prices finally bounced back a little today and closed with a > $6 gain, but is this a fluke or will the trend continue? In an effort to try and find an answer, I decided to look into what the experts had to say regarding Gold’s short & long-term outlook. What did I find? There are a plethora of opinions on the web discussing both sides of the issue… Some say we are due for further corrections; others say the corrections are over.

With that said, please allow me to share a couple of Articles that I enjoyed (both positive and negative). With this information at hand, hopefully we can all make more informed decisions on the matter.

This Gold Action Article, by Dr. Clive Roffey, uses the Elliott wave pattern of analysis and suggests the recent volatility and price decline in Gold is probably almost over and a major Bull market is expected ahead. (I recommend you read the entire link above, but here are a few snippets for those without the time.)

The fundamentals remain rock solid for a large move in the gold price based on falling global production combined with sharply rising Far East demand in addition to an increasing distrust of the dollar as an investment currency. Sure the gold market is going to have sharp corrections. It is the nature of the yellow metal to move from buying euphoria into selling stupidity in a matter of days. Traditionally it keeps you hanging on by your finger nails before it changes course. But it does not matter. We are into the big wave III that must go above the tops of wave I in 2002. So that any short term sharp correction is just another superb buying area, not a panic selling one.

The sell off hit all the commodities based on a sudden rise in interest rates in the US that theoretically should strengthen the dollar. I have news for you. Technically, interest rates in the US will certainly rise but the bullish effect on the dollar will be negligible. Rising interest rates implies falling bond and equity markets as well as inflation. But the problem will arise in terms of Japanese and Chinese investment in bonds. Will they be happy to see their US investment capital eroded??

At this point of time all the commodities have been doing the same intermediate correction in an ongoing bull market. So it is also buying time for oil and other metals as well as the precious metal sector, as well as the shares in these commodities.

Global gold shares are a superb buy whilst the other general equities continue to machinate in sideways moves.

I must reiterate for the doubters that we are looking at a major long term bull market in gold with the current level being a superb short term and investment buying opportunity.

Another positive article I’d like to share with you (a shorter one) is: Higher Interest Rates Mean Higher Gold Prices.

It's all nonsense. That higher interest rates means lower commodity prices, that is. All the chatter is just that - diversionary clap-trap. If the personal savings rate were to be viewed back to 1960, you'd see that only intermittently did Americans save less than 9%. Today we're setting aside a negative 2.75%! And that's the personal rate. The government's rate of "saving" (surplus) has long since gone down the slop shoe.

You can clearly see that it took a Fed funds rate of close to 20% in 1980 to break the back of gold, and retrieve the US dollar from the abyss. Of course, for Americans it meant a serious depression and misery from which many have not yet recovered. Even then the personal savings rate barely made it back to its former 10% rate, but from 1981 it never looked back and has trended all the way down to where it is today.

As we've pointed out repeatedly, this is an election year. The only goal of the Establishment is to get the incumbents who play ball returned to office. To accomplish that they must see to it that the "Feel Good Index" (Dow Jones) is trending upward, and interest rates are not sufficiently high to break the back of the housing market (voter piggybanks). Can they break commodity prices to forestall a building inflationary climate without harming the Dow Jones or housing? In the short term, it appears that way.

It only matters in the short term, and there is no fundamental political change in philosophy coming our way. The verbiage will become more shrill, yes, but in substance only enough to placate voter insurrection who will vote them another tour in Washington.

At some point the gold price will cross over the Dow Jones and interest rates, Fed and 10-year, will have to exceed 20% for the Federal Reserve to save itself and their political co-conspirators. The stress to accomplish this will fall on the American people to pay the bill.

Take a visual snapshot from the above chart of the period, say 1975 to 1981. Note that big spike in savings followed by a sharp plunge in 1975 is eerily similar to 2005 to the present. Gold began another leg up in 1977 with the savings plunge. That was gold's launch pad to its parabolic rise hitting $850 at one point. Will a Fed funds rate of 20% be enough to save the dollar this time? Can Americans who have no savings tolerate a "Feel Goods Index" drop to 2,500 with a commensurate gold cross at $2,500 per ounce?

I don't know about you, but it doesn't get me all tingly when I think about the outcome.

Finally, Ned W. Schmidt’s article Moneyization, suggests that the gold market is just reaching puberty, and due to structural problems in the US economy $1,300 gold is a real possibility (suggested read).

So far the ride in Gold and Silver has been enjoyable. What needs to be remembered, though, is that the good part is still out there in the future. The global shift away from paper assets to real assets is in infancy. Puberty has barely arrived. Denial is still too widespread among the majority of investors. Individuals remain doubters that the Real Paradigm will reign investment supreme in the years ahead.

Individuals are increasingly moving to the only viable and liquid real alternative to fiat money. Gold's price is where it is today due to individuals selling government money and buying Gold, the natural money. Each individual investor must evaluate the relative merits of their national money. Some situations are more urgent the others. New Zealand, for example, has recently demonstrated that urgency can develop rapidly. Complacency is not rewarded by foreign exchange markets. Getting out needs to be done before the problems develop.

The trade deficit of the U.S. is both structural and long-term in nature. The spewing forth to the rest of the world of green pieces of paper is not about to abate soon. Analytical delusion on the part of the Federal Reserve has prevented and will prevent actions before a dollar crisis is in full bloom. With the U.S. housing market already showing the first signs of implosion, the Federal Reserve will "toss dollars from helicopters" in a vain attempt to stop the collapse of mortgage debt. As the U.S. economy plunges into a policy created economic abyss Canada will be dragged along, like the roped mountain climbers plunging to their death.

Dollar denominated investors, both of them, should be using all buying opportunities to add to their Gold positions. As shown in the last two charts on US$Gold and CN$Gold, those opportunities present themselves on a regular basis. US $1,300 Gold and CN$2,000 Gold are both no longer fantasies about which Gold Bugs write. They are real possibilities!

On the negative side of the issue, Jack Chan at Goldseek wrote a fine article titled Outlook for GLD. In his opinion (with much data/charts to back it up) he suggests that Gold is experiencing a pullback that was expected, but due to supply/demand issues a much larger pullback may be in store. (suggest you open & read the link)

It is not wise to write about gold’s correction. It seems folks prefer to read those four and five digit gold price predictions, therefore, if you belong to the “to da moon” club, read no further. In a bull market, price accelerates, consolidates, then accelerates again. The consolidations could be just a mild pullback, or sometimes a deep correction. What determines whether it is just a pullback or deeper correction depends on two things: support and resistance. When supply overwhelms demand, we have resistance. When demand overwhelms supply, we have support. Simple volume analysis provides excellent feedback on this tuck of war between supply and demand, therefore, support and resistance.

GLD mirrors the movement of the bullion, therefore, gaps occur often due to overnight price pressure from overseas and from the futures market. On 2/07, GLD gapped down on heavy volume, obviously supply was in control. After finding support at the 50ema, it rallied and filled the gap on 3/02. But the volume shrunked by more than 50% from the down gap, and when a gap is filled at lower volume, supply is in control again and price is firmly rejected. To put it simply, when a gap is filled at lower volume, it often becomes support or resistance, in this case, resistance.

Then on 3/08, GLD gapped down once again due to heavy selling in the futures market overnite. Today, gap was filled at about half the volume, therefore, today’s high should become resistance. Since we are rejected by resistance again, price will naturally search for next level of support…..

Gaps galore! In charting, gaps are the magnets and price is the steel. Here are the good news and bad news: Bad news first: there are three lower gaps which are begging to be filled. Now the good news: all these three gaps were on above average volume, therefore, if selling continues but volume dries up, there is plenty of support below. But if volume increases, and these gaps are filled at higher volume, we need to go deep…..

The gold bulls out there must be having a fit. Look, I’m just telling you what I see. If the two down gaps occurred in low volume and left unfilled, that would be very bullish. But because they were filled and now have become resistance, there is no need to revisit them any time soon, especially with so many gaps below current price levels. For the long term well being of the gold bull, it is in our best interests that these lower gaps get taken care of sooner the better. Because the further prices rally away from these gaps, the deeper and more painful the eventual correction will be. That Katrina gap is obviously a “breakaway gap” and may not be filled, ever. Well, not until the next major gold bear market anyways, in the year 2525. According to most gold analysts, $600 gold is a gimme for 2006. Folks, there is no “gimmes” in trading. One baby step at a time.

So, with all this information at hand, what do I think? I personally still believe the long-term trend for gold is a major positive, but I do believe further short-term corrections (possibly major) could be in store.

The reason I’m so bullish long-term: The fundamentals of our US economy are broken and need to be fixed. Only after a resolution of these problems (or 20% + interest rates) will I be bearish on this metal. With that said, I’m even more bullish on Silver than Gold, but we’ll save that one for another day.

Some of the problems I see (reasons to be bullish):

Housing is due for a major correction
Interest rates are on the rise
Oil issues will still be on the radar for the foreseeable future
The Fed will continue to print money like crazy
Our debt and trade deficits continue to increase
Consumers are massively overextended
Blue/white collar job outsourcing is still rampant
Stock market euphoria (irrational exuberance) still exists
The dollar is overvalued
IRAQ is a mess
IRAN is in the crosshairs

Best of luck in your own decisions


Rob Dawg said...

Everything you mention is correct and biases the price of gold in US dollars to the upside. What I say next does minimizes these factors. What I say next is not a prediction or any of that. Gold just isn't a flight to safety anymore nor is the production of gold a fixed component. As a commodity gold would decline in an economic retraction. As a consumable component of things like computers gold will decline in a contraction. Indeed gold costs could contribute to such a retracement. I don't "do" gold for the reasons above and my suspicion that the market is not truly open.

The kind of world economy that can "use" $2000 per ounce gold isn't recognizable today. Small investors, say anything less than 50 kilogram lots, are going to see transaction costs that eat any profits anyway. Even -if- gold retains any economic turmoil premium these days that premium isn't available to the public. +/- a few percent fluctuations aren't going to tell us anything.

In short, I agree big short term fluctuations are likely. We disagree because I am saying meduim and long term prices are unpredictable and you say generally higher.

contrarian2day said...


I always appreciate your rational viewpoint.

Agreed--the future of this gold market is unpredictable, yet my belief is: there are far more reasons (at present) to be bullish than bearish.