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Sunday, November 18, 2012

Scratching Gold Bear.

Well, the elections are over and the landscape has cleared immensely with that, but I have been scratching my head a lot lately, not from some kind of an itch (I have been using Head and Shoulders shampoo diligently and my scalp is a TV commercial example of health), but from bewilderment: what are the Gold Bulls thinking?
If you turn to the media, including internet, there is a broad chorus of voices quite convinced that the only way for gold is up, to $2500 in 2013 or higher, citing the relentless money printing of our FED, Central Banks gold buying, bearish perspectives of the US dollar and slow but sure recovery of the housing market. Investors seem to be following dutifully putting their money in gold, with the most broadly held gold ETF GLD relentlessly hitting new records of the amount of gold it is holding: at 1340 tons in November 2012. That compares to the holdings of 1232 tons in September of 2011 when the actual top was made and 1282 tons in May of 2012 when the last rally off $1530 started. So let's do the math: 200 dollars down from the top and 100 ton-plus more in GLD holdings. Is this the smart money accumulating? Yes, right.
Now, excuse me for this following diatribe on fundamentals, a sin that I have been trying to avoid in this sanctum of Technical Analysis and Charts, but it is entirely self-serving exercise trying to relief some of the discomfort that I have been always experiencing while visiting psychiatric wards to consult for medical problems.
Let's do a forensic exam what brought the "golden bull" to life and fueled it in first place. Some would say that after 20 years of bear market it was simply time for the bull to be born, and it was my main view over 10 years ago, when I became bullish on gold. However, with the perspective of time and events, a nice chain of events can be coined together. The chain is made of financial/economic troubles that were remedied with government and central bank response to undo those undesirable conditions. The first identifiable link was the Asian financial crisis of 1997-1998 that was "solved" during the 1998 market meltdown by central banks intervention. That stimulus in turn put a fan onto the already bubble-ready NASDAQ that ended up in the burst in early 2000 and a bear market that followed, which was again met with more easing and interest rates cuts. Along the way a tragedy of 9-11 was inflicted on our country and two wars were staged in response to that, resulting in countless billions of dollars being spend inside and outside of the country and dollar depreciation. Well, with low interest rates and forceful government spending, a bubble in the housing blossomed, bursting of which caused banking collapse and another forceful central bank and government interventions acronamed as TARP and QE (1,2,3...). With all of that, 2000-dollar gold seems to be natural and granted. So, why did it top out in 2011 and why should it not be going up?
For the careful reader of this text, it should be quite obvious. Simply, most of the conditions that had driven this bull market in gold, have (let's put it this way) expired. The wars are either over or drawing to their conclusions. There is no housing bubble with its credit and liquidity excess. Bailouts and hand-outs have been already done and the government is rather looking to recover the money spend on those. QEs were front-loaded and the latest one is just a muddle-through QE. Interest rates are and have been at a rock-bottom for a while. Elections are done and all parties are seemingly bent on rising taxes or cutting spending or both.
So going back to the question what those folks who think that gold will keep going up are thinking? I guess they follow same logic as at the top of the NASDAQ and housing bubbles- extrapolating current trend to infinity (never mind that the trend has already had changed over a year ago).
For those who never noticed, gold made a top in early September 2011 (yes, over a year ago) at $1923 per ounce and suffered a precipitous drop to its 200 days moving average at 1530 within the same month. Since then it has been oscillating in a broad range finding support at around 1530 and resistance at 1800.

The latest upswing that started in the Summer of this year failed to break out through the 1800 level for the third time- a bearish development. After recent drop from the unlucky 1800 level, gold found expected support at 200 days moving average printing a nice bullish weekly engulfing candle, but not penetrating above 50 days moving average at around 1750. Last week gold backed off from its recent high again and got support at the round-number of 1700.


So what are those charts telling and where gold is heading next?
Let's look at the life-time chart of this bull to see what may be coming, on the bearish side.


There is a channel with lower trendline support that is currently at around 1450 and will get to just under 1500 by the end of the year that may be the initial stop for the drop. After an initial bounce from that level, if fundamentals wouldn't change (read lots of pork thrown around by government), the target is the support trendline rising from the initial trajectory of this bull that is currently at $1000, give or take and that is were gold could be heading.  If that seems excessive, there is a precedence in the last gold bull market of 1970's, where after reaching a high of $197 in December 1974, gold collapsed to $103.5 in August 1976, before resuming its uptrend (just divide by 10, it would be quite eerie if this prediction were fulfilled).

It may be surprising to some, but the secular bull market would still be intact if gold pulls back to this trendline (without breaking it), and all of the decline still would be a secular bull market correction.
Now, if that's not enough and stupidity at the government level prevails and we enter a full-blown depression, 700 level would be in the sight.
Interestingly enough, the unhedged miners index HUI has been nicely on track predicting such an outcome, as you can see on the charts I posted in my charts list on stockcharts.

And my favorite shampoo brand.

This H&S nicely corresponds to the same pattern on copper's charts that I have discussed in my prior posts.


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