Worrying Gold

Gold has been on a straight up rising left to right ride for about 2 1/2 years now. Such things can not go on forever…

So we keep an eye on them.

The charts on GLD (the ETF that holds physical gold) have some ‘worry points’ in them. Not yet as much as during the Silver Bubble, but similar (if early).

Most visible on the very long term charts ( a 4 or 5 year chart with weekly ‘tick marks’) there are some more subtile things on the one year daily tick chart. So what are they?

GLD vs Related Metals and Miners

GLD 4 year vs metals and miners 26 July 2011

GLD 4 year vs metals and miners 26 July 2011

The first thing to notice here is just the broad “disconnect” between GLD and the other metals. Even the XAU “gold and silver miners” index has “gone flat” the last 6 months or so. From about January of this year, there is just no ‘lift’ in the other tickers (other than the Silver Bubble we had in May – but even it has returned to conformance with it’s peers).

Yes, each metal ‘inflects’ from rising to flat at a different time. Industrial metals, like copper – JJC, inflected earlier. It had a ‘correction’ in 2010 June / July then recovered a bit, but at less total gain / time, and has since gone flat too. (A similar curve is in PPLT the Platinum ETF, but it starts at zero at inception so all you get is the ‘wobble and flat’ parts on this graph).

So “what’s the deal?”.

That’s the question…

When a commodity is not responding to natural economic forces (supply / natural demand shifts; tech changes in mining; new tech demands ) the “usual suspect” is that it’s become a “Story Stock”. It has caught the imagination of the ‘common man’ and is being sold as a “story”. This, inevitably, leads to a bubble and bust. (As stories have a life that ends when either everyone has heard it; or the “event” fails to materialize.)

IMHO, the “Story” on Gold is that currencies are toast and it will soar when there is ‘no budget deal’ as some cataclysmic collapse ensues. That there will be no such collapse is not relevant to the existence of the ‘story’… On “bugger the currency”, we’d expect to see all ‘store of value’ commodities to rise more or less apace. (We see that in Jan 2009 to Dec 2010, then a ‘correction’ after a long run, and continued correlation on into about Feb of 2011. Since then, Gold is it’s own “story”…

That the gold and silver miners are not “following suit” means that smart money is NOT buying “gold in the ground at a discount” but rather expects it to not hold that prior value long term. Certainly not long enough to mine, refine, and market it…

The next thing to note is how the price ticker has ‘pulled away’ from the SMA stack. It was, at the bottom of dips, ‘touching’ or near the 40 week ( or 200 day – 5 day weeks…) blue line in the move from 2009 April to 2010 July. In December 2011, it barely gets past the 20 week ( 100 day ) line in the dip, and this last dip is just touching the 20 week line from the top with a single bar, then lifts off…

Not quite a ‘parabolic blow-off top’, but trending that way…

Now, look at the last few ‘price bars’. Notice how they are very small and ‘squished up’? The next to last one being a ‘star’ or ‘cross’… Now look at 2009 November. Notice how they get ‘squished’ then, too? Then a drop follows to almost touch the SMA 40 line. It’s a worry…

On the usual indicators, it’s pretty much “don’t worry, be happy”. The slowest is DMI. It is “blue on top” and with a steady sideways ADX and DMI+. Exactly what you see in a long running Rocket Ride ticker. DMI- is not inflected up and is just cruising on the bottom… But DMI is slow, especially on weekly tick mark charts, and when gold crashes, it crashes fast and hard.

Next notice that RSI and (a new one..) Ultimate Oscillator have very similar ‘shapes’. But U.O. moves a bit further and faster, sharper in the turns. We’ve had a nice “50 / 80” oscillation like you get in positive running tickers… But in the rise of last April, the peak is thin and he drop a bit faster. right now, in this rise, U.O. isn’t even getting much over 60 and RSI is looking ‘flatter’ and like it’s going to make a ‘peak below the prior peak’ as ‘stepping down’. Yes, I’m projecting where there are no data yet, but that’s the first indicate of ‘top soon’, and with the speed of gold movements, you do NOT want to be late leaving the party…

Also note that on that dip of 2011 January that just barely got through the 100 day line, U.O. had a quite low low. The trend is weakening, even if only a tad…

Are there other charts with other information? Do they soothe the worries or amplify them?


GLD 5 yr w  26 July 2011 Vf ROC MO

GLD 5 yr w 26 July 2011 Vf ROC MO

In this chart, we have a couple of things going on. The prices we’ve already seen (though on this year longer chart they are more ‘compressed’ per tick mark so look different).

First off, notice the huge volatility spike at that bottom in Oct / Nov of 2009. That’s typical of a sell off. See how ‘stretched out’ the price bars get? You get the opposite at tops, though harder to see as less extreme. Now look at the price bars today. Little squashed things… And the volatility? Sitting on zero… Not just a ‘one spike down to nick it’ and back up, but a nick and ‘lay there’… Very much not good…

On ROC and MO, sometimes one speaks more clearly than the other. They are a bit quirky and so I often don’t talk about them. In this case, you can see that each run up ends with an inflection of the ‘black mountains’ on ROC and MO. Each “buy the dips” is at a bottom excursion below the line. (During the longer down trend in 2009 you get the reverse ‘look’ with ‘sell the peak’ on the brief crossovers to the topside). What caught my eye here is a subtile thing. For ROC, the size of the ‘black mountains’ is shrinking over time. For both ROC and MO, the recent ‘rise’ is a very modest black spot so far. (IFF this run picks up steam, they could become larger mountains, but right now it looks like ‘weakened momentum and rate of change’).

Not dramatic on it’s own, but when coupled with other ‘worry points’ the ‘worry bag’ starts to get heavy…


This is a bit more problematic as there are several markets where gold is traded. Folks might just be swapping from GLD to Futures or IAU or… But usually that kind of change takes months or years to impact and even more often, folks just keep trading the ‘leader’.

With that caveat:

GLD 5 yr w 26 July 2011 Vol SlSt Wr

GLD 5 yr w 26 July 2011 Vol SlSt Wr

First off, notice how you get a giant volume spike out of the drop into the bottom of Nov 2009. The other volume spikes also mark runs ‘into gold’. Unlike most stocks (where volume spikes come at bottoms) GLD volume spikes come from “story” panics. And when the spike ends, a drop follows. Now look at recent volume spikes. Thin. Thready. Weak. Our recent volume is drying up. Markets are a ‘volume seeking device’ (as that is where market makers get a commission). You can’t force folks to buy, but you can scare them into selling…

So volume, too, says to be worried. Just about everyone who wants to own gold does own gold…

At the bottom, Williams %R is modestly ambiguous. There is a small ‘skinnier’ above the 50 line in the recent runs, but the present run is not yet done, so gives no confirmation. Below the line is getting skinnier too, though. Slow Stochastic is ‘above 80’ so the next move ought to be to the downside – but who knows how far. Perhaps just another ‘dip’ to buy.

In Conclusion

I’m not yet willing to ‘call the ball’ on a Gold Bubble. It is toppy though. I’d not put any new money in, at this point, and I’d be scaling out of positions ( in fact, I’ve lightened my holdings of GLD, SLV, and some other metals; though I still hold some).

I’m looking elsewhere for a ‘safe store of value’. Bubbly markets in commodities are NOT safe… That was one of the problems with the Gold Standard – the underlaying commodity is prone to large fast supply / demand swings and price excursions.

OK, these ‘weekly tick mark’ charts are not much use for a fast time scale decision. It can take months for a ‘prediction’ to come due. Is this saying a ‘dip’ in September? Or just after August 2nd? Too coarse to be clear at this time scale. I’ll just give one ‘daily’ tick chart here for a ‘faster view’:

GLD 26 July 2011 1 yr d RSI Slst DMI

GLD 26 July 2011 1 yr d RSI Slst DMI

Here we can again see the ‘squished’ price bars the last couple of days (though at this scale gold trades in small discontinuous bars a lot as the ‘price fix’ is in London, so you don’t get the benefit of seeing the broad price bars of a continuous market on days like that end June / start July bottom tick (that in a smooth market would be a broad bar at a bottom… instead it is an isolated ‘tick’ away from other prices. A “gap down”.) As Gold is very ‘gappy’ at this price scale, it’s easier to see the effect on the 4 or 5 year weekly tick mark charts).

We also see RSI at ‘near 80’ in this last run up, but lower than the prior run up where it touched 80. There is still time for spike up in this run to make RSI ‘tick higher’, so it’s an ‘early call’; but at present it looks like were getting ready for ‘steps down’ in RSI and a topping call.

As ADX is in the ambiguous zone of 20-24, I’m using Slow Stochastic instead of MACD (MACD says ‘be in’ still). Slow Stochastic is also saying “be in” as it is still ‘mouth up’ but at a ‘crossing 80’ after a recent dip, it’s ‘late stage’ for this run. (Notice that rarely does it take more than one ‘dip’ mid run prior to a ‘buy the dip’ move down to ‘near 20’. So at a minimum, I’d say ‘buying moment sometime next week or so’ and certainly NOT a ‘buy now’. And if it’s not time to buy, then it’s likely time to be selling…. Price is a LONG way from that SMA trend line…

So, all in all, I’m seeing now as time to “sell the news” (From “Buy the rumor, sell the news”) as we’re getting news of Congress playing footsie on a debt deal. Then, after that ‘news’, I’ll be doing a ‘reassess’ after the “deal” as to “top?” vs. “Buy the dip?”.

Yes, this is an early and speculative assessment, but in news driven event driven gold trading markets, you have to move even faster so sometimes move on even less news. When “gap down $50 at the open” is the norm, you simply can not wait around for ‘trend following’…

Update, minutes later…

This is a chart of the Kiwi Dollar from New Zealand vs the GLD gold, BZF the Brazilian Real, FXY Yen along with FXF Swiss Frank. (All ETFs you can buy as ‘stock tickers’, btw).

The other way to see this chart is that things are largely static and it’s the US Dollar that’s shrinking…

BNZ Kiwi vs GLD, BZF Brazil Real, FXY Yen, and FXF Swiss Franc

BNZ Kiwi vs GLD, BZF Brazil Real, FXY Yen, and FXF Swiss Franc

Update Two 27 July 2011

Since Luis has leapt to the wrong conclusion from the above currency chart, I’m adding one here that is longer term (so shows the context vs the $US dollar better). This is a 5 year chart of the Euro vs GLD and a basket of other currencies, all measured in $US Dollars. If it was a ‘dollar dropping’ story, they all ought to be moving more or less in sync (with minor variations based on each country balance of trade / payments and inflation rate).

FXE vs GLD and currencies 27 July 2011

FXE vs GLD and currencies 27 July 2011

FXE  - Euro
GLD  - Gold ETF (physical metal)
BZF  - Brazilian Real
FXY  - Japanese Yen
FXF  - Swiss Franc
FXA  - Australian Dollar
FXM  - Mexican Peso
FXC  - Canadian Dollar
INR  - Indian Rupee
CYN  - China Yuan

Update Three – a few hours later

On Bloomberg they ran a chart of “Inflation Adjusted Gold” and found the price is about what it was at the top of the last bubble peak. A web search turned up these two charts from a bit earlier, so you need to ‘mentally fill in’ the price to date of just over $1600 / ounce.

First up:


Inflation Adjusted gold through Feb 2010

Inflation Adjusted gold through Feb 2010

From the article here:


So, look at the $1620 point on that graph. If ‘past is prologue’ we’ve got most of the rise behind us. Prior top between $1800 and $2000. RAPID drop after, back to below $1400…

Similar graph from here:


with this chart:

Inflation Adjusted gold through 2009

Inflation Adjusted gold through 2009

Again you get to mentally color in the price up to $1620 or so. Same story.

And that is why I find things a bit ‘worrying’ right now.

Well, finally found the Bloomberg chart, but at a site that had ‘lifted’ it (so I’m not going to give them attribution). I’m still looking for the original Bloomberg chart so they can get attribution (and I can put in their chart as a link…)

Bloomberg Inflation Adjusted Gold 2011

Bloomberg Inflation Adjusted Gold 2011

While we’re not quite in as steep a ‘parabolic blow off top’ shape as last time, it’s darned similar. I would expect as similar a plunge on the backside of whenever that blowoff top happens… And that’s basically my whole point. Be out early, or be very very fast on the exit call…

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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34 Responses to Worrying Gold

  1. Nick says:

    Fundamentals point to lots of uncertainty over the next week or more.

    Greece is already done, for a while.

    US is next.

    Then the other PIIGS.

    All have issues that won’t be resolved by political fiddles.

    So my view is the fundamentals still look good for lots of uncertainty, which is good for gold.

    A big shake up will see more wanting to get on the ‘bandwagon’. That means the trick with bubbles is getting out at the right time

  2. boballab says:

    As long as Obama is in office, Turbo Tax Timmy has access to the printing presses and the Bernak is considering another QE round (stealth or not) do not expect a drop in gold.

    Maybe more people people should have listened to that loon Glenn Beck back in 2009 when he advised buying some when the Stimulus was passed…

  3. George says:

    I would sooner put my money in the Swiss Franc than gold. There is an ETF for that and the dollar has reached an all-time low against the Swiss Franc so it is likely going to be too late now, probably should have moved the money into that a year or two ago.

    Problem with gold is that the price isn’t a pure play on the USD while the Swiss Franc pretty much is a relative strength play.

  4. E.M.Smith says:


    I like both FXF and FXY (Yen) as “store of value” currencies, but for ‘gain’, oddly, the Kiwi BNZ and Brazilian Real BZF are also moving up!. Interesting chart here:


    As the yen took a pause for the quake, it is playing ‘catch up’, so good for ‘late entering folks’ who didn’t see the discussion about liking the Swiss Franc some odd months (years?) ago…

  5. Bruce Ryan says:

    on the economy in general, I’m asking if we have got to the point where everybody is negative?
    What is the sentiment out there?

  6. R. de Haan says:

    @Bruce Ryan
    on the economy in general, I’m asking if we have got to the point where everybody is negative?
    What is the sentiment out there?”

    A friend of mine runs an umbrella import company who is selling about 10 times his normal volume thanks to continuing rainy weather conditions.

    People hate him for his success.

  7. E.M.Smith says:

    I’ve added that 6 month currency chart as a static chart to the posting. The link in the prior comment will get a ‘live version’ that changes over time.

    @Bruce Ryan:

    The point behind sentiment indicators (and ‘momentum’ indicators of various sorts) is to detect just such ‘everyone knows it’ over done sentiment… and early indication of ‘time to leave’ as ‘everyone knows Bernanke will bugger the currency’ so all the selling is done…).

    Oddly, the hardest thing to do is to convince someone that what “everyone knows” means it is “exactly wrong” to bet that way… Especially so when ‘late stage’ and topping, but not yet in the sickening plunge state. Even during the plunge, folks will argue that it’s just a ‘correction’ and be buying with both hands trying to catch the falling knife.

    So as more folks here comment “The dollar will be buggered so Gold is Safe”, it is, in fact, confirmation of “top, time to exit”… but don’t ever tell them that, folks would rather prefer to skin the messenger alive than think that they are among the ones who have ‘bought the story stock’…

    At any rate, this is a very early “heads up” not a “dropping tomorrow” prediction. For that we need a couple of more “failure to advance” moments along with RSI stair steps lower and MACD headed to below zero… This is more “time to get a way to buy the dip – THEN decide to hold or sell out on failure to advance should it happen.”

  8. Chuckles says:

    E.M. Your final update is I suspect closest to the truth – gold is not rising, the dollar is dropping.

  9. boballab says:

    @ Chuckles

    If you haven’t seen the demonstration by Glenn Beck about the buying power of Gold vs the Dollar, you should. It clearly shows that the “increase” in Gold is nothing more then the decrease in the Dollar by looking at the cost of a good suit:


    Think you will get a kick out of this “Hockey Stick” graph:

  10. R. de Haan says:

    Morgan Stanley’s Q3 Outlook Gold, Silver, Rare Earth’s and every other Metal under the Sun

  11. R. de Haan says:

    Charting david Rosenberg’s thesis NO GOLD Bubble until $ 3.000,-

  12. bruce says:

    The gold play post lead me to think of the recession in general. From there I wondered how sentiment on the recession was holding.
    The administration my be holding the inner-tube underwater very adroitly , but sooner or later that tube will slither away from their grasp and it will “fall up” like a bubble in beer.
    So I have two opposing ideas to fumble, or juggle. 1, The “This time is different” rule, and 2, They really are adapt at fouling up the business climate.

    Thinking the better part of a recession is made up of sentiment, if sentiment is at its worst, that is when the bubble falls up. And we come out of the recession like we usually do. At the same time thinking, this time is different, because it really is more than a snafu.
    Thinking it is more than a normal snafu leads me to think sentiment is at bottom and thus ready to rise. But common sense tells me it really can get worse. Which is a good …
    are you seeing a dog chase his tail?
    sorry I’ll go away now.

  13. NZ Willy says:

    Yes, I’ve been topping up my gold & silver in comfort, using NZ dollars. No price increase. Feel sorry for all you poor benighted Obama-dollar users.

  14. Luís says:

    Hi Michael. Once again you try to understand gold by looking at GLD, luckily this time you were able to reach some practical conclusion right at the end.

    Here’s a little glimpse of what is driving gold and silver prices at the moment:


    There are other data out there on sales and stocks that show something entirely different from your bubble thesis.

    Take care.

    [ And once again, Luis, you try to attribute to me what I do not say. I’ve not said “It is a bubble about to burst”, but rather “The charts look like they may start to indicate “bubbly top soon”. Further, you seem to just LOVE buying into ‘stories’. The whole point of charts is to divorce yourself from ‘stories’, to see into the collective consciousness of what participants have already done. So, for example, if the Gold story were “dollar to be worthless, gold only real value”, that’s a great story right up until everyone has already bought gold; at which time the “story” persists, but there are no buyers left… Inevitably there is a “bubble and drop” at that moment no matter what the story is.

    To check the story thesis, you compare gold to other ‘stores of value’ such as silver, platinum, even copper and zinc, and you look at the miners, who have more gold in the ground than above ground. IFF they are following suit, it ratifies the “story”. If not, it casts doubt. We are “measuring the dollar” and finding that many metals are NOT “bubbly”. Then we look at mining stocks. IFF the dollar were driving it, the mining stocks are either “dirt cheap” with all that gold in the ground or being driven sideways by irrational forces. Again, “a worry” as it says “more likely a bubble in gold than the ‘story’…”

    Now, per your pointer to ebay sales: Slightly less than useless. Most of the drivers of gold prices are major buyers and sellers. Central Banks of countries, for example. They can trade more in one trade than all of Ebay in a month, if they so desired. All it really says is what the charts already showed: There are a lot of ordinary folks buying “the story”… So, visit London, ask the metals exchange if Ebay makes a bid during the daily price fix… and how much it matters when The IMF decides to sell $20 Billion in a day.

    But you are vested into the “story”, and will love it to the very end, no matter what happens. Just like the folks who were vested in the Silver Story were most vocal and vehement just as the bubble got strongest. That’s just part of human nature. The very thing that the charts are designed to protect you from is the one thing you simply will NOT be able to accept. Human nature…

    My “story”, were I to endorse one, would be that most likely China is dumping it’s $Trillions of BOTH Euro and $US and moving that into “stores of value” such as gold and land in places like Brazil and New Zealand so that they can get food from those lands. (Africa, too, but their currencies don’t have ETFs to graph). WHEN they run those currency stocks down, the things they are buying will have a dramatic price sag (as has happened in every other commodity where they have had cyclical planned buying of stocks). That would explain the BZF / EWZ disconnect too.

    Which “story” is better? No way to know… without a heck of a lot of digging into data that are hard to find or not even available. And THAT is why the charts are useful. Because belief in the “story”, no matter which one it is, is just that. A “belief”. And about as useful as a belief that God will save you.

    So, look at this chart of Euro vs GLD (and a basket of other currencies):


    Kind of blows that whole “It’s the dollar” thesis all to hell… Gold is just on a rocket Ride up against ALL those currencies. I’d give it about a 20% max depreciation of the $US Dollar as reflected in the basket. Yet gold is up 150%. That, Sirah, is a “bubbly character”… (Unless, of course, you wish to assert that the Swiss Franc has had a 2/3 depreciation…)

    So the “story” of “it’s the $US dollar dropping” fails a sanity test against other stores of value and other currencies. That makes it a fear trade story stock in a bubblicious run. Not “topping” yet, but getting there.

    When will the end come? Don’t know. It will most likely be a news driven event that stops the rise. Perhaps a budget deal. Perhaps Greece being kicked out of the Euro Zone and the PIIG rump getting religion. But when it happens, there will be a ‘failure to advance’ in the gold price, and a drop in volume of buying. Then a sickening plunge as all those folks who bought gold start trying to sell with no new buyers.

    But enjoy your bedtime “story”, and feel free to ignore my Grimm’s … and the moral in each of my ‘fairy tails’… -E.M.Smith ].

  15. Bob Layson says:

    I have bought gold not to make money but to have money. Banknotes will not do as well in ten years time.

  16. PhilJourdan says:

    Although I got my formal education in Economics, I am a Network Engineer, and do not play the market (I let my advisor do that). So I usually skip your mark posts as I am not really interested. But this one got my interest up.

    I have been watching gold – more as a reverse economic indicator than an investment decision. So I was intrigued by your prediction. I like the logical sense of it, and yes, it is a “story” issue now. Everyone is being told to jump into gold for safety. When that happens, I make sure I do not follow the herd. Some are going to get rich, but not everyone.

    Thanks for the education.

  17. E.M.Smith says:

    I’ve added a 5 year currency chart so folks can see the divergence between Gold and a basket of non-US currencies over the longer time period. The 6 month chart is useful for “who is buying something somewhere now” and argues for folks buying “stuff” from New Zealand and Brazil (likely not their stock markets as EWZ is flat to dropping) but their land and agricultural products. The 5 year chart gives perspective on Gold vs (everything else) and shows how gold is rising out of all proportion to inflation of currencies (unless, of course, one wishes to tell the Swiss that their Franc has dropped to 1/3 the value of 5 years ago… clearly not the case. So it is gold rising, not currencies dropping, for the bulk of the move. I’d give it about 20% via currencies by a visual average of the right hand intercept.

    Hopefully this will help folks get a balance between how “stories” make them think vs how “compare and contrast with other stores of value” reports the relative movements.

    @Bob Layson:

    While likely true, I’d be reluctant to buy gold at this point as it HAS run way up. In comparison, Platinum is ‘dirt cheap’ and does not have the “bubble risk”. As an economic recovery happens, it will rise on demand growth too, while gold will drop on ‘failure to advance’. You can get a nice Isle of Mann platinum coin too. Diversify your metals holdings… (Probably also a reasonable time to hold some silver as the ‘bubble and drop’ has been cleared. I’d still watch the price, though, as it can take a long time to stabilize after that kind of disappointment event.)


    Yeah, a lot of us Economists learned the law of supply and demand; and that there was a large supply of Economists and almost no demand… but saw a large demand for Tech Guys… Me too… So my ‘day job’ is in computer stuff.

    But my first love is market dynamics. Been fascinated by it since I was 8 years old and the town stock broker would have lunch in our restaurant… “We’d talk”, and he even let me sit in his Rolls Royce once… So I have a ‘personal database’ of about 1/2 century of “market watching” along with a ‘by proxy’ exposure to the rest. Just love it…

    At any rate, glad you found one you liked…

    FWIW, my personal favorite “inverse indicator” for gold is simple: When the news and finance channels on TV are all full of “Buy Gold NOW!” ads, they are having trouble filling that side of the trade. Demand is falling at that high price. Time to sell gold when that happens…

    @N.Z. Willy:

    Go ahead, just rub it in… Would you like some salt too?



    The way out….

    It isn’t “different this time”, but you have to pick the correct reference point.

    FDR was he original model ( though Nixon was called ‘the last Progressive President in his wiki page … and we all know how happy we were with him…) so just look to FDR as your model / guide. The Progressives like to think he fixed the economy and saved the world, so want to do more of ‘his stuff’. Yet his Progressive Agenda was WHY the business recession turned into The Great Depression. (Well, his and Wilson’s “great works”…).

    So “can it get worse”? You betcha! …

    We’re not ‘out of the woods’ until the Tea Party spanks both “Tax and Spend” Dimocrats and “Just Spend, don’t tax” Republicants into submission. Oh, and gets the Jack Boot of Zealous Regulation off the throat of businesses…

    So, right now, you can see a similar (if milder) impact in EWZ. It was growing like a weed until the Regime Change shifted to ‘investor hostile’, since then it’s gone flat. Now the Obominator is “investor hostile” and the USA is “gone flat”. They can pump all they want into the “tire tube”, it’s all leaking out the “sovereign risk” hole of “investor hostile”… Until that changes, anyone with a brain will be building factories in China and maybe India…

    Given a choice of “build oil refinery in USA” vs China, India, Saudi, {some tax haven island}; I’d go for the tax haven island or China (with India / Saudi tied for third depending on how the Arab Spring handless the Arab Fall…)

    The USA would not even be on the consideration list… I can freight in Diesel and Gasoline at full market price and not have the sovereign risk…

    Repeat for: Chemicals, rubber, tires, finished goods, furniture, clothing, computers, semiconductors, metals refining, metals manufacturing, painting anything, shoes and leather goods, car parts, cars, appliances, ….

    So the US dollar drops apace as we need to BUY those things, but export less the world wants as ‘stuff’ is made overseas in larger degree. ( You can only sell so many cows and canned peas… and once China has a decent airliner, well, Boeing is going to ‘have issues’… beyond just trying to open a new factory in a non-union state. Then again, were I Boeing, I’d be looking to open a China factory Real Soon Now… Oh, Wait, they’ve already done that: http://www.industryweek.com/articles/boeing_to_double_workforce_at_china_factory_22624.aspx )

    So “this time is not different”, it’s just like Wilson / FDR… but with a minor brake on things from The Tea Party. And yes, the Investor Hostility Hole is still there… so don’t expect any bobbing upward any time soon…

    @R. de Haan:

    I suspect $3000 / oz is a bit ‘generous’. Personally, I’d “guess” more like $2000. Traders like to run at round numbers, so at $1600 and rising, we’re likely to ‘take a run’ at $1800, and if THAT happens, it’s pretty much a ‘done deal’ for a $2000 run. It’s at that point that the traders would start to cash in and selling pressure would likely develop.

    The charts say there is a ‘pause / worry’. But that could be quite adequately explained by the “story” of a debt deal due in a week… So we’re at a “news flow” inflection point. Often you get a pause then. WHEN the news hits (whatever it is), we’ll have the “battle of the stories” and we’ll need to see which one captures the imagination. “Tea Party Brings Discipline” (with carping of “end is near due to default”) vs “Nation Saved By Debt Bubble Growth” (with carping of “end is near due to inflation”). Four possible stories, and the winner determine the mass mindset that will drive the prices… 50 / 50 odds of more gold Rocket Ride vs Bubble Bust.

    So this is an ‘early warning’ and not a “bubble bursting” posting. Personally, I’m taking my money and stuffing it into things like Yen and Platinum. Real “stores of value” that are not tied to either story outcome over the next few weeks. AFTER the dust settles, I’ll slide back into the winner…

    I don’t expect them to move much in any direction in real terms. And that’s the whole point…

  18. E.M.Smith says:

    I’ve added a couple of charts on Inflation Adjusted Gold history so you can see the parallels with the earlier (1970’s) “housing crisis / inflation / gold bubble” process…. I lived through that one, and this one sure looks a lot the same to me…

  19. R. de Haan says:

    As for the currencies:

    Thousand pictures worth one word: WORTHLESS

    As for the current devopements and the near future (also for Gold)

    The Road Map to Ruin

  20. DirkH says:

    Even a common-good-socialist kinda colleague here in hypertaxed Germany today told me he considers buying Gold – the kind of colleague who’d never buy a stock, as companies are evil exploiters of the working man.

    The last time that happened to me was when during the last big oil bubble a colleague in a cafeteria told me that oil would only go up from there. Of course, that was exactly at the peak of the bubble.

    Go figure. I wouldn’t touch Gold any more than i would touch a very high P/E stock. (And i don’t… from experience i know that my touch immediately deflates the bubble ;-) )

  21. PhilJourdan says:

    E.M. – I actually was working in the field (economics) for many years. But one day I had to install a network (that was the early 80s, so the one who installed it was the expert). And when I was laid off, I decided to switch careers. I am lucky, as I have never had a boring job! (IMHO – I am sure others would disagree. ;)

  22. George says:

    This seems interesting to me for a reason I can’t quite put my finger on:


    But I would change it a bit and buy land rather than houses. Find a nice piece of ground with some water in Southern Utah or Southwestern Colorado.

  23. boballab says:


    I saw that article too and I think you are probably seeing the same thing in that chart that I do: The Housing market is almost back at where it belongs and the Boom and Busts seem to be on a regular cycle.

    If you look at that chart you will notice that housing was slowly rising until the 1920’s when you had a mini bubble which the Great Depression wiped out. Then you had the post war economic boom which led to another bubble that crashed in the 70’s back to around 100K. Then right after that we started the Boom that went bust in 2007/8. Basically it looks like a roughly 30 year cycle (1900-1929, approx 1940 – approx 1970 and 1981 – 2007/8).

    Also there is this quote from the Forbes piece that the chart came from:

    All told, swapping gold bars for bricks, whether as investment or a place to live, hasn’t looked this attractive since the inflationary depression of 1981. US housing’s previous low came during the deflation of the Great Depression. Never mind that the average US home doubled in size inbetween, or swelled another 40% since. Because whichever flavor of depression we’ve got today, the immutable object of unchanging, unencumbered gold has once more whipped back to its pre-20th century value against the ever-changing, credit-reliant market of residential housing.

    It’s almost as if the “long boom” of easy credit never happened. At bottom, the average US home cost the equivalent of some 71.5 ounces of gold in 1934. Forty-six years later, it fell below 77 ounces of gold. Today’s 103-ounce price tag isn’t rock-bottom yet. But compared to the top of a decade ago, it’s getting there.


  24. Luís says:

    So the “story” of “it’s the $US dollar dropping” fails a sanity test against other stores of value and other currencies.

    The sanity test would be to compare the supply of gold against currencies such as the euro or the dollar during the last decade or so.

    You could also check the figures for physical deliveries at the COMEX, LBMA and the asian exchanges during the same period.

    It is interesting to note that you treat silver as dead and buried, while it’s price is presently above 40 $/oz. I believe you are looking at things from a very short term perspective.

    [ -E.M.Smith:And I believe you don’t read very well. So what? “Belief” is relatively useless. As I pointed out, per silver, it would drop, have a Dead Cat Bounce, then a ‘ring down’ and then most likely start to rise again on a return to long term trend. That is exactly what it did. Also I had said ~”you can buy it cheaper after the drop”, which was exactly right (and I did, and then sold again on the next short term top). So no, Luis, I do not treat it as “dead and buried”, I treat it as a volatile commodity prone to “bubble and drop” with the typical patterns all such have. (Parabolic rise, plunge, Dead Cat Bounce, decaying oscillation aka “ring down”, resume trend; eventual repeat). Commodities are VERY useful for trading, pretty dicy as an ‘investment’… That I do not subscribe to your emotion driven faith in it as Gods Gift Of Stability and Growth is “not my problem”… It is just a commodity, like all other commodities, and with the same “issues” as an investment vehicle.

    Do I use a short term perspective? Well, “yes and no”. IFF you would bother to actually read what I write, you would see that I have a “variable time scale”. I look at a 5 to 10 year (weekly tick mark interval) chart to set “context”; then “slide in” to the time scale that is most useful for any given set of trades. Typically a 1 year or 6 month (daily tick mark interval) chart. Sometimes (when markets have gone very flat) a 10 day (hourly or 15 minute tick mark chart) if that is the only place with price trends to trade. I’ve regularly admonished folks that they need to “pick THEIR time scale of interest” and frequently point out that the reason one Talking Head will say FOO is going up while another will say “going down” is precisely because they are working different time scales. BOTH can be right, but using a different time scope. As a consequence, I slide between 2 to 3 scales to assure I’ve got my context right AS I make shorter term trades inside that context.

    Why do that? Well, as you saw (IFF you bothered to look) it saved me from buying silver at near $50 / oz and then let me buy it at about $35, and then sell it higher (for the portion I sold). So instead of being DOWN $10 / ounce, I’ve got profit in the kitty AND holdings at about a $35 basis. That’s why.

    No, I don’t have “day trader postings” on those trades. It happens too fast for posting and I think most folks would not be interested. Yes, I did specifically say “You can likely buy silver now” just a bit after the DCB was done and during the ‘ring down’ phase. Hardly “dead and buried”. But you prefer to assert what I have not said, and act from your preconceptions, not from what I’ve written. You also prefer not to look at the history of accurate “calls” and like to ignore the dollars gained by them. Fine with me. Just don’t say I did something that I did not do. It gets old fast.

    Per your desire to redefine what the “sanity test” ought to be: Um, supply is only 1/2 an answer (and not a very useful 1/2). I’ve posted the comparative prices of other ‘stores of value’ and currencies. Clearly gold is the one that is ‘out of whack’. The “why” is pretty simple. Demand. Not supply. (The miners are fairly stable). Demand is a function of emotional excess (as you so admirably demonstrate with great reliability) and “belief”. Unfortunately, they can be very fast to change and fickle in action. (That, BTW, is why gold and sliver are prone to “bubble and bust”… Relatively fixed supply, highly variable demand due to emotional swings.) So you have bought into a “story” that you are in love with. You will defend your love against all comers. Fine. Just don’t expect others to ratify your fixation.

    Gold is just a metal, just a common commodity like all others. Very long term the price is set by “cost to produce”, very short term it is set by emotional excess. Medium term it is set by central banks around the world. Cost to produce is about $400 / ounce (varies quite a bit by miner, some as low as $250. At $1600/ ounce, all sorts of properties become viable and supply can increase dramatically, but it takes a couple of years to open new properties). So a $1600/ounce price is, inherently, self defeating in the very long run. Medium term, it can be collapsed by some central bankers deciding to support their currencies with gold sales (admittedly unlikely right now as they are choosing to risk inflation instead of deflation of real estate). Short term? It’s held up by folks like you; blowing into that bubble with all their might… and as soon as they decide to stop, it collapses. Like all bubbles do. So “how high” depends entirely on how many folks can be convinced to “believe” and toss all their self worth at it…

    COMEX, et.al. and especially Asian deliveries are just a measure of that emotional excess. Validated for ‘a while’, then violent in the rebuke. Look at the Bloomberg chart above of the ’70s round of this same process. Look at the DOWNSIDE of that “spike and plunge”. Then ponder the risk of buying gold now. Yes, it has some upside yet to go, but ever more downside below you.

    “Managed the RISK and the reward will take care of itself. -E.M.Smith” You, Luis, are fixated on, and making decisions from, fear and greed. Fear of currencies and greed for gold. Neither fear nor greed is a good tool for decisions. You then want to complain that I’m not embracing the stories of fear of currencies and greed for gold; as though that were, somehow, ‘a bad thing’. Yes, I’m not embracing those stories. And that is EXACTLY the whole point. And it’s a very good thing.

    So take gold, and plot the price of, oh, copper or oil or cattle or sugar or houses or cars or… and you find that your thesis that gold is constant and the dollar is plunging would require that in real terms those things would need to be selling at about 1/3 of their prior “value”. EVERYTHING ELSE must have plunged by about 2/3 of “real worth”. Just crazy. Yes, the dollar has been cheapened. About 15% to 20%. The REST of the 150% gold run-up is NOT the $US. That’s 130% for “emotional excess” and 20% for “The Dollar did it”. Very risky ratio to be betting on a 130% emotion driven trade…

    “In late, early out. -E.M.Smith”. That’s a basic trade rule of mine. It prevents trying to ‘catch a falling knife’ buying too early AND it prevent overstaying a trade (or a “story”…) and selling too late. It lets you catch the “sweet spot” in the middle of the run and avoid the two risky ends. So now, IMHO, is the time to be edging toward the exit door in gold. Moving into something else that has a lot more upside and a lot less downside risk. Yes, I still hold some gold (not a lot. Maybe $5000 – $8000. I’ve not totaled it up lately) but not the $30,000 I held a week or two ago. Probably sell down to about $2000 when the news of the “budget deal” hits. (“Buy the rumor, sell the news”).

    And no, Luis, that will not mean I’ve decided gold is “dead and buried”. It will only mean that I’m waiting for a better, cheaper, entry point to reenter. With “profit in the kitty” and a lower basis… ( I was actively buying and trading gold at the $300 to $900 price points, holding some through the $1000+ middle. I suspect you didn’t notice that…) Personally, I like “buy at $800 sell at $1600” much better than “buy at $1600 panic out at $800”, but feel free to suit yourself…

    Basically, a “buy at $1600 with a $2000 peak likely ‘soon’ and a $800 plunge in days after it risk” is just a lousy trade risk / reward ratio.

    But enjoy your “story”… -E.M.Smith ]

  25. PhilJourdan says:

    George & Boballab – Housing is, by trends and history – a good buy. But the problem with housing right now is not where it “should be”, as that would be a definite buy. There is still a massive amount of foreclosures that have to work their way through the system, and until that finishes (with luck, in about 6 months to a year), housing will begin its recovery. The issue with foreclosures is they are basically being unloaded at firesale prices, and that depresses the market for all houses. Banks have an asset they do not want (the house), so unload quickly. It costs them money to maintain the asset, so the longer they hold it, the less they realize from the sale (normal people can and do hold them for a long time because they are working the asset – i.e. living in them).

    For an indication on when to start buying houses, watch the backlog of foreclosures. Once it gets down to historic levels, that would be the time to start buying. Kind of wonky, but I have come to respect my Uncle in this (now retired, but made his fortune in real estate).

  26. boballab says:


    Banks are resorting to the Bulldozers and are not trying to unload the houses quickly:

    BofA Donates Then Demolishes Houses to Cut Glut

    Bank of America Corp. (BAC), faced with a glut of foreclosed and abandoned houses it can’t sell, has a new tool to get rid of the most decrepit ones: a bulldozer.

    The biggest U.S. mortgage servicer will donate 100 foreclosed houses in the Cleveland area and in some cases contribute to their demolition in partnership with a local agency that manages blighted property. The bank has similar plans in Detroit and Chicago, with more cities to come, and Wells Fargo & Co. (WFC), Citigroup Inc. (C), JPMorgan Chase & Co. (JPM) and Fannie Mae are conducting or considering their own programs.


    Also keep in mind those people that had their homes foreclosed on, they too thought housing was a “good” buy in bubble and it would just keep increasing in value. Alas like every other bubble it pops and the value goes back to were it belongs and for housing that is historically 100K of gold. You see that “good investment” only works for three types of people: The one that buys and sells property to make money, the people that buy a house to live in with cash and have no mortgage and people that buy the house with a 30 year mortgage early enough in the bubble. Everyone else gets screwed.

  27. E.M.Smith says:


    If this cycle is like the last one I lived through, the next step is a bubble in “collectables” and land. (And, as you noted, ‘houses not so much’, though they do ‘recover’ in nominal terms).


    Yup, I remember the days of ‘you installed it, you are the expert’…

    Don’t forget the “other problem” with housing. A Large Load of “Boomers” who are about to retire, sell the home, and either move into a retirement home, a low maintenance apartment / senior living facility, or a medical facility… In my and spouses sister’s family, we have 2 homes and 3 kids. As we ‘age out’ of those homes, there is only ‘one home short’… yet each kid will likely either need a ‘roomy’ or get married and have more homes to inherit in THAT family… As the ‘age pyramid’ turns into an ‘age square’ we don’t need any new homes beyond replacement…

    I’d buy farm land before I’d buy homes… (Or I’d buy shares of ‘assisted living’ facilities…)


    Yes, there is a ‘generational’ cycle to housing boom / bust. Fairly regular right now at the 30 year generational time. May dampen out now that the “boomers” are aging and the ‘eco-boom’ is smearing out.

    Also depends on have a generation grow up that has not lived through a boom / bust so they can repeat the same errors and the “powers that be” can repeat the same scam (IMHO, of course…)

    At any rate, as gold is entering the ‘parabolic’ phase, it’s time to start swapping out of it and into things that have not yet started that run…

  28. Chuckles says:

    Another chart for interest, the creator thereof noted that there had been a huge raid of ‘paper’ shorts on gold in the last couple of days –

  29. boballab says:

    Watch this video of Mark Rubio on the floor of the Senate:

    After that not much more needs to be said.

  30. E.M.Smith says:


    That’s part of why I think gold is getting out of whack. ALL those currencies did not have that much decline in purchasing power…

    Measure them in oil or copper and they are not nearly dropping that fast…


    Yup, he is pretty darned straight up about it…

    I find the Kerry “come back” clearly an example of political gaming…

    The number of flat out lies from the Democrats is astounding. Getting a larger credit card is defined as ‘paying your bills’. NOT putting more things on credit is called ‘a grave risk’. Passing two bills out of the house and nothing out of the senate is called “obstruction” by the house. Just bunk and bull.

    The simple fact is that there are not enough resources to cover the promises. Something has to break. Democrats are trying to use that for political advantage (“Never let a disaster go to waste”). They have no interest in ‘fixing it’, only in ‘best advantage from it’. IF they “win”, the country is headed for a Greece like collapse in under a decade, perhaps as soon as 5 years. (That’s a simple financial consequence of the spending rate, NOT a political statement.) IF congress “fixes things”, there will be a near revolt from all the folks who find out that they don’t get goodies after all. I’m not sure the government can survive THAT either.

    There is a point in a failure mode where you can choose the nature of the failure, but not have a ‘non-failure’ outcome. IMHO, that’s where we are. But it’s a process that takes a generation to happen… so folks think it isn’t happening… even though we are now in the last few years of that generational process.

    We’ve taken the “speed” for a long time. Now we either die in a big old “Meth Bender”, or “dry out” in a hellacious withdrawal process… We’re too damaged from years of drugs to just keep on just taking them… and the pusher is about to stop giving us dope on a promise to pay ‘someday’…

    So while I find it an interesting drama to watch (sort of… knowing it ends badly is kind of a bit of a spoiler…) as the congress critters posture and preen; I find it terribly off-putting that they don’t seem to understand that they are strung out and need to pull the needle out of their arm. They think One More Fix, JUST ONE MORE… and everything will be FINE again!!!!

    They are so used to lying they don’t even hear the lies anymore.

    I think we need to rechristen the Potomac river De Nile…

    At any rate, something will be resolved in the next few days, one way or another, then as uncertainty leaves the field, gold will likely take a dip. Perhaps a big one. Then comes the hard part: “Buy the dip” or “failure to advance”? It’s likely to depend on the nature of the mistakes made by congress. (Whatever they can agree to do will be a mistake of one sort or another, and failure to act will also be a mistake… The only correct answers are the ones they can not accept to do…)

    One of the more interesting options I heard suggested was that The Federal Government sell the gold in Ft. Knox to The Fed for some giant pile of currency and a promise to redeem it later… to buy several more months of hand wringing… To the extent The Fed then sold any of THEIR gold to stabilize the dollar, it could cause ‘interesting times’ in metals…

  31. PhilJourdan says:

    As Rubio is not running for president in 2012, he really needs to be Senate Majority leader if the Republicans taken control in 2012.

  32. P.G. Sharrow says:

    YUP! Gold is way over priced. 3 times more then cost at least. If you must, own Platinum or better yet good farm land.
    Japan seems to be trying to drive down the Yen from its elevated position. The result of a Whale bowel movement maybe? ;-) pg

  33. George says:

    The IMF should be dumping some gold here soon for more European bailouts.

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