Gold – What now?

Gold ran up for about a decade, with a wobble or two but not much.

Then just a few months back it whacked into the roof.

Then it fell for a while, with some strong volatility on the way.

So, what now?

Here’s a 7 ish year chart with weekly tick marks.

GLD all data  weekly tick mark

GLD all data weekly tick mark

First off, notice that the “wobbly wedge” in the last few months looks remarkably like the wobbly wedge in 2008.

That shape is something I call “wedging in”. There are various tea leaf readers who assert, based on the angle of the top to the bottom, or a bunch of other odd bits, that they can say which way it will resolve. What I’ve noticed is that it indicates a battle between net buyers and net sellers. Each rise is met by selling a bit earlier. Each drop runs into buyers. The wedge forms and heads to a point. AT that pointy end one side wins. I’ve not seen a clean way to say for certain in advance which side wins. In 2008, “buy more” won. (Likely as a refuge from a tanking stock market, IMHO).

Notice that both times the Price Ticks violate the Simple Moving Average line sets. MACD with “red on top” violates the zero line into ‘be sold” range. DMI goes to “red on top” into ‘be out’ range. ( You can buy back in when DMI and MACD both go to “blue on top” and MACD has a nice 45 degree or better angle upward.) There is a smaller version of the same ‘wedging in’ back in 2006, but it does not violate the SMA stack and does not have MACD go to below zero nor have DMI ‘red on top’. That’s a more typical ‘correction’ ‘reversion to trend’ that is encountered early in a secular bull run.

But eventually “the end must come”. Is that time now?

One of the issues is that many hedge funds (and others) loaded up on gold all along that run. Many of them are having issues as their stock portfolios are taking hits. If highly margined, they may find margin calls they MUST meet. So either they, or the broker, is going to sell something. For many of these folks, selling the gold that has not gone anywhere in the last year will be the most rational choice.

So this ‘topping actions’ or ‘wedging in’ tends to have a ‘crash bang tinkle’ aspect to it. Three peaks before you end up ‘below the line’ and wondering “what next”. A bit disturbing is that there is a kind of ‘gap down’ to the last tick mark. We’re sitting on $1500 and praying not to break below it. (If that happens, a LOT of folks will start selling in a hurry as it will be clear a new down trend has begun.)

Typically what happens now is one of two things. Like last time, a rise to the SMA stack and a cruise right on through them to a new bull run… Or… at the SMA stack prices stall, then fall away to the downside and a new bear run begins.

No, I don’t know which one it will be; but it will be one of them, almost certainly. On very rare occasions you can get prices just falling away from here. If that happens, bail out immediately. There is either a Whale shorting like crazy, a Hedge Fund blowing up and being liquidated, or a bunch of folks in panic or getting margin calls. None of which can be stopped nor even slow down quickly. Shortly after that all sorts of other folks will join the panic selling and it’s a crash. You don’t want to be deciding “Sell or hold?” then. You wish to have been sold out for a while and deciding “Buy now or wait?”. (The ideal time to have sold was on that black ADX line inflection down when RSI touched 80 and MACD also turned to “red on top” or at least when DMI confirmed with “red on top”. At this point, the best strategy is wait for an SMA stack touch and sell then or put a stop loss order behind it. IF we just plunge from here, well, at least you know what you ought to have done ;-)

Gold is incredibly fickle. There could be a sheik somewhere decide to buy a couple of tons, or a central bank decide to liquidate a few tons to prop up their currency. You just don’t know and it can happen over night. Arguments “To The Story” are fruitless. Forget all the stories about hyperinflation, about store of value, about safer than paper money. It is just a commodity like any other and subject to the same law of demand / supply equilibrium. IFF a lot of folks decide to sell, for whatever reason, price is going down. If they decide to buy, it goes up.

My guess is that we’re going to go down for a while. The dropping stock prices will have a lot of hedge funds scrambling and the lack of rise in a year will have others wondering why they have this “sterile asset”. Industrial demand will be down as the EU flirts with recession and China is slowed. Lack of recovery will have a lot less jewelry being bought. High prices will be dampening jewelry sales too.

Add in that a lot of folks have already bought their “emergency gold” and not a lot of demand unmet out there. If it starts dropping faster from here, even the “safe haven” folks will abandon it. (At least for a while).

(Yes, it could rocket straight up to $4000 tomorrow. Please spare us all the arguments about how hyperinflation is just around the corner and Your Story is Different!! This time is never different and The Story never matters. There is always a story, going up, going down, middle of a hard crash. The story just doesn’t matter. ALL that matters is net buyers vs net sellers. OK?)

So we watch and let the market tell us which it will be. While “my story” leans toward a sell off for a year or so, I don’t believe MY story either. It’s OK to have a story, just don’t let it get in the way of looking for DMI Red On Top or MACD Red On Top and Below Zero…

IMHO we have at most a couple of weeks of wobbling sideways for this thing to make up it’s mind and “pick one”…

Unfortunately, on this kind of long duration chart, volume is less usable as comparisons across years can just be growth in popularity of that ETF and unrelated to the underlying asset volume. Still, looking at this chart on BigCharts.com with volume and volatility shows a curious inversion of the past volatility. On this drop, volatility has stayed low. Last time it had a spike. This time there was a volatility spike in the rise a few months back. Volume has stayed modest in this drop too. Slow Stochastic has a drop, half a rise, and drop again.

All those things look more like a ‘blow off top’ where folks have “married their positions” on the spike and refuse to sell. That just invites shorts with Fat Wallets to drive them to the wall. Still, Central Banks tend to dominate, so harder for a Hedgie or Whale to manipulate if the Central Banks lean the other way. (But which Central Bank right now is buying gold? Who has ‘too small’ a balance sheet?)

So while I can’t say for certain, it does look to me like “down more than up” (though I’d expect ‘down’ just after a rise to the lowest SMA line).

In any case, it will be interesting to watch.

Subscribe to feed

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...
This entry was posted in Economics - Trading - and Money and tagged , . Bookmark the permalink.

5 Responses to Gold – What now?

  1. p.g.sharrow says:

    On gold, Just found this on Foxbusiness:

    “Despite once calling gold the “ultimate bubble,” George Soros’ hedge fund nearly quadrupled its exposure to the SPDR Gold Trust from 85,450 shares in the fourth-quarter to 319,550 shares in the first-quarter. Soros Fund Management also opened a new position through call options in Newmont Mining (NYSE:NEM), one of the world’s largest gold producers.”

    Read more: http://www.foxbusiness.com/markets/2012/05/16/gold-silver-decline-george-soros-nearly-quadrupled-gold-stake-in-q1/#ixzz1v6OuqhBF
    pg

  2. adolfogiurfa says:

    @P.G. & E.M.: Newmont Mining new gold mine project named “Conga”, in Cajamarca, Peru, though having been already approved its “environmental impact study” by the peruvian government , has been stopped by the action of Cajamarca region´s President (kind of a governor), though not having the legal authority to do that (In Peru the country owns the subsoil, the underground, then local governments do not) , and with the help of a local suspended catholic priest, the jesuit ex-priest of name Arana, taking as pretext supposed climate studies which say that it would affect the sources of water high in the Andes, though reality is that it does not rain at the origin or rivers but at middle altitudes; not only that but both made a “rally for water, as it is supposed that global warming will make water sources more scarce”, the funny thing is that demonstrators almost drowned because of flooding rains. It has been denounced that both guys are being paid by a known international NGO which recently signed a “deal” with an also known Gold mine in South Africa (a deal naively published by that NGO in its web-page), which exploits gold through very deep mining, with much higher costs than the open pit mining and cyanide leaching as it is done in NM mines at Cajamarca, Peru.
    The government in order to intermediate contracted another international environmental study which has confirmed the first one (already legally approved by Peru´s Mining & Energy Ministry) , presented by NM. However, as money flows, these guys, backed by international NGO´s are really “untouchable” though they may committing crimes like blocking highways,etc.
    In the end, the promoters of these “civil society movements” are seemingly seeking either to manipulate markets or taking things to such an extreme to make NM sell its properties to some known “New World Order” elite member. Summarizing: This is what “climate change” is all about. So @E.M. had its intuitive powers well in place when he began study the climate scam: IT IS ABOUT GOLD & LAND GRABBING, it is about CHANGING WORTHLESS PAPERS INTO REAL ASSETS.
    And the maddening reality is that silly people or “good hearted people” believe their “tricks”, from “climate change” to “trash food eating”, etc.

  3. Pascvaks says:

    “Add in that a lot of folks have already bought their “emergency gold” and not a lot of demand unmet out there. If it starts dropping faster from here, even the “safe haven” folks will abandon it. (At least for a while).”

    As you say EM, it’s hard to pick a ‘reason’, best we can do is keep our personal opinions out of the mix and watch the charts; but ding, dang, flubbermeisters, what’s the fun of that? Guesstimating is the toughest science on the planet, even tougher than astrology, and it’s better and easier and faster than all that quantum & string theory physics stuff anyday;-)

    OK! You’re right! Watch the chart!

    Ahhhhh…

    Just curious… Let’s say I’m the Fed and I think (for some strange reason) that it’s prudent to put the gold I stole back in Fort Knox. Isn’t it kind’a easy to print up a bunch of paper and buy a bunch of gold? Price doesn’t matter does it? Not to the Fed, right?

  4. adolfogiurfa says:

    @Pascvaks: Any decent trader must know what William Hershel observed in the 17th. century about sunspots cycles and wheat prices (food prices in general) (*), and knowing that those traders have had the same profession for more than four thousand years, they would undoubtedly choose as alternatives to valueless papers, agricultural lands properties and gold. This is why it is happening, precisely now, when we are passing through a low solar cycle, land grabbing.
    These elite/traders were successful in convincing good hearted people and easily buyable politicians, about the necessity of applying “land reform” everywhere. The result of this was the universal removal of local landlords´properties, which passed/ is passing, into their hands.
    (* http://stevengoddard.wordpress.com/2011/07/01/william-herschel-on-sunspots-and-wheat-prices-in-the-17th-century/ )

  5. Pingback: WSW, Sunday, 20 May 2012 | Musings from the Chiefio

Comments are closed.