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.
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.