Traders and the Gold “Top”

Last week’s commentary, Gold Knows, engendered lots of comments by traders. Quite a few suggested that the post itself was marking the top in Gold, and it was therefore a short.

Not only did that turn out to be premature — Gold managed to tazck on a few more bucks since then — but it seemed to be
misunderstanding the whole Bernanke versus Gold post. It was not a call to run out and buy gold there; rather, it was a
critique of the corner the Fed has painted itself into. (Our initial Gold rec came  years ago when GLD was in the low 40s).

But since so many traders brought that up, here are some thoughts on Gold. Fade
(short) the metal and/or the miners if you like, but you best understand
the current set up before you do:

Short term, Gold is overbought. Note that since its low in early
October — when many of the same commentors here were calling for Gold
to drop back down to $300, Gold has rallied from $570 to $685 — about
a 20% move in 8 months, outperforming most of the major US Indices (even before this week’s unpleasantness). Sentiment is now shifting from a rather
negative consensus to a fairly positive bend.

Technically, Gold has approached the July peak of $690. There
will be significant resistance there. Additionally, pay attention to the major developing divergence: The Gold stock index (XAU) has been lagging
the performance of gold, which is, more often than not, a major negative for
both Gold and the Gold stocks.

Based on all of the above, this does not look like the beginning of
a large upmove commencing any time soon. I would call that possible
but not probable (unless something funky happens with Iran).

Given all of these factors, the short term probability of a breakout
above $690 is only modest. The correction in Gold, which began last May
when it tagged $755, may still have further to go.

However, if we do get lucky and see a decline that carries Gold to
under $600 and the XAU down to near 120, consider it an opportunity.
Short interest in Gold would inrease geometrically.

If this technical retracement were to unfold, I would expect a monster rally to follow.

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  1. charts commented on Mar 2

    “However, if we do get lucky and see a decline that carries Gold to under $600 and the XAU down to near 120, consider it an opportunity. Short interest in Gold would inrease geometrically.”

    This is an extremely indirect thought process. I think most traders hoping for gold to rise consider themselves “lucky” if gold keeps going up NOW, not if gold goes down to $600 and they have to first wait for gold to short interest to build before hoping for a short covering rally. Were I long gold, i’d rather see my trade work in a straight shot, rather than have to travel through a rube-goldberg machine. Your definition of lucky is certainly interesting.

  2. Craig commented on Mar 2

    Dennis Gartman said gold is like the piano player in a whore house. When the raid comes everyone gets arrested but not everyone is charged and held.

    I think gold plays out because the dollar is weakening, the yen/Euro/world currencies are strengthening vs the dollar, the carry trade unwinding, the economy slowing, the market is under pressure, and the fed will be pressured to at least jawbone a cut.

    Notice the statements of fed officials in the last few days. They all but warmed up the helicopters.

    The top in gold happens like it always does. Think/harken back to previous gold tops…’s when people get gold fever and line-up to sell jewelry and cheap undervalued dollars.

  3. skateman commented on Mar 2

    I don’t think gold’s all that safe anymore. Gold was just as much a beneficiary of hot money as every other commodity and asset class, and I expect it to suffer equally when the hot money leaves (rather evaporates). Plus, the credit bubble and the effect of China point to eventual deflationary not inflationary pressures. Finally, isn’t the marginal cost to produce gold only about $200 an oz.? Is it conceivable supply might ramp up just as prices start coming down?

  4. Ollie commented on Mar 2

    Skateman, I thought we all knew by now that commodity bull markets last at least 18 years. So no, it is not conceivable that gold supply will rise as demand falls, causing prices to fall. The beauty of gold is that it is a hedge against inflation and deflation. This sort of independent, and dare I say, heretical thinking on your part will surely lead to trouble. Gold is the only magic asset class.

  5. Teddy commented on Mar 2

    Skateman, this is truly “the thrilla in Manilla” with the Fed cornered not by Gold, but by the inflation in the real economy. And does monetarism work well with a negative savings rate?

  6. Craig commented on Mar 2

    Um, not magical, but it is perceived as a safe haven from falling fiat currency.

    If the markets weaken as expected here, then so will currencies. YES, some speculative fluff will come out of gold, but if it breaks 650 I would be a nervous buyer and use tight stops.

    Here’s Bill Cara’s take on gold.
    “After the spot gold price had edged back (from 658 to 674) from Tuesday’s hit, it sank again yesterday and is presently sitting at about 660 650 (after a knock-down after 8am today).

    “Smart traders are letting the Fed bring this market to them. The range of 650-700 is holding. On extreme dips, I believe the gold bulls are buying. They are waiting for the Yen to rally against the $USD, and then they expect to enjoy a quick run up the yellow brick road. So the action of the past three days was necessary to consolidate the gains made in the move above 650. I think that 650 is a good price and that we are close to a break-out on the upside.”

  7. skateman commented on Mar 2

    I wasn’t aware of any natural law that decreed commodity bull markets MUST last 18 years. It might be a bit more complicated than that! As Bill Miller wrote last year,

    “A feature of the data showing the performance of commodities over 50 years that appears lost on those now allocating assets illustrates the distinction made by Stephen Jay Gould in his book Full House between conflating the trends of a system with the trends within a system. From the early 1950s to the early 1970s commodities prices oscillated, and were lower in 1972 in nominal terms than they were in 1950. Prices then tripled over the next three years, then declined for a couple of years, then spiked up in 1979 and 1980, and
    traded sideways for nearly twenty years before declining into the tech and telecom boom. They have subsequently soared over the past 3 or 4 years. The 50-year trend OF the system is indeed up at about the rate of equities — after this big move we have just experienced — with minimal correlation, but that obscures the trends IN the system, which show 20+ years of returns that oscillate around zero (depending on the index and the measurement period there are modest nominal returns that offer about a zero real rate), followed
    by very sharp moves up to a new equilibrium level that is about 3x the old level, then a few decades of stasis.”

    Also, gold may be perceived as a hedge against inflation, but it seems to me there was some rather significant inflation from 1980-2000, yet gold prices fell rather significantly in nominal terms! Perhaps the correlation (gold vs. inflation) isn’t as high as you think, at least in the short-term like 20 years:)

    Does monetarism work well with a negative savings rate? I’m not sure what you mean. A negative savings rate to me means consumers are pretty tapped out, which implies lower demand and thus lower prices down the road (all those factories in China will still be there). I thought we all knew that inflation is a lagging indicator.

  8. Teddy commented on Mar 2

    Skateman, I agree the consumers are tapped out and the next step should be a secular return to a positive savings rate and a reduction in the trade deficit, otherwise does monetarism work well?

  9. DavidB commented on Mar 2

    gold will probably be above $700 before June as spring is one of its two traditional rally seasons

    The volatility is actually a positive in the gold market. It means the battle has begun

  10. Greg0658 commented on Mar 2

    Gold for most of you is still #’s on a piece of paper / computer file.

    A warehouse of toilet paper now thats wealth in bad times. Or thinking bigger a soup cannery.

  11. skateman commented on Mar 2

    Well, monetarists believe that changes in the money supply are the primary cause of fluctuations in economic activity, so the rate of change should therefore be held low and constant (ostensibly the job of the Fed). I think the monetarists have a point, though I don’t think changes in the money supply are the one and only factor affecting the economy. Again, you ask if monetarism works well? In theory it should, but I don’t think the Fed has historically been very good about keeping the growth of money constant, and perhaps in today’s world (e.g. with derivatives) they don’t have as much control as they used to. If you really believe inflation will be a problem going forward, it seems to me it makes more sense to invest in a growing, income producing investment like GE or P&G stock (when trading at a reasonable valuation), as they’ll keep up with inflation by raising prices and grow in real terms as well. While in the long, long term gold may keep up with inflation, you may have to endure decades of no correlation to rising prices at all, if gold had been previously bid up to speculative levels. Further, it pays no income. Doesn’t sound too magical to me.

  12. Byno commented on Mar 2

    Um, gold apparently doesn’t know THAT much, as it is looks to be breaking out of a very long h&s top.

    I haven’t commented in a long time, but from the looks of Bary’s post, I belong to the group looking for gold to bottom out somewhere in the middle $300 range.

  13. Chief Tomahawk commented on Mar 2

    Yes, well my silver position, which I’ve been holding since the Fed pause last summer, has taken a beating since Monday’s close.

  14. ld commented on Mar 2

    Consumers may be tapped out, but the US government has some bills to pay and doesn’t get tapped out, with the federal reserve standing by to snap up all the debt in exchange for fresh dollars. Throw in a little bit of sanctioned keynsian fiscal stiumlation and you have a nice dose of inflation.

  15. ld commented on Mar 2

    Not to mention, if the US consumer is tapped out, then the chinese have no use for the busted US consumer market and no longer need a cheap currency. They can take all those dollars they’ve accumulated and use then to keep building out their infrastructure. Then it’s dollar down, treasuries down, yuan up, yen up, commodities up.

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