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Is It All Over For Gold?




Last week everyone was cheering as gold and other commodity markets were making new highs. This week however, things have changed as everyone seemed to want to jump through the same door, at the same time, putting a great deal of downside pressure on many markets.

This phenomenon sometimes happens when people have multiple positions in multiple markets in the same direction. When they start to take profits, there is no one left to buy.

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12 Responses to “Is It All Over For Gold?”  

  1. 1 AB

    Gold is at another bullish extreme and in the process of correcting (in sync with the $USD index rallying at a support level), and so you're asking if it's all over for gold?

    The easiest long trade on Gold has been to buy it when it hits the 26-week exponential moving average, and sell it when it gets 10% above it.

    It doesn't get easier than this.

  2. 2 Mike C

    Babak,

    Peer into your crystal ball. :)

    Really just looking for another informed opinion. Do you think the $1424 top recently made is a major intermediate-term top similar to the $730 in spring 2006, $1034 in March 2008, and $1226 in December 2009, or do you think it is just a shorter-term top with maybe some weeks or a month or two of consolidation before marching signficantly higher in the next couple of months?

    GLD bounced nicely today off the 50 DMA and held the short-term support around 129.50ish. Maybe we can get some sideways trading and then another move up like what happened in the 05-06 upleg. On the flip side, as Hewison points out MACD has made a higher low despite price making a higher high. This was the same setup as the May-June higher tops before the major correction down to the 200 DMA at 113.

    One thing that seems odd to me is the major gold uplegs seem to be getting shorter in duration and smaller in magnitude. The 05-06 move ran all the way from August to May. The 07-08 move ran from August to March, and then the 09 move really only lasted from the Sep breakout over 1000 to beginning of December. Now if 1424 is the TOP this one will have run only from September to early November. I consider the BEGINNING of a major move as the price point where gold first breaks out to a new closing high and then how far and how long does it run once achieving that.

    Not sure what to make of it from a cyclical and/or seasonal perspective. I'm in the secular bull camp for gold, but I've got no desire to ride through the corrections and sit through the consolidations. The interesting thing is that basically ALL of the entire 10 year move in terms of net gains has occurred in very short bursts. Gold seems to spend a very large amount of time either correcting or consolidating the short-lived fast furious gains.

  3. 3 Babak

    Mike, just my opinion... in late October I was of the thinking that the recent top in gold would be followed by some shallow retracement/sideways trading. This was mostly based on the reaction of some sentiment indicators. Gold performed even better than I anticipated and took out that high.

    Now, I do think that the top we've seen recently in November is an intermediate top similar to the others you point out (April 2006 and December 2009). We're seen a really high amount of bullishness from Rydex traders coupled with a reluctance to give up in the face of lower prices. While gold fell today by about 1.5% today, the assets in the Rydex precious metals fund actually went up!

    Putting sentiment aside, from a technical point of view, gold is not as overbought as it was on those prior occasions (or February 2009). The relative distance of gold price from its 200/50 trend is relatively low and can't be compared to those occasions. So perhaps somewhere in between, an intermediate top but not a MAJOR top. Also, gold doesn't have the same parabolic shape that it did on previous occasions.

    Just my opinion though... please do your own DD

  4. 4 AB

    Why don't you try drawing a resistance top line connecting the early 2008 high and the late 2009 high?

    Then you will see why prices have been churning where they have.

  5. 5 Babak

    AB, sorta like an ascending triangle formation? that's a pretty ominous technical pattern... if it breaks the lower trendline.

  6. 6 Mike C

    Just drew in the ascending triangle formation...definitely see it pretty clearly, but it looks to me like we broke out to the upside out of the formation.

    Where does your lower trendline currently come in at. The way I've got it drawn it looks like 124ish which interestingly is the shorter-term breakout level as well after the topping action from May to June at 122-123. It would seem like 124 is a critical price to hold otherwise perhaps a very severe drop like fall 2008 might be in the cards.

    Need to take another look with fresh eyes but I'm thinking about a stop at 129-129.50 on my current trading position. Got some nice profits (option leverage) but a ride down to 124 would take them all away.

  7. 7 AB

    I guess one could call it an ascending triangle, but I'm not a pattern enthusiast. I was just pointing out that the current churning is taking place at a top resistance line. But you're right, a break could spell trouble for longs.

    The support trendline from the 2008 low puts support around 1275-1300 (for futures/spot, not sure about GLD), and that's where the 26-week EMA is.

    I think Babak is onto something though, the more I looked the more it looks like a real top. It hasn't gotten long-term oversold since the run began in 2001. Thus, a very mature uptrend. I did notice that the major corrections occurred in 2006 and 2008 - the former being when Bernanke raised rates the last time, and the latter being when the commodity collapse occurred / the $USD rallied strongly after a long downtrend. So would think, there has to be some major fundamental incident to incite such another correction.

    The longer-term 40-month moving average, which prices touched in 2008, is currently at just above 1000 - a convenient price level where there should be tons of support, if gold gets so unloved that it actually gets there.

    In any case, I agree with the video - long-term bullish gold, and platinum is looking a lot cheaper at the moment.

  8. 8 Avi

    2 things about gold that i dont like

    1) everyone talks about how there is now big demand from CB because they are now buyers (whereas they used to be sellers). But CB's were all sellers at the bottom of the gold market in 2000 -2001,... contrary indicator anyone

    2) Almost everyone that owns gold thinks it will go higher. They expect a pull back but almost all expect it to go to $2000 or $3000... but if you look back a 1 or 2 years ago, 1300- $1400 was the price target of most..we hit it.

    I have a suspicion we could get a larger pull back, perhaps testing $1000. Its hard to bet on it happening, or structure your holdings for it, but i think it is a real possibility. Even in the Nasdaq bubble you had a few pretty good selloffs, that after they reversed gave the market much more strenght

    Personally I think the gold market has been trading too 'easy' on the long side, I think it might be time for some weak longs to get shaken out...

  9. 9 Mike C

    Good thought-provoking comments AB and Avi. Babak, you have a higher caliber commenter then the typical investment blog and I think that speaks to the quality of your blog posts. If someone asked me for one blog to get information for *ACTIONABLE* investment/trading decisions I would direct them to Trader's Narrative. I've referred a few people here for the weekly sentiment stuff and they love it.

    Some thoughts/questions on the comments:

    1. What is the significance of the 26 week EMA. I haven't seen this before. Obviously, I'm familiar with the 10-week and 40-week (50 day and 200 day) that everyone, his brother, and dog looks at, and I've seen some also look at the 65 week moving average which looks to have been major support during the entire secular bull move except during the fall 2008 sell-off.

    2. I'm thinking it is still too early to try and interpret a few central banks buying (India and China) as the contrarian interpretation of the ultimate top. Sentiment is so darn tricky, and these days everyone wants to be a contrarian including myself. Sometimes, it is difficult to establish exactly what the consensus/mainstream opinion is to actually be contrarian to. IIRC, the 2001 bottom was essentially marked by the British central bank dumping their entire gold position. Furthermore, and I'd have to verify this but I think I am right, if you go back to the 60s and 70s there was a multi-year period of central bank acquisition of gold. I guess I'd be more concerned or thinking it was a contrarian indicator if some central bank or a few said they were swapping ALL of their dollar reserves for gold, and not just some minute adjustment.

    3. By definition if someone owns an asset, then presumably they think it is going higher, otherwise why would they own it so I'm not sure I follow this point. I'm not sure EVERYONE thinks gold is going higher. In most of the online discussions I have, I still mostly get the it is a shiny metal with no intrinsic value that doesn't pay dividends meme, and just about every week I still see a note that gold is in a crazy bubble that is going to crash. I just don't see anything comparable to say home prices in 2005-2006 when EVERYONE "knew" home prices don't decline. I'm in the secular bull camp of 2500 and that is really based on just eventually hitting the Dow/Gold ratio of 2 which is where it at least hit during the 3 other secular bull cycles.

    4. A move to 1000 would be rattling for sure. It would shake many out, including myself. I have no intention whatsoever of riding a correction down to 1000 which is why I would try to have logical stop price levels where I step aside and wait for clear bottoming action before getting back in. Any thoughts here? Seems like in the shorter-term, 129-130 would be one level to watch. Another might be the 200 DMA which I would note gold has not traded below for the last 2 years once breaking back above after the fall 2008 sell-off. There have been like 3-4 pullbacks to the 200 DMA that lasted a few days before rallying sharply.

    I suspect a move to 1000 would bring out the mob calling that the gold bull has ended, the "bubble" has popped and I'd bet we'd get gold bearish sentiment at levels similar to the March 2009 sentiment in stocks. Would probably be a great entry point with a stop just below 1000 if it didn't hold.

    But yeah, it is very difficult to bet on that, or even try to construct a trading position for all the possible contingencies. Regarding your point on the NASDAQ, yes, I am reminded of the fall 1998 sell-off before it really did go parabolic in 1999-early 2000. Wouldn't that be the mother of all headfakes with a sell-off to 1000 to shake people out and then you get the parabolic move to 3000 with few on board.

    Go back to the 70s secular bull in gold, and I think it was either 75,76, or 77 where gold dropped 50% before resuming the uptrend and then the final 6 month burst in 79-early 80.

    Russell says the third speculative phase lies ahead. He has decades of market experience and wisdom. He seems to have equal conviction in this call as his 50s bull market call and 1974 stock market bottom call. He says this could be the greatest bull market in a generation. I know of NO ONE who has been as right as him on gold the last 10 years. Ultimately, I've got to go with the R-man. But the question is how to time entries and exits with all this choppiness. Going to try and stick to my support/resistance levels, try to stay with the trend as indicated by the weekly MACD/PPO (which is still on a buy but the signal line has turned down), and pay attention to the gold sentiment.

  10. 10 AB

    Everyone uses moving average periods that they feel suits them, and I use 26 weeks because it represents half a year, or two quarters, and for commodities, which is what I deal in, I'd rather be on seasonal cycles which I feel the 26-week better represents. There is absolutely no harm in using a 20, 30, 34, 40, 50, or 52. But I just know that gold, silver, oil, and some other commodities (including the currently "hot" softs and grains) and even currencies (like the CAD) seem to gravitate to it, but this doesn't mean that prices don't gravitate to others. But note the July low in Gold - bounced right off of the 26-week during a capitulation.

    The 40-week is simply a translation of the 200-day/10-month, which I had thought was more suited to institutional equity investing - IBD makes serious use of it, for example.

    Also, some like EMAs and some like SMAs or other - again, you go with what works for you.

    I think you're right about the upcoming choppiness - maybe sell calls on weak up moves, because volatility should be pretty high.

    About those other issues you mentioned, I think it's pretty clear that there will forever be a bid under gold prices, but that those buyers will no better than to pay up for it, so gold will continue to bounce off of excessive highs and modest lows. Especially if it's really true that China wants to increase its reserves and that there is this enormous hoarding of physical gold by the super-wealthy that I've been hearing about. So a move toward $1000 would be astonishing if it did happen, and it would only happen if for some reason the dollar became THE ONLY currency of choice in this world. And do you really see this happening? But if it did, I'd let prices break $1000 and then buy, not put a stop just beneath it. Note the smart ones who bought Dow futures in late August when the Dow broke 10000 - lately every time the Dow has broken 10000, it's provided a profitable long trade buying it at the 9900 level.

  11. 11 AB

    If this doesn't link, then copy and paste this, then go to the media centre for reports

    http://www.gold.org/

  12. 12 microcap speculator

    Like you I am an INO affiliate, but I anticipate that the "all over for gold" theme was really more of a headline grabber than an assessment of where we are at. No real trader would call the end of a multi-year move without more confirmation.

    I also note that the gold rally -- even from its base a decade ago -- is not all that large in the scale of most commodity spikes. See the monthly charts at mrci.com, and you will get a sense of how large a commodity spike can be.

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