Gold: Here’s why holding >$1000 should mean “off to the races”

"This post is an email from Jock G who had helped me prepare my presentation on Trading Gold. I will be speaking baout it in Toronto on October 21 and in Las Vegas on November 20 - Alex"

Every time gold nears $1000, it gets “smacked down”. I wonder why….

Put that into the context of how much easier it was to make progress BEFORE the first assault on the magic number of $1000:

Bernanke and the banksters will once again do everything they can to “smack down” gold if it does rise above $1000. You know that the gov’t leases gold to the “bullion banks” who then short it. (When gold rises, it creates doubts in the value of paper money). If they’re unable to constrain gold’s rise this time, it will mean “the jig is up”.

Longer term, THIS could also be an important factor in breaking the FED’s hold on gold:

China pushes silver and gold investment to the masses

A report suggests that the Chinese government is pushing the general public into buying gold and silver bullion, which could have a dramatic effect on the markets.
Author: Lawrence WilliamsPosted: Thursday , 03 Sep 2009

LONDON -
We are indebted again to Paul Mylchreest's Thunder Road Report for news that will bring big smiles to gold and silver investors everywhere. Apparently China is pushing the idea of buying gold and silver for investment purposes to the general population in the way that Western television sells soap powder. If 1.3 billion Chinese citizens start buying gold and silver, even in tiny quantities, imagine what that will do to the market!
The report notes that China's Central Television, the main state-owned television company, has run a news programme letting the public know how easy it is to buy precious metals as an investment. On silver investment the announcer is quoted as saying " China has introduced its first ever investment opportunity for silver bullion. The bars are available in 500g, 1kg, 2kg and 5kg with a purity of 99.9%. Figures show that gold was fifty times more expensive than silver in 2007, but now that figure has reached over seventy times. Analysts say that silver has been undervalued in recent years. They add that the metal is the right investment for individual investors and could be a good way to cash in."
What appears to have happened in China is a total relaxation of strictures on holding precious metals by the individual with the government pushing gold and silver as an investment option, seemingly at every opportunity. This is a far cry from the situation only a few years ago where the distribution of gold and silver was strictly controlled. Now, the Thunder Road Report notes that every bank will sell gold and silver bullion bars in four different sizes to individuals and gold related investments are said to be soaring in popularity.
Around a year ago, Leyshon Resources managing director, Paul Atherley, in an investor presentation in London - and no doubt delivered elsewhere in the world too - commented that some employees at the company's gold mining project in northern China would, on pay day, go to the local bank and buy a small gold bar as an investment and wealth protector. To an extent we put this down at the time to mining company hype - but this seems to be exactly the same phenomenon noted by Thunder Road. The Chinese are being converted from being the lowest per capita gold consumers in the world to a nation of small precious metals investors. Now, by next year, Chinese consumption of gold is likely to exceed that of India, which has been for years the world's biggest gold market. And one suspects that the potential for gold purchasing by individuals is only in its earliest stages. As more and more Chinese move into the cities and individual wealth grows, this trend is only likely to accelerate.
Paul ends the piece on Chinese gold and silver potential with the following comment: "Simply put, the Chinese government is trying to trigger a national gold craze...and it's working. The Chinese public now has gold trading platforms on steroids.... ...Also, for the first time in history, Chinese investors can even trade gold abroad (in London) with the swipe of a ‘Lucky Gold' card. I can't even get Bank of America to open a foreign currency account."
This may be an overstatement of the case from a precious metals bull - or it may not! Certainly if China is indeed pushing the public to buy gold then there may well be a hidden agenda here. It's unlikely they are doing it and will suddenly pull the rug out from under millions of investors. A cynic (or a raging gold bull) would suggest that this will precede a move to switch a good proportion of the country's reserves into gold which would have a huge effect on the global gold price and could prove disastrous for the dollar. Maybe it's not in China's interests to drive the dollar down too much until it has managed to divest itself of the huge dollar overhang (see the article on Chinese Sovereign Wealth Funds we published yesterday - Chinese sovereign wealth fund dumping dollars for strategic investments like gold ). The country may well already be, of course, surreptitiously building its gold reserves without reporting the build-up.
If the Chinese are indeed beginning to buy gold and silver as the quoted report suggests then this has to be a strong signal that prices are going to rise, and perhaps rise dramatically, in the relatively near future. We await comment from other China watchers for confirmation of the gold and silver buying spree, but with global gold production at best flat and probably in decline, even a small increase in Chinese buying could have a substantial impact on gold and silver prices.
(from Mineweb)

Jock G

Things That Make You Go, hmm? Gold, Fools and FAZ - by Stephen M

The late-comer bag holders know they’ve chased their late entries into this prolonged rally. These “greater fools” are uneasy, and while some have tightened stops, others have taken out big insurance to hedge their bets. Tomorrow’s lower prices may not be met with the buying that we’ve seen lately. Perhaps there’s no one left to fight the fire once smoke appears. Maybe they’d rather escape the burning building and collect the insurance money instead?

GLD Redux by Grant C

A couple of weeks ago, I noted that GLD was set up in a symmetrical triangle on the weekly charts. Frankly, I thought it would head down after a series of lower highs, but up it went. So, now what? Well, GLD did emerge, but it hasn't been much of a rush--no real urgency in volume or momentum, yet the intermediate trend is up with a possible retest of the highs in the future. Though we broke out, the 2-day RSI tells us we're short-term overbought. Some traders buy the breakout and in this case would have made money. Since I prefer a more conservative approach, I'm stalking GLD, looking for a retracement to value, or the rising 20-day EMA.

Connecting the recent Blog dots - by Stephen M

I have been very interested in the following the posts and the ensuing comments:

* GLD symmetry by Grant
* What Would Turn Me Bullish On Gold by Alex
* Jock’s ensuing perspective on gold’s potential break out possibilities.

Now, a week or so later, where are we? Have these recent developments altered out level of bullish or bearishness on gold as well as the general markets?

Today the weight of the SP500 index falling out of its wedge has turned the VIX back up, causing fear to re-gain a slight grip. What about the short and long term implications for the dollar which broke down from it’s triangle and proceeded to slice through support?

If these new short term trends extend into intermediate and long term courses, does it increase the likely hood of new lows on the SP500? What about the contrarian slant to all of this? It seems like the majority think it is a foregone conclusion that we will put in a higher low, just as it was last week when all of the “experts” were saying with conviction that the SP500 would “at least” continue up to the 200 DMA.

Then there is the FED. Have they orchestrated this? Id love to read some lively discussion regarding all of these seamlessly integrated elements of the market we are in today.

Thank you,

Stephen M.

Another Perspective on Gold - by Jock G

Jock G is a SpikeTrade guest. He is a Camp graduate and an extremely serious researcher and trader - Alex

Another perspective on gold: First, there’s no doubt that GLD and GDX are looking technically weak right now. Here’s a chart noting 4 false breakouts of GDX at resistance of 38:

Since start of ’08, GLD has 3 times failed to close and hold above 97:

Longer-term charts are open to opposing interpretations:

Grant looks at the monthly chart, sees a 1-2-3 top, and expects further weakness, Eric Fremd also looks at the monthly chart, but sees an inverted H&S, and potential for a long-term rally.

This is no contradiction really, since no one can know the direction of the future “squiggles” of a chart. We can only assess future probabilities based on how we interpret today’s chart. And, events could change the picture tomorrow: oil blockade, assassination in Pakistan, Chinese pullback from buying US treasuries, inability of C and BAC to raise capital.

Short-term, a continued pullback looks likely. There’d be no chance of a major “spike” till GLD broke out and held (on volume) over 100, and GDX did so over 38. Should that happen, however, it’s probably off to the races. I feel certain this global financial crisis is going to go on for some time yet. Plenty of time for GDX and GLD to touch the bottom of their trading ranges, and then “spike” way above the top of their channels.

A look at the much longer term suggests why this could be the case. To me it’s compelling that in the major financial crises of the 30’s and 70’s, “super-spikes” DID occur. Here’s a look at a longer-term (and quite cluttered) chart:

The headline is that in Cycle 1 (ending in 1938) and cycle 3 (ending in 1979) gold rose to levels of 4.5 and 6 times the S&P (respectively). The first “super-spike” of the 30’s was a response to deflation – the great depression. The second “super-spike” in the 70’s a response to major inflation (including the OPEC oil embargoes). The common theme was a massive loss of faith in the banks and their paper money.

I don’t need to remind anyone that today’s psychology is similar. Gold’s latest “mini-spike” to 1000 was at the collapse of Bear Stearns. In fact, the threat to the global financial system has NOT receded. Paper currency is being debauched as never before – globally. Even the Swiss franc (partially backed by gold in the 70s) is a purely “fiat” currency, with no backing by hard assets! There IS no strong currency for traders to flee to if the US dollar weakens.

This underlies recent statements by the Russians and Chinese calling for less reliance on US dollars as the global reserve currency. The Gulf oil states are planning to incorporate gold in their creation of a common currency. These cultures have revered gold for millennia – and the US dollar for just decades.

By the way, if gold were to reach 4.5 times the S&P, the price of gold would spike to $4000! – and then probably retreat as quickly as it had risen. Gold stocks would probably rise a further multiple on the 4.5 times that the metal itself would rise.

Unless you believe that Geithner’s TARF, TALF and “PeePIP” are going to work, AND that Congress will then approve a further $1 Trillion for bank re-capitalization, you might be wise to address the possibility of a “super-spike” in gold. The latest IMF report foresees a further $4 trillion in global financial losses before the carnage is over. Estimates are that US banks alone will require $1 trillion in new capital AFTER toxic assets are removed from their balance sheets! Only after such re-capitalization will bank balance sheets be strong enough to encourage bank managements to resume lending.

Unless you believe the world’s key governments (US, UK, Germany, Japan, China, Russia) will get it right in the short term, and will cooperate to avoid beggaring-their-neighbors, you might consider the possibility of a further collapse in confidence in the banks and their paper money at some point during this crisis.

Where does this leave us regarding how we think about gold, and how to trade it? Maybe the best stance is that technically gold and gold stocks are currently weakening on the weekly chart. How long this continues, how far it goes, who knows? Whether GLD and GDX stop their declines and reverse at the bottom of their trading channels, or break down further is unknowable. Perhaps Alex (concentrating on incremental changes) has it right.

But, I can’t avoid looking at the possibility of the trade of a generation, if in fact gold shows behaviour similar to the comparable financial crises of the 20th century.

Perhaps we need to identify what (technically) would be required to change the stance of gold bears (such as Grant) and or of gold bulls (such as Eric and myself). You may want to associate yourself with whichever position you favor, but we all need to maintain a trader’s mental flexibility and willingness to admit when the market shows him he’s wrong. Life will certainly be less stressful if I am proven wrong on the above notions!

Jock G

What would Turn Me Bullish on Gold - by Alex

After seeing Grant's bearish posts on Gold, I felt tempted to share my daily Gold homework. I do not have an overarching long-term view on 'the barbarous relic at the moment - but I watch it daily for a potential short-term upswing of, say, about $50. If I can catch a third of that upswing, I'd be very happy.

The Weekly has retreated from an overbought level (above the upper channel line) to below value. The Impulse system had turned from Red to Green, before reversing back to Red last week. It often trembles like that at important bottoms.

If Gold trades above $892 this coming week, the weekly Impulse will trurn from Red to Blue, permitting buying.

The daily chart appears to be drawing an A-B-C bottom which we saw in a multitude of stocks earlier this year. If gold continue t decline for a day or two, and then its MACD-Histogram ticks up, it will complete a bullish divergence and give a powerful buy signal. This is why I am watching Gold closely these days.

Many thanks to Grant and other Spikers and SpikeTrade Members for very thought-provoking comments!

Alex

GLD monthly by Grant C

Eric's comment on my post about GLD's daily and weekly charts made me pop up a monthly GLD. Here's my favorite topping formation, a huge 1,2,3 Top formed on bearish divergence with the declining RSI and MACD indicators. If price drops, 65 is about right for a target. If my analysis is correct, then either inflation is not going to be a problem, or gold has finally lost it's value as a monetary subsititute.I bet on the latter--these days, not a lot can be done with gold except wear it.

More GLD--monthly by Grant C

Eric's comment on my post about GLD's daily and weekly charts made me pop up a monthly GLD. Here's my favorite topping formation, a huge 1,2,3 Top formed on bearish divergence with the declining RSI and MACD indicators. If price drops, 65 is about right for a target. If my analysis is correct, then either inflation is not going to be a problem, or gold has finally lost it's value as a monetary subsititute.I bet on the latter--these days, not a lot can be done with gold except wear it.

GLD symmetrical triangle - by Grant C

As most of you know, I like volatility and it contractions and expansions.

Here are two charts of GLD, the gold ETF. On both the weekly and daily charts, a large symmetrical triangle has been forming for several months. There has been two distinct lower highs--not good, while there was a creation of a double bottom, which is now being challenged. The 84-85 area is support at the 200 DSMA. If price breaks the 200, we are transitioning from a bull to a bear market and the drop to 78 should be quick. The weekly shows a similar view. Watch carefully over the next few days to see what happens--I will be.