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Prepping For The Great Gold (GLD) Fizzle
02/07/13 by Matt McAbby
Filed under Bourbon & Bayonets
Ladies and gentlemen, as you well know, the investment landscape is an ever-changing montage, with new economic and corporate developments impacting the markets on a minute by minute basis. And depending on one’s time horizon, those developments can be extraordinarily profitable – or unfathomably expensive.
A day trader betting on the latest job numbers, for example, might take a wicked skull-shucking if he’s wrong, while a longer term investor who puts his money down on the same security at the selfsame hour could well be rewarded handsomely for his efforts.
We at Bourbon & Bayonets endeavour to enable our readers to ride the intermediate trend with the majority of our weekly market insights – and that means we have to be on the ball with respect to the longer term currents that move markets, too.
Last week, we reported to you on two of those currents, themes that we’ve addressed in our weekly letter for some time now: 1) the decline in the Treasury market and 2) the (ongoing) decline in the gold market.
As regards the former, we’ve been sufficiently emphatic. We’ve told all and sundry at every opportunity to ‘get out of Dodge’, and that going forward bonds were no place for anyone interested in preserving capital, let alone ringing up profits.
With respect to gold – and silver – our initial protestations were offered last summer (2011), when the whole complex topped out and we began the unpopular job of publicly defying the powerful goldphile lobby. Since then, we’ve been consistently bearish, calling out several profitable interim tops for those interested in shorting the PMs along the way.
Gold (GLD) Shock and Awe
So imagine our distress when an inordinate number of readers are still trumpeting the official gold party line, claiming that ‘money printing’ and ‘excessive debt’ and ‘unfunded mandates’ and ‘fiscal cliffs’ and ‘Chinese bond repatriations’ and ‘new global reserve currencies’ are about to light the fuse under the gold rocket and send poor halfwits like McAbby to the poor house.
To put it plain, we’re in shock.
Not, dear readers, because they’re wrong.
They’re right, to be sure.
Gold will skyrocket.
But not now.
And not likely until it’s widely perceived by those same trumpeteers that gold is the worst possible asset to possess that ever was.
And that, too, to our great chagrin, is also not now.
What Went Wrong?
Where these goldphiles err is in their belief that THERE IS NO VALUE TOO HIGH FOR GOLD TO RISE.
And because they believe this, they also believe that every correction is a manipulation, and every downdraft but a minor delay in their inevitable rise to becoming KINGS OF THE WHOLE DAMNED UNIVERSE.
While in truth, they’re just guilty of sloppy thinking.
For gold does not exist in a vacuum.
Gold will rise and fall in singular accord with the flows of cash that buffet every other investment instrument on the planet.
There are no exceptions. And one of the factors that contributes to those flows is the relative strength of other asset classes. That is, in the fast food world in which we live, where immediate gratification is the only iron clad rule, then yesterday’s gold investors will today race to buy equities the instant they see signs of potential outperformance from that asset class.
And only those adherents of the gold ‘religion’ – those who are married to the shiny metal and not to the profit principle – will be left holding the bag, squeezing tight their dead money while opportunities to increase their wealth drift diamond-like past their bleary eyes.
Ahem.
The following chart from Credit Suisse outlines the price trajectory of gold for the last eight years, along with a 3 standard deviation channel alongside.
According to Credit Suisse’s calculations this is the first time in the gold bull that we’ve breached the lower band of the channel. They say it’s bearish. And while it’s clear from the chart that something ‘new’ has happened, a bull might look at the picture and say, “Wait a minute, this means we’re due for a bounce!”
But we believe he’d be mistaken.
Take a look below at the weekly chart for gold, as represented by her proxy, the SPDR Gold Trust ETF (NYSE:GLD), which we believe will have the final say on gold’s future.
The weekly chart reveals that we’ve been locked in a trading range since the fall of 2011, and that we’re now situated at precisely the mid-point between the two bands (red square at top).
The direction of the next breakout will determine which way gold trends for as much as a year from now.
Or, to be more precise, if we break above the trading range, we’ll likely see gold levitate toward its former highs at 185; if lower, we should expect a drop toward moving average support in the vicinity of 125.
And if RSI and MACD indicators have anything to say about it, the next move will be down.
RSI moved sub-waterline the first week of December, and if current trends continue, MACD could confirm with her own dive by week’s end.
If and when that happens, GLD will accelerate toward the lower end of the trading band at 148.50.
Beyond that, of course, it’s a guessing game.
Until then, a longer dated straddle or strangle (the latter if you’re short on cash) would be wise. And for those with a little more experience, a short condor or butterfly could pocket you some nice premium.
We expect to see some genuine movement in GLD forthwith.
Many happy returns,
Matt McAbby, Senior Analyst, Oakshire Financial
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Featured Comments
melvin ayers on Thu, 7th Feb 2013 7:30 PM
short term down!!! Long term up and away!!! IN the mean time load up on “DOG” stock
melvin ayers on Thu, 7th Feb 2013 7:33 PM
year 2018 will be the next calamity for the US of A.. Seven years from 9/11.
Russell on Thu, 7th Feb 2013 7:59 PM
Quote, “Gold will rise and fall in singular accord with the flows of cash that buffet every other investment instrument on the planet”.I can buy this premise about gold falling, but from what I see, stocks will fall too and so will your bonds that you(me) have been bearish on…. Gold and bonds have already broke down, I am seeing that stocks have or are very near tcpping out!!
mb on Thu, 7th Feb 2013 8:25 PM
I do not think you have a clue…. as usual
Lynn Badler on Thu, 7th Feb 2013 8:32 PM
Hi, well gold SHOULD be going up but the stock market has
not made sense since Bernanke started wildly printing money
and lowering interest rates so stocks will continue up and commodities will continue down. Silver might do slightly better than gold, not as a metal but as a useful item in in things we buy and your claim to fame
says over 100% profit in 2010, what about 2011 and 2012????
Eckert DeNinno on Thu, 7th Feb 2013 10:09 PM
I think you are wrong. Why is Russia repatriating their gold? Why are several tons of gold arriving in Dubai every week? How can the fed double the money supply without it every having an inflationary effect?
Don on Thu, 7th Feb 2013 11:40 PM
Down?
Don’t think so.
-Indicators on my weekly charts show a slight upward bias. Slightly positive.
-ABCD symmetry completed at about 158 on dec 17th.
-Since then there seems to be a determined attempt to hold the price down. Look at the strong distribution on the last 6 weekly bars with little variance on the closing prices.
-These weekly closing prices are all sitting more or less on the 61.8 retracement of the last swing. This is a good place for a change in direction.
-Expect a bounce once the wondrous magical buoyancy of the overbought markets dissipates.
-Once price clears 174, my targets are 180, then 187.5
Time will tell. I may owe you a beer, or you may owe me one.
Cheers.
-My targets
tommy king on Fri, 8th Feb 2013 12:11 AM
you’re right McGabby !look at your proxy for gold miners AGCZ,Andes Gold, has just about passed into oblivion at a whopping $.0033/share and looks poised to be in Hades soon .Congratulations!
Anish Poojara on Fri, 8th Feb 2013 1:05 AM
If the Chinese are really buying gold why is the price not going up?
They may just be selling and telling the world that they are buying.
bruce on Fri, 8th Feb 2013 7:36 AM
Maybe a slight downturn, but definitely much higher long term. China is hoarding gold like it is going out of style and mines are not pulling as much out the ground. All that adds up to a higher overall price. I would also suggest a position in Silver and Platinum. Both have room to go up and platinum is hard to get, costly and can not be recycled.
Larry Lane on Fri, 8th Feb 2013 11:14 AM
For some time now central banks have been loading up on gold reserves.
IN SPITE OF ALL THIS LARGE INSTITUTIONAL BUYING – the price of gold for several months has only managed to tread water.
In my thinking this is not good news for gold bulls.
john fabacher on Fri, 8th Feb 2013 1:58 PM
gold will stay in a range between 1600.00 and 1900.00 until china aqires 7000 to 9000 tons…it will then be revalued to 7000.00 to 10000.00 per oz. to balance debt held bt all countrys…in effect a new gold standard to back different countrys trade balances…the present dollar reserve currency standard is prooving to be unworkable as it does not represent true value…the petro dollar will be discarded and currencys will be valued according to their gold reserves and trade balances…this is the end result of the present currency wars going on at the present time…goods producing countrys will be the winners because of this currency revalueation…
MR R T SNARE on Fri, 8th Feb 2013 7:12 PM
You appear to ignore the US $16.5 trillion debt, and the rapidly deteriorating political situation in the Middle East and North Africa. As long as the US Federal Government, with its associated $3.2 trillion annual overspend, continue to print more fiat currency, the banks will connive to lap it up and convince everyone all is well. To that add the recent 4 trillion euro support from the ECB.
For small investors like me, I am perfectly happy to accumulate more gold and silver stocks every time these crooks try to manipulate the gold and silver markets. You seem to be unaware that in a recent silver onslaught, more than the entire annual silver production was shorted in HF trading in the space of 5 mins. Idiots like me rushed into buy and the trade reversed rapidly. The crunch will come very rapidly any time soon now. The US Budget problems have been kicked down the road a couple of months, but I certainly believe Armageddon is approaching rapidly and will be triggered by a conflict in the Arab world.
I believe the weakness in the gold price you have described so accurately are a symptom of Government interference. You may wish to note the GDX has now reached one of its lowest points in recent time but the number of short positions has also dropped to a very low level.
We will see who is right by the end of March.
Paul1307 on Sat, 9th Feb 2013 12:44 PM
Why did gold go up in the first place, starting in 2002? Profligate spending, budget deficits? No. It went up because the dollar began to lose its value. Why did the dollar begin to lose its value? Because of the Bush tax cuts that the Market knew would eventually lead to deficits. How far did the dollar drop? From 120 to about 70 (DXY – dollar index), a 45% debasement. Did other commodities also soar in value? Yes, both gold and crude quadrupled in price over the same period. But that’s more than the inverse of 45%! Yes; speculators seeing a price increase underway jumped on the bandwagon and pushed them all up beyond a simple inverse relationship – as usual, and as always.
Why should gold go down in price? As the economy improves, the chances of paying down the debt increases and so too does the possibility of an improving dollar. And, so too will all commodities produced elsewhere in the world. Increasing tax revenues will help, as will saner fiscal policy.
It’s not “Chinese hoarding,” or “increased demand for jewelry in India,” or any of that other rubbish; when you debase your currency you have to expect that everything produced foreign will go up in value, usually, disproportionately, as gold and crude both did. If the dollar ever sees 120 again, expect gold to be about $300/ounce – again.
The stock market has heated back up, and gold can’t match its returns and so is not so popular, leading to lowering prices; likewise we can expect to see the 10-year treasury move back up to 3.75% to as much as 4.75%, the traditional range.
If “national debt and deficit” are the root of calamity, point to another major economic power in the world suffering rampant inflation. You can’t because there is none, ergo, ease off the panic button and think rationally about investments rather than betting on something that is not in evidence. Japan’s debt is 220% of GDP; major problems there? No. Elsewhere? No.
Gold miners are down because they forward sell virtually 100% of what they expect to produce, those prices are down, and hence their profits will be too. Rational, logical, and demonstrable, unlike screaming the sky is falling and betting on umbrellas when there isn’t a cloud in the sky. “But there could/will be.” If you let your politics dictate your investing you’re playing scared, not smart. Since the price of gold has been falling since 2011, what are you thinking???
Paul1307 on Sat, 9th Feb 2013 12:50 PM
And PS: why in the world are central banks buying gold at its high price rather than in 2002 when it was comparatively dirt cheap? Answer: it’s unsubstantiated rumors promulgated by folks trying to get you to buy the gold they hold at higher prices than what they paid. Checked the prices of “collectable US gold coins” lately? Way, way off their highs. Same thing, create a buzz then unload your product at a profit, and let the suckers beware. Gold was a market created by speculators hoping to eventually sell to the greater fool, and it worked marvelously – for them.