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Yesterday was a very interesting day. All of the stars were
aligned for a perfect storm as Asia had sold off 3%. Europe’s market
was selling off on fears of a further spread of contagion due to what they
perceived would be a bad day in America and the nagging feeling that the high
hopes for Greece and the other PIIGS nations would suffer the same fate In
the pre-markets our markets were down showing signs that we would do the same.
As the market opened the DOW and S&P were showing signs of a
collapse and gold hit a new intraday high of $1622. Silver was rallying and
it looked as the market would play out as scripted. Then at about 11AM the
market made an abrupt about face. There was chatter regarding Greece’s
inability to pay for the restructuring of the debt, there was chatter about
China’s runaway growth and ensuing problem with inflation.
While China has had a growth of 7% last year and a projected growth of
9% this year they have unsuccessfully raised the interest rates 5 times in an
effort to cool down the economy. Most people do not realize the chasm between
the haves and the have nots in China. In the farmlands are the very poor,
uneducated people but in cities like Shanghai there are the young tech savvy
professionals that are living the good life. They drive BMW’s or
Mercedes go clubbing after work and have all of the mannerisms of the 2000
Wall Street professionals that lavished themselves with every comfort and
plaything. The day will come in China when the haves and the have nots come
to grips and my response to that will be “China, welcome to the NFL
version of Capitalism.” My perception of it is that we in the West are
afraid of the big bad Chinese but as the market proved today their emerging
opulence is relatively new and in time will become a thorn in the side of the
elder party members who wish to maintain control over the new intelligentsia.
The only thing that has ever worked is a free and open society where people
are free to choose their fates. Benjamin Franklin wrote in the “Historical
Review of Pennsylvania in 1759 “Those
who would give up essential liberty to purchase a little temporary safety
deserve neither liberty nor safety.”
Sadly, I
have seen our country losing these liberties as we scramble to protect our
safety. But that is a subject for another essay.
I
predicted yesterday that as the market sold off Gold and Silver would rally.
While Gold hit an all time intraday high of $1622.90 or $157.80 on GLD, Silver
managed to put in an intraday high of $41.10 and closed at $40.40 or $38.35
for SLV. Silver has had volatile
parabolic swings while Gold has acted in a healthier manner as this chart
below will show.
One book that I have
lived with is “Technical Analysis of Stock Trends” by Edwards and
McGee. Very often in this masterful text they will provide a proxy chart of a
“head and shoulders” pattern for instance to demonstrate what the
pattern should look like. Well if they wanted to show a proxy chart of what a
healthy uptrend should look like they would have had to go no further then to
show this chart of the spot price of gold. Notice how between October of 2010
and January of 2011 the stock ran up to the trend line and ran down to the 50
day moving average 4 times before settling at the bottom trend line. The RSI
and the slow stochastics signaled a buy. From January 28th of 2011 until May 1stthe stock
moved in a slow, predictable and healthy way taking two steps up and 1 step
down putting in a series of highs and lows before hitting the top trend line
where the RSI and the slow stochastics predicted a sell. From the sell on May
1st until
July 1st gold
made the same orderly retreat and we were once again signaled by the RSI and
the slow stochastics that it was time to buy again. Since that time it has
continued its steady assent upward but a look at the RSI and the slow
stochastics have yet to signal a sell. How far will gold run I have no idea
but if we have learned anything from this little exercise it is to trust you
charts, especially when they are so well defined like the Gold chart.
If we
take a look at the same chart using the ETF GLD we will see the same patterns
emerge.
A look at this
chart will show the same moves as the previous chart as it ran up in a slow,
steady and healthy move. How far can it run? It will be fun to see.
In conclusion, under no circumstances should you
open a position in gold here. As the study of both of these charts has shown
GLD will pull back to the trend line and we will have another chance to buy
in.
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