Gold $1000 Quest

Despite the feeling that gold has been struggling with $1000 forever, this quest is actually pretty new.  March 2008, just 16 months ago, marked the first-ever $1000 attempt.  Since then there have been two subsequent attempts in 2009, both unsuccessful.  But for a variety of technical reasons (which help drive sentiment), each subsequent attempt has a higher probability of finally breaking the $1000 shackles.

The first attempt at $1000 had its roots back in August 2007.  Gold had spent much of that year consolidating between $650 and $700, and by mid-August it was again languishing near $652.  At the time, most traders were very bearish on gold.  Its highs were drifting lower and calls abounded for a steep washout selloff.  But this excessive bearishness proved to be fertile soil from which the biggest gold upleg of this entire secular bull emerged.

Gold initially shot to $835 by early November, a stellar 28% gain in less than 3 months.  Then it consolidated around $800 for about 6 weeks, before heading off to the races again in late December.  On the first trading day of 2008, it closed at $857 to achieve a new all-time nominal high.  This garnered widespread media coverage and got many new investors excited about deploying in gold, an important precedent for the coming $1000 breakout.

Gold continued surging on balance, rarely looking back after blasting through its January 1980 high.  By March 2008, gold briefly climbed over $1000 for the first time ever.  But its $1005 close had the misfortune of happening the day before Bernanke’s Fed cut interest rates by 75 basis points instead of the expected 100bp.  This took pressure off the US dollar and sparked a sharp commodities selloff.  Over the next 3 days after the Fed’s “moderation”, gold plunged 9.3% and hopes for $1000+ were quickly crushed.

But the circumstances of gold being repelled at $1000 on its first attempt aren’t anywhere near as relevant as the rally leading up to it.  Between August 2007 and March 2008, gold had rocketed 54% higher!  This was a stupendously big and fast move dwarfing anything that came before it in this bull.  It works out to a 0.4% per day average gain.  Yet in gold’s entire secular bull before this, since April 2001, its average daily gain had only been 0.1%.  After such an epic run to $1000, traders were understandably wary.

Less than a year earlier, they had perceived $650 to $700 as being “normal” for the gold price.  So $1000 then looked way overbought to almost everyone, even many hardcore gold bulls.  In addition, as you can see above, $1000 was way above gold’s uptrend’s resistance.  It is tough, if not impossible, to sustain new highs in such a scenario.  After any abnormally large rally to new highs, backing and filling is necessary to gradually get traders comfortable with the new prevailing levels.

This high consolidation after a huge and fast rally helps redefine norms for a price.  There is a tug-of-war between sellers and buyers as everyone is trying to understand whether what once seemed like crazy-high levels are now sustainable.  The longer a price consolidates high, the more traders come to accept these levels as the new norm.  In gold’s case, it consolidated around $900 for several months after this first $1000 attempt.  Going from a $675 base a year earlier to $900 was a big jump.

But traders soon acclimated to the new higher prevailing gold levels.  In July 2008 as commodities prices surged to record highs, gold caught a bid and was driven over $975.  But this extra-trend spike fizzled out before it became a full-blown $1000 attempt.  It didn’t come within 2% of $1000.  Commodities were correcting and gold started plunging in the bond panic anomaly preceding the stock panic.

A year ago this month, there was a panic in the bond markets as the massive US GSEs (Fannie and Freddie) backing mortgages were on the verge of bankruptcy.  Big foreign investors rushed to sell bonds and bought US dollars (to buy US Treasuries), kicking off the biggest and fastest US dollar rally ever witnessed over such a short span of time.  The result was gold got crushed, first by the bond panic and then by the stock panic.  I wrote about this crazy episode in depth in October and May if you want some more background on its gold impact.

These back-to-back panic anomalies were the result of pure fear, not fundamental weakness in gold.  So once the fear bubble started abating in stocks, gold started climbing back up into its trend.  The first true stock panic in 101 years must be viewed as an anomaly in commodities including gold.  The hyper-fearful sentiment spilled over from the stock panic, but soon after that gold’s anomalous lows quickly unwound.  Realize the sole reason a second $1000 attempt didn’t happen sooner was this panic.

Between mid-November at its panic low to late February, gold again blasted 40% higher.  Not only was this a huge move, but it was also very fast.  It averaged 0.6% per day, 6x this gold bull’s average pace prior to August 2007!  The lion’s share of this spike was driven by heavy GLD gold ETF buying by stock investors, and it was enough to carry gold to $992 by late February.  But again external factors short-circuited gold’s ascent before $1000 could be breached.

The stock markets were slumping into despair in late February, spawning fears of a renewed panic.  Washington, instead of helping investors, was targeting us for radically higher taxes, suffocating new regulations, new government bailouts of bad players who should fail, and much other anti-free-market pro-socialism nonsense that sapped confidence.  So investors again fled all markets, including gold.

But regardless of the reasons it failed, again the most relevant aspect of this second attempt is where gold came from technically.  It had rallied hundreds of dollars an ounce in a very short period of time.  It looked overbought on a short-term basis at $1000 and it was above trend.  Extra-trend spikes seldom lead to sustainable highs because a price is naturally so overextended after such a move.

But since that second attempt, several remarkable things have happened.  First, gold didn’t collapse after it.  Instead it consolidated high, averaging $927 since February in its highest base ever witnessed.  Second, gold actually made a third attempt at $1000 in early June.  The time between $1000 attempts compressed dramatically.  This is the natural result of gold’s uptrend inexorably pushing it ever closer to $1000.  The rising support line, sans panic anomaly, clearly shows this trend.

And $1000 gold is finally within trend!  This is a really big deal.  The great majority of investors and speculators use technicals, they consider recent price action within chart context before making buy and sell decisions.  And a price within trend, no matter how psychologically significant it is, is always more comfortable than a price out of trend.  Traders are not likely to sell until resistance is hit, and now that $1000 is finally under resistance the odds of it being decisively breached have never been higher.

Provocatively these technicals are fractal in nature, they appear similar and work similarly at many different scales.  The first gold chart above looked at gold’s technicals over years, showing gold getting ever closer to breaking above $1000.  Interestingly, if we zoom into each of these 3 previous attempts on multi-month charts, the same phenomena become apparent at this scale too.  Until now, $1000 was always overextended and above trend.