Gold did almost exactly what we expected in the last
update, it bounced from oversold off the support at $1190 - $1200, only to
break sharply to new lows on Friday, crushed by the strength of the dollar.
We got with the plot and are doing fine with bear ETFs, one of which rose by
22% on Friday alone. The dollar is remarkably strong especially given that
its COTs and sentiment readings are already bearish by normal standards, so
what is going on? - and where is the dollar headed?
Gold did almost exactly what we expected in the last update, it bounced
from oversold off the support at $1190 - $1200, only to break sharply to new
lows on Friday, crushed by the strength of the dollar. We got with the plot
and are doing fine with bear ETFs, one of which rose by 22% on Friday alone.
The dollar is remarkably strong especially given that its COTs and sentiment
readings are already bearish by normal standards, so what is going on? - and
where is the dollar headed?
Gold did almost exactly what we expected in the last update, it bounced
from oversold off the support at $1190 - $1200, only to break sharply to new
lows on Friday, crushed by the strength of the dollar. We got with the plot
and are doing fine with bear ETFs, one of which rose by 22% on Friday alone.
The dollar is remarkably strong especially given that its COTs and sentiment
readings are already bearish by normal standards, so what is going on? - and
where is the dollar headed?
The dollar is so strong because the world economy is about to finally
disappear into the deflationary vortex, which our illustrious leaders have
been fighting tooth and nail for so long now, which they should as they got
us all into this mess in the first place.
The game?s over ? everyone and everything is maxed out on credit with
extend and pretend having been taken to its ultimate conclusion. The
misallocated capital from the worldwide orgy of QE has powered an immense
carry trade that has driven asset prices to incredible extremes, and the only
thing that has kept the game going is very low interest rates, and in the
case of the US stockmarket by buybacks by management intent on running up the
prices of their stock options, but the situation is now so desperate that
rates are at 0 and even running negative in some places. Central Banks are
stuffing QE into the gullet of the world economy like they are force feeding
a goose, but still they can?t stop the forces of deflation, which are
gathering in strength and now closing in for the kill.
The continuing unwind of the global carry trade is what is driving the
dollar higher and higher, and the higher it goes, the more it encourages
money to abandon developing markets and return home to the dollar, a classic
vicious circle. Where is the dollar index going to end up as a result of
this? ? an educated guess is the 120 area. For starters have a look at the
long-term dollar index chart below which shows a projected target?
If this is what is going to happen to the dollar, then what does it mean for
investors, in the simplest terms? It means that cash (the dollar) is King,
for a while anyway, and just about everything else is going to collapse,
including gold silver and oil, as in 2008 only much worse, because the
ammunition that was available then to mount the great extend and pretend
campaign ever since has been exhausted. These days, however, we can do a lot better
than simply scurry to the safety of the dollar, like scared rabbits. You
don?t have to get out of your depth selling short or buying Puts, if you
don?t want to, you can simply buy bear ETFs in just the same way as you buy
stocks, and by selecting either leveraged or unleveraged ones, you can choose
the level of risk that you are comfortable with.
The 6-month chart for the dollar index shows that is on its way again,
having broken out upside from a bull Pennant just over a week ago. The
near-term target for this move, on an equal move basis, is about 102 and it
could easily exceed this as it is a minimum objective.
Let?s now review the chart. On gold?s 6-month chart we can see how it stalled
for time at the support at $1190 - $1200 for a couple of weeks, which allowed
its oversold condition to unwind a little, but then broke sharply lower on
Friday in response to extraordinary dollar strength. It?s next port of call
should be the support at $1130 - $1140 at its lows of last November, which
are expected to fail in due course too.
On its 8-year chart gold continues to look weak and like it is setting up for
another steep drop at least to its strong support in the $1000 area and possibly
lower to the lower boundary of the downtrend channel shown, which would put
it somewhere in the $850 - $900 price zone. This would hardly be surprising
if the dollar index continues to rally hard towards our price objective in
the 120 area. We had concluded in the last update that a giant 3-wave
reaction is unfolding in gold, with the C-wave expected to unfold in a
similar manner to the A wave which occurred early in 2013, and nothing has
happened since to change this outlook, except that it looks even more likely
after last Friday?s support failure and sharp drop. On the positive side this
C-wave should mark the end of gold?s bearmarket, although here we should note
that if the deflationary collapse is really bad, gold could temporarily go
even lower than our downside target detailed here. We will be watching
closely to see how it pans out when we get there, as it should present an
exceptional buying opportunity.
On gold?s latest COT chart we see that Commercial short and Large Spec long
positions have moderated, but not by enough to prevent further serious
losses?
Click on chart to popup a larger clearer version.
The Gold Hedgers chart is in middling ground and doesn?t provide much
guidance one way or the other?
Click on chart to popup a larger clearer version.
Chart courtesy of www.sentimentrader.com
The latest Gold Optix chart is fairly bullish, but not enough to spare gold
from another drop, and on any such drop it should of course improve
significantly.
Click on chart to popup a larger clearer version.
Chart courtesy of www.sentimentrader.com
The latest 8-year chart for the HUI index still looks pretty awful, with a
severe downtrend in force and its moving averages in bearish alignment. Since
it is not now oversold on its MACD indicator shown at the bottom of the
chart, it could easily break to new lows and plunge from here, which looks
likely given the outlook for gold. The first step towards its negating this
bearish scenario will be for it to break out upside from the downtrend
channel shown.
The latest chart for the Gold Miners Bullish Percent Index shows that
investors haven?t thrown in the towel yet on PM sector stocks. They are still
too bullish by recent standards, which is not a good sign.
It is vitally important that no matter how much you love gold or silver, you
maintain a detached and objective attitude to it, if you are to avoid losses
and maximize gains. All investing is an opportunity cost game, and to the
pure speculator it doesn?t matter if something is rising or falling in price
as long as he is on the right side of the trade. It is in this spirit that we
bought a range of bear ETFs in the Precious Metals sector early last week,
including this one, which rose in price by over 22% on Friday?s sector
breakdown?
What we would like to do with this is ditch it for a handsome profit at the
bottom and reverse position to long. The challenge will be to recognize the
bottom.
Finally we should not underestimate the sheer pleasure of ownership that
gold bestows. Take Mr Bond in the picture below, for instance. He knows he
should have sold this girl in 2011 but he just couldn?t bring himself to ?
and who can blame him? ? but he could have hedged of course. Who knows,
perhaps he did.
End of update.
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