|
Since the middle of December, gold has executed an impressive advance. It
rose from $1047 to an inter-day high of $1263. Money is again flowing into
the yellow metal in response to a confluence of positive technical
indicators, continued deterioration in other markets, as well as for
geopolitical concerns. This has triggered a response from an increasing
number of commentators who are calling this the beginning of a new gold Bull
Market. Am I overly cautious in expressing a wait and see attitude, and will
I miss the boat? Or, are those who are plunging into the market and driving
it ever higher setting the stage for a later damaging decline? This can take
gold to a final Bear Market low, and replace their current paper profits with
real losses.
The gold Bear Market began in the summer of 2011 at a $1920 peak. The next
4 years witnessed the eternal metal’s nearly 50% grueling decline to its
December 17, 2015 low. Gold stocks simultaneously experienced an
unprecedented price collapse. The major golds as measured by the HUI fell
from a 638.59 top to a 99.19 low, for an 85% decline, while junior
exploration companies fared far worse.
Numerous conditions and factors exist that can support the belief that
gold may have bottomed in price. They may be sufficient to produce an
impressive price rise from gold’s low point. However, without confirmation I
believe they are insufficient to justify even a suggestion at this point,
that a major low is in place.
The markets well know the various economic, financial and geopolitical
triggers that can kindle a rocket-like rise in gold. The enormous expansion
of the Fed’s balance sheet along with monetary easing by Japan, the EU and
other major countries carry inflationary fears that may one day become real.
Many large global banks remain de facto insolvent and might still collapse,
setting off another financial calamity. The travails of Deutsche Bank are
currently a visible example of this. The war against the Islamic State which
has taken over large swaths of Iraq and Syria, or the civil war in Syria
might escalate. The U.S., EU, Turkey and Saudi Arabia want al Assad of Syria
deposed, while Russia and Iran want him to remain in power. Both the U.S. and
Russia fly numerous daily sorties in the same regions. There can be a
miscalculation or an accident, such as recently occurred when Turkey shot
down a Russian jet, while following their different agendas. Either can
engender a global confrontation. Similarly, the war in Ukraine is still
simmering. It might expand and draw in the U.S. against Russia. Further, I
believe the United States and other major economies are in recessions. Their
stock and commodity markets are suffering, and their declines may suddenly
steepen. Any of these can generate serious, wide-spread losses and
bankruptcies and lead to international financial turmoil. Still other issues
exist and combined, give the markets and investors constant reasons for
concern if not fear.
Technically, gold has set up for a counter-trend rally. The precious metal
posted a double bottom separated by a few weeks on December 17, 2015. This
became part of a rounded bottom formation from which gold recently rose. Both
of these indicators mark points from which great Bull Markets can arise.
Also, the HUI drew a multiple bottom at about 100, culminating at 99.18 on
January 18. This too was convincing and showed significant support. Further,
the relative strength index (RSI) recently struck and rose from a very
oversold low near 20 on the daily chart. Additionally, the U.S. dollar is
sharply declining in tandem with gold’s powerful rise, and is giving it added
tailwind.
Of great significance, the U.S. dollar index completed a large, nearly
perfect island reversal pattern. These are very powerful, and might indicate
the top of its great Bull Market that began in 2001, with lower prices to
follow for a considerable period.
A BOTTOM IS IN, BUT IS IT THE FINAL BEAR MARKET LOW?
I believe the simultaneous appearance of these major and impressive
technical factors alone are sufficient to mark an important gold low. If you
combine these with the above daunting, pervasive, financial, economic and
geopolitical concerns, I can see how a long-term bullish case for gold can be
easily made. However, if you look deeper below the surface, I think the
determination of the gold low is not as solid as one might
think.
Brief double or small rounded bottoms are often responsible for generating
important counter trend movements, but are not necessarily confirmatory of major
lows. Gold’s Bear Market is over 4 years old. The rounded bottom was
only three months in duration, with the double bottom covering only a few
weeks in extent. For comparison, gold’s 2001-2011 Bull Market rose from a
$255/$252.50 double bottom that spanned two years, from 1999 to 2001. Given
these conditions, I have to question if they are sufficient to engender a final
Bear Market nadir. I would like to see at least six to nine-month formations
for each. Also, round numbers such as 100 for the HUI often provide
important, temporary support. They may produce good rallies before the market
finally reverses course, and the Bear Market resumes its downward journey.
However, they don’t positively confirm Bear Market end points. Regarding the
RSI, it sharply rose along with gold and already touched the overbought zone
on the short-term chart. It is true that markets can remain overbought or
oversold for extended periods. However, at its recent 86 reading on the
short-term chart it is preparing to signal caution.
I cannot understate the importance of the dollar’s recent price action.
And this is a major plus for the bulls. On February 2, when the dollar
completed its island reversal top and fell, gold simultaneously exploded
upward out of its rounded bottom. The dollar should continue to decline, and
could act to buoy gold’s current advance and support any short-term declines.
Ultimately, I believe the fact that these important signs occurred
simultaneously, is the match that touched off the yellow metal’s explosive
rise.
I would be remiss if I failed to note that gold marked its low the day after
Janet Yellen announced the first federal funds interest rate hike in many
years. This may be a coincidence, but market players could have interpreted
this as the Fed’s believing that the economy was expanding, and stirred their
inflationary expectations. After all, given what appears to be Bear Markets
in stock and commodities, the hedge funds and momentum players needed some
market to play. With gold rising, and then silver and the gold stocks, these
became some of the few “games in town” they could pile into and possibly
generate profits. I’m certain that many hedge funds and momentum players have
had a hand in this advance. Further, I think a short squeeze developed which
may extend and take gold far higher in the near term.
What must not be forgotten is that “Bear Market rallies often look better
than the real thing”. They can appear from seemingly nowhere and sharply rise
while the trapped bears rush for the exits to cover their short positions.
Goldman Sachs yesterday repeated its recent bearish call on gold. I wonder if
they’re one of the trapped.
WHY
I’M NOT CONVINCED GOLD’S BEAR MARKET HAS ENDED
The primary reason for my reluctance to believe gold’s Bear Market has
ended, is the unwavering bullishness of so many gold enthusiasts, and the fact
that too many seers were so quick to call the death of the bear. From its
2011 top, there have continued to be too many commentators repeatedly calling
“bottoms” in gold. This perennial bullishness has kept numerous people from
selling their positions.
The end of all earlier major gold Bear Markets have been attended by quite
different circumstances! After suffering the anguish, misery, despair and
substantial losses from a Bear Market, the vast majority that continued to
hold their positions finally gave in. They sold their remaining metal or
stocks and many were quoted saying the likes of, “I never want to see or hear
about gold again” or, “gold is going lower and will never rise”. Nearly to
the man or woman the gold market was ensconced in a cloud of agony,
depression and even disgust. I have yet to see this condition prevail since
the bear took hold. Time and again these commentators have announced with
authority that the Bear Market ended. At some point they must be right
because all Bear Markets end. This could be the one. But to be prudent, I
want the market to show me.
The simultaneous and compelling nature of the technical bottom indicators
I discussed, lead me to believe that this rally still has “legs”, and will
likely move higher for at least the near term. This can be extended further
in both time and price if the dollar continues to decline, and the brewing
banking problems escalate. For the nimble, this presents an opportunity for
short-term profits. However, if you make purchases be careful. Rallies such
as these tend to end as quickly as they began. What is left are latecomer
longs who are trapped.
For me to consider becoming long-term bullish I want to see how gold and
the major gold stocks react during their first important correction. There
will be one, as there always is. At that time, I will reevaluate my belief
and act accordingly. However, until proven differently, I am approaching this
as a Bear Market rally, but with an open mind.
As I write this, we may currently be in the midst of the defining
correction I am looking for. For this reason, I am anxiously awaiting its
outcome. This will help clarify for me whether we are in new Bull Market, or
a bull trap.
Dr. Richard S. Appel
UniqueRareCoins.com
|
|
