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Gold behaved as predicted in last weekend’s update - it rallied into
the middle of last week before plunging on Thursday and then ended the week
with a modest upturn. Thursday’s plunge involved a sharp break below
our important parabolic uptrend channel, and although the break was not by a
decisive margin and gold rallied Friday, this sharp drop has bearish
implications.
We can see this
latest action on the 1-year chart on which we can also see that although gold
has broken down from the parabolic uptrend, it has yet to breach the
“last ditch” support of the lower boundary of the parallel
uptrend channel, which is shown as a dotted line. Until that happens a
significant bounce is possible particularly as it is now quite deeply
oversold on a short-term basis, as is clear from its RSI indicator and
stochastics and in the vicinity of its rising 50-day moving average. In the
situation of a continuing intermediate uptrend we are now at a classic
“buy spot”, and even if, as we believe, the intermediate uptrend
has now reversed, it would be quite normal for a bounce to occur here
although in this case it will turn out to be a trap. If the lower boundary of
the parallel uptrend channel shown is decisively breached it will be a signal
to close out all long positions, as such a break will call for a initial drop
to the strong support at the top of the 20-month trading range, which starts
to come in at about $1030.
 
Some observers are comparing
the current reaction to the mid-trend correction that occurred half way
through the powerful uptrend of late 2007 and early 2008, that we can see on
our 3-year chart, which took the form of a continuation Triangle, but there
is an important difference, which is that the steep advance preceding the
Triangle in 2007 did not blow out above the top of its channel, as occurred
on the recent near vertical advance. The recent event was a blowoff top which
normally marks the end of an advance.
Many
“bugs” cling to the idea that gold is set to rocket because the
cartel controlling the gold price is about to be smashed, and are deluding
themselves that the recent powerful breakout by the dollar is just some blip
or aberration.
That’s not the
way it looks to us - this dollar breakout, which we predicted well in advance
as demonstrated by the chart from the 29th November update which appears
below, looks like the real deal, and the dynamics behind it are believed to
be as follows…
Big overseas
Treasury holders such China and Japan are believed to have
“strong-armed” the US in the recent past behind the scenes and
essentially said “You either quit undermining your currency and defrauding
us with your zero interest rate policy or we are going to dump them, big
time, and collapse the Treasury market.” The Treasury market is the
“aorta” of the US, which involves swapping essentially worthless
paper for the goods and services of countries that are dumb enough to buy
them, thus allowing the US to live way beyond its means running continuous
massive deficits. It is viewed by the administration as infinitely more
important than the stockmarket, which is small in comparison. It is thus clear
that if it is necessary to sacrifice the stockmarket by raising interest
rates to rescue the Treasury market, then that is what’s going to
happen. The rising Treasury yield curve, which has recently become very steep
is indicating that rate rises are in the pipeline. Smart Money has already
got wind of this and has been stampeding to close out US dollar carry trade
positions, hence the breakout and sharp rise in the dollar, and the plunge in
gold. The ordinary Joe sat rustling his newspaper hasn’t got the
faintest idea of what is going on as usual. Given the magnitude of the US
dollar carry trade positions that have built up this year on the back of
unprecedented negative real interest rates in the US it should be obvious
that a intensifying stampede out of them could easily drive a massive dollar
spike, perhaps considerably larger than the one we saw last year, especially
given the precarious condition of many countries in the European Union. In
this situation commodities and the stockmarket will be trashed.
Those of you who may
be deluding yourselves that the dollar’s recent rise is just a
countertrend blip might like to reflect on this article in The Wall St
Journal titled Net Assets in Bullish
US Dollar ETF Go Vertical in December . The point to
appreciate here is that this asset buildup is not occurring at the end of a
move, but rather at the start of it, and is thus a proxy for very high volume
on the dollar breakout, indicating both that it is genuine and that the
dollar is destined to go MUCH higher.
Finally, the idea
that Big Money is going to be defeated by the “little guy” led
into battle by his favorite cheerleaders and gurus is naïve and
fanciful. We never try to beat big money because they have access to the best
information, the information that really matters and they pull the levers and
call the shots - instead we aim to “ride on their coattails”.
Take a look at the latest COT chart above on which we can see that the
Commercials, who are by the way very patient, are still running big short
positions in gold. This chart implies that gold could have a long way further
to fall.
Clive Maund
Diploma Technical Analysis
support@clivemaund.com
www.clivemaund.com
Also by Clive Maund
Trading the precious metals and Energy
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