01/02/2010 by Philinje.

After some more research and some charts from an experienced trader named Art, it seems there is a credible case for a peak in April around $1350.

It seems likely we’ll get a very short-term bounce and then further declines in February. That will mark a reliable short-term bottom. So a prudent strategy is to wait for the lower low and see if things turn up from there.

The potential for a peak in April is supported by two things: a technical pattern called a Head and Shoulders and the work of a famous market commentator named Martin Armstrong.

Posted are two documents from Art. One shows that the all-important neckline of the Head and Shoulders pattern has not been violated. In fact, we have some more room to move down. How low? Well, if gold stays above the previous $1033 high, that’s very positive. Since gold is pretty volatile at times, though not as much at bottoms, it could overshoot and quickly get back above $1040 or so, for the pattern to remain valid.

The second document shows Art’s annotation of the long-term gold chart from Martin Armstrong. That chart is hard to read easily, but the latest price action is shown. The long-term trend channel is marked with double lines. Armstrong wrote a piece in November about gold that projected a likely path forward. In case you don’t know about Martin Armstrong, he is a controversial figure currently in Federal prison, but who has been incredibly prescient about markets.

Armstrong was one of the original proponents of cycle theory and his predictions have proven uncannily correct, time and time again. For the past few years he writes reports by hand and typewriter and they get posted on a website dedicated to him. It’s a long story about how he got in trouble, but basically the guy is an independent thinker who won’t abide by the idiocy he sees around him.

Armstrong wrote in November that if gold makes new highs after November, it would likely top in April. Well, there were new highs in December. The top of his long-term channel in April is roughly the same as the projected top of the H&S pattern, or $1350-ish. Afterward there would be a decline into October and then a strong move up into 2011.

He also said if there were no new highs after November, we might see a low in April and then a strong move up into October. That seems contrary to normal seasonal behavior, and anyway gold has shown strong resilience these past two weeks despite the re-appearance of risk aversion.

Finally, Art also bases his work on Alf Fields, who is quite famous now for predicting the strength of gold’s move back when it was below $200/oz. What interested me in Art’s analysis early on is that he has been in communication with Alf Fields, who stopped publishing reports about two years ago because he was concerned people were following his projections to trade gold.

Alf Field uses Elliott Wave theory but is distinguished as someone who can use the theory accurately. Most can’t. E Wave analysis is highly prone to as-you-go revision, and despite all the rules and patterns described in the theory, the tendency is for practitioners to re-fit market behavior as it happens. Not very useful, most of the time. Robert Prechter, credited for making the theory popular, has been a gold bear since the start of the bull run in 2002.

It says a lot about someone’s integrity that he didn’t want people putting themselves at risk based on his analysis. What Alf Field said in his last report is that trading gold is idiocy. Gold is about self-protection and that means getting in and hanging on, because it will be wild ride. Alf is the only person who accurately projected the price moves in gold several years in advance and further projects those moves into the final top of the current Major Wave 5. The swings have already been gut-wrenching, and they will get more extreme.

Anyway, Art has been communicating with Alf and the charts with the wave count show a kind of extension of Alf Field’s analysis, in the sense that current market behavior has been accounted for. In the big picture, Alf’s projections are still valid.

So, this is a lot of ammunition to support a view that we may see a peak in April. For various reasons, including Delta turning points, a low in February seems likely. Let’s see how it goes.

Art’s Head and Shoulders charts

Art’s annotation of Armstrong gold chart

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30/01/2010 by Philinje.

What a roller coaster. In December it looked like the jobs picture in the US was recovering rapidly and the dollar started to move up because of expectations the Fed would raise interest rates. Then at the beginning of the year, it looked like the reflation trade was back on. Equities kept moving up, despite a higher dollar (normally a funny thing to say, but remember there is the carry trade in USD these days), because at that point an economic recovery was still in the air.

Well, gold never got to the $1200 level again - about $1160 was all it could muster. Not surprising with dollar strength. Then risk aversion came back and whacked the markets for the past couple of weeks. This gave more fuel to the dollar. Gold got taken down to its recent low around $1070, but has hovered in the region of $1080 - 1090 for the better part of this week. Silver got hit hard, of course, and touched $16.

It’s amazing that gold has stayed as strong as it has. In 2008, risk aversion brought it down along with the commodities complex, though not as hard as pure commodities or silver. Last November, right on Thanksgiving Day, Dubai World made gold look like a risk asset that would suffer in risk aversion.  It suffered these past two weeks, for sure, but it could have been much worse.

As of Friday, the US advance GDP report brought a little life back to the reflation trade, though the general markets got taken down again. The 5 min gold chart looks like an epileptic fit, and yet it ended at $1080. Materials showed some strength in the general market. And the Yen was weakening, though in the end risk aversion held the day.

I have to say, in the first week of this episode I thought the reflation trade would come roaring back. After all, Greece getting in trouble and China raising reserve requirements did not mean the end of the world. But the old risk aversion sentiment kept hanging on and kept going strong right through the close of the second week. That’s bad.

Are we due for a relief bounce? Yes, but who knows. The sentiment seems rotten. Also, February is not usually a strong month for equities. In fact, we just had a classic trading signal when the low in January exceeded the low in December. That is a pretty reliable sign that there will be further declines in the rest of the year. Also, this is a mid-term election year, the worst year in the presidential election cycle.

On the other hand, equities were frothy and over-extended by any standards. The rally from the low last March had gone on and on with hardly a correction, and by September or October it was already over-bought. But that’s how rallies can be. So maybe all the hot money got nervous and wanted to take some profits. That’s not the same thing as a market panic.

One thing for sure is the Euro and Pound are not looking good. The currency markets are seeing a definitive move up in the dollar, and the Euro and Pound will take it on the way down just like they did on the way up (inverse of the dollar). This means there are tough times ahead for gold in USD.

So let’s see how quickly the markets pick themselves up. If we get a strong bounce into mid-Feb, the reflation trade might have some life yet. But if there is sideways consolidation and tepid moves upward, the chances are risk aversion has come back in a big way. That lends more strength to the view that there will be another crash later this year.

There are a few ways to play this right now. The most aggressive is to start building a small short position on moves up and just see how things go into March. One way to do this is by buying puts, for example on GLD or SLV. If you have a long-term view and want to free up some cash for a possible screaming buy later this year, then sell a bit on moves up. It all depends on your time horizon, entry levels, and personal situation.

Let’s see how the next couple of weeks unfold. The projected near-term top of $1350 in gold is not completely out of the question, but the likelihood has dropped below 50%. However, it might be a very good time to buy gold in other currencies, on any weakness in the dollar.

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10/01/2010 by Philinje.

Happy new year and welcome to more of the same.

At the end of 2009, the dollar got a sudden boost from the prospect of lessening unemployment. That raised the specter of the Fed raising rates sooner than expected, and the dollar shifted into bullish mode.

But as of this past Friday, the unemployment numbers looked a bit worse and while still showing an improvement compared to a couple months ago, the dollar spiked down. It recovered pretty soon and then sagged into the close. So it could be that our sudden dollar bull has just as suddenly subsided.

So gold is looking strong as it tries to break above $1140. It may do that this week and the next stop is just under $1200. If that happens, the likelihood of new highs above $1227 may materialize, and we might be looking at the projected $1350 level.

On the other hand, be cautious at the $1200 level. If that doesn’t hold, and the dollar heads back up with conviction, we might get the C leg scenario. So this next move is critical. The next check-point in the calendar is end of January.

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20/12/2009 by Philinje.

Gold may have bottomed for now, or it may bottom this week. Projections for this decline range from $1030 to $1090. So far we hit $1095.

If we get to $1030, then the Rosen scenario is especially valid, and that would mean a subsequent high below $1227, the recent peak and all-time high. On the other hand, if gold stays above $1070, the next high could be $1300 or so, the projection from the reverse head and shoulders pattern. While a significant decline could follow a peak at this higher level, it would possibly not be as extreme as the $650 target Rosen is focused on.

The next high could be in late January - early February. So let’s see how high it goes.

Two articles by Clive Maund summarize a number of the points made here recently:

http://www.clivemaund.com/article.php?art_id=68

http://www.clivemaund.com/article.php?art_id=67

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04/12/2009 by Philinje.

The Non-Farm Payrolls came in at 11K lost jobs - way better than the expected 125K lost jobs. That put some fire under the dollar because suddenly it looks like a rate hike is back on the table.

So unfortunately, gold has taken a hit after it broke $1200  and $1220 over the past couple days. It spiked to below $1190. The Euro, GBP and Yen have spiked down against the dollar.  Interestingly, Euro gold has come down a bit and is possibly forming a top. CHF (Swiss Franc) has also dropped against the dollar, which does not bode well for gold. Both CHF and gold are considered safe havens, but the ironic thing is a rising dollar may bring down equities, eventually.

For the moment, equities are zooming up. Maybe that will continue for a while until carry trade unwinding pressure builds (possibly at 80 or so on the dollar index).

The forex charts are looking extreme, like there is a decisive change in sentiment as regards the dollar. Let’s see what happens.

The bad news is, gold is behaving like a risk asset, as evidenced by the Dubai spike down, and now like a safe haven (essentially the opposite), as evidenced by this spike down. This underscores the speculative interest behind current prices.

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30/11/2009 by Philinje.

The first glimmer of a new wave of problems popped up, just as America was sitting down to its Thanksgiving holiday. The net effect is that JPY carry trade reversed to some degree, causing declines in Yen currency pairs and especially the EUR/JPY, which came closer to the magic 120 number where carry trades might unwind in earnest.

Interestingly, gold also got hit with a quick decline to $1140. That level was only breached to the upside early the same week, and now looks like support. Prices drove straight back up to settle at $1176. The big question is, Is the $1190 level a local top?

Clearly, gold is viewed as a risk asset at present. It’s ironic, but all the evidence so far points to the current high price being fueled by speculation more than anything else. Also a bit strange is that the dollar did not shoot up the way the Yen did. Either this says it is more resistant to carry trade unwinding or possibly that Europe is more exposed to probelms in the Middle East. But EUR/USD came down only a bit, enough to take the wind out of the breach of 150, and not nearly as much as EUR/JPY.

General US equities declined too, and that caused just a moderate bump up in the dollar index. So really, it looks like the dollar is extremely weak, as it’s already drifted back below 75.

This brings up an alternate scenario that is being tracked by some E-wave experts. Thanks to Art Roldan, a subscriber at Ron Rosen’s site, a new Elliott Wave analysis says we might have seen the start of a minor wave 4 down 10 $1070 and then a wave 5 up will take gold to the $1300 area, which is the projection from the inverse Head and Shoulders pattern.

Wave I with 5 minor waves

If this scenario plays out, with a possible high next March-April, there might still be a decline in gold into next October. And it might still be a major wave C, but that starts to look less likely. On the other hand, if a current decline in gold carries past $1070 and let’s say past $1020, then the likelihood of wave C down remains high.

Given how weak the dollar looks, I give either scenario 50-50 chances. If there is another financial scare in the US, that might cause a dollar spike from the dollar carry trade unwinding, so certainly we can’t rule this out. But the Fed has to monetize several trillion of debt in the next 12 months, and that means a lot of downward pressure on the dollar.

By the way, gold was breaking out to new highs in a number of currencies, including EUR and GBP, but the Dubai scare has temporarily knocked prices down. Given that both currencies have remained relatively strong against the dollar, the gold price action has been impressive.

Let’s see if we get a correction down to $1070 - 1020, and let’s see what happens when the US traders show up at work later today.

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21/11/2009 by Philinje.

The correction here refers to an error. Previously, Ron Rosen calculated a pontential high of wave B in gold at $1120. He has now corrected that to be $1168.70.

The reason is that Elliott Wave rules talk about an Extended Flat correction usually resulting in wave B being 1.382 times wave A. I guess his earlier calculation did not use the 1.382 factor.

The wave B at the end of 1974 was 1.382 times wave A. Here are the numbers:

1974

Wave A - $134, down from $179.50

Wave B - $197.50, and 1.382 x wave A = $196.88

2009

Wave A - $681, down from $1033.90

Wave B - 1.382 x wave A = $1168.70

The high this week was $1153.40. But there is some chance of a turning point top on Nov 24 and gold did not decline much by end of week, ending at $1151 after a brief dip to $1130. We could see gold in the vicinity of $1160 next week.

And of course it could go higher before a correction starts. If the wave B and Extended Flat theory holds, gold will then not see another higher high until after the wave C low, July to Nov next year. But if this theory is not valid, then gold might see a mild correction and keep heading higher. Regardless, the cycles of Martin Armstrong project a major low next Oct.

So, a wave B top could be in the vicinity of $1160-70. But otherwise gold could head to $1250 - $1350 in March-April after a mild correction and then another correction could result in a major low next Oct. The reason $1250-$1350 is talked about a lot is that is the projected completion of the inverse Head and Shoulders pattern that is so visible on the gold chart.

Most people see it as an inverse Head and Shoulders, but Ron Rosen sees it as part of an Extended Flat correction. Time will tell. In a sense, Rosen’s forecast is more optimistic, because after the low in 1976, gold shot up to its historic high at $850 in early 1980. But this time the wave C low will be below $681, because wave C ends below wave A.

Yes, it is possible that gold hits $1250 AND the wave C occurs afterward, but in that scenario it is more likely that gold will correct mildly and consolidate until next Oct. Rosen is almost alone in his forecast of a wave C, but he presents compelling evidence and reasoning, and he is an ardent gold bull with many years of experience.

We will see what happens after a near-term correction and then the following high. If that high goes higher than the current high, the wave C scenario starts looking unlikely. For now, it’s a possibility like all the others.

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19/11/2009 by Philinje.

The reasoning behind the dollar rallying if bonds fall is based on the scenario that bonds losing value could cause unwinding of carry trades, which will cause borrowed dollars to be returned.

However, there is a related scenario of bonds falling that would also be coincident with the dollar falling. This is the currency crisis that so many people have talked about. In this scenario foreign countries see no hope for the dollar and refuse to purchase more Treasuries - ie, countries like China would stop loaning money to the US.

There is already a trend getting started of countries purchasing less Treausries than before, at the same time that the Fed is buying Treasuries - aka Quantitative Easing. Initially the news that the Fed would do this caused bonds to rally, but then they dropped nearly to the 112 level, which is now the neckline of a Head and Shoulders top formation. Lately, 30-year Treasuries are staying high, near 120, but if they were to drop below 112, that would be a bad sign.

In the article below, the author notes that the Fed is currently buying almost half of all Treasuries that are auctioned, while countries like China are buying a lot less than they used to. So the Fed is propping up bonds by printing dollars, while forex traders are “selling” dollars to buy other things. In an extreme case, foreign owners of dollars and US bonds could flee the dollar, which would cause it to collapse. So many people are warning about this that it seems a tad unlikely.

Nevertheless, flight from the dollar would cause bonds and the dollar to sink together. But I suspect in the initial stages the dollar would rally, before giving up the ghost.

Here is the article:

http://www.gold-eagle.com/editorials_08/summers111109.html

The author is really saying that a collapse of stocks is actually more benign than a currency crisis or a country crisis. But there are intermediate stages where things may look different than he outlines.

Please note that in the stock crisis, the dollar will likely rise and gold may suffer, at least for a while. But it will suffer less than other assets. And in the currency crisis or country crisis, gold should go through the roof. It might be that we move from one stage to the next, and the transition from the stock crisis to the currency crisis will result in bonds falling while the dollar rises, at least temporarily.

Regardless, gold has the potential to rise even if the dollar is rising, and it can spike easily into the thousands after factoring in inflation from the last time that happened in 1980.

In the short term, gold hit $1150 and it looks like a correction is unfolding. If it holds above $1000, that might mean it has more legs and it could climb to above $1150 in the next few months. Everyone hates the dollar right now which is a reasonably good indication it will probably rise. But after a mild rally it could dive down to its all-time low of 71 and that could put the top in for gold, in the near term.

Or, something catapults the dollar, like bonds breaking below 112 because the Fed decides to ease off the Quantitative Easing. That would set in motion severe problems, like mortgage rates going up, so it’s not that likely, but in the meantime the Fed is monetizing US debt, ie printing dollars to loan dollars to the US, which is clearly dollar-negative and makes US bonds even less attractive.

If you’re trading gold, just keep mind that how the dollar behaves may be counter-intuitive, so stay alert. Otherwise, accumulate gold on dips, preferably physical gold. There is a lot of noise right now about fake gold bars being discovered (filled with tungsten). This is yet another sign that gold demand is outstripping supply, and that people are demanding physical delivery. For the average investor, gold coins and maybe gold at the Perth Mint are two good choices. I am still comfortable with BullionVault, but I know that’s not for everyone.

If a correction unfolds now, let’s see how gold does around $1000 - 1020. It might not even get there.

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16/11/2009 by Philinje.

If equities decline, we could see a rise in the dollar. While this doesn’t guarantee a drop in gold, it will probably have an effect in the short term. Gold is spiking today in Asia to a new all-time high and is currently at $1130.

Here are three articles with pretty compelling evidence of why equities might decline quite soon:

http://bespokeinvest.typepad.com/bespoke/2009/11/breadth-not-yet-confirming-new-highs.html

http://www.hussmanfunds.com/wmc/wmc091109.htm

http://www.marketoracle.co.uk/Article15052.html

You can see in the last article how the current rally has re-traced 50% of the fall in 50% of the time, as well as a variety of timing cycles. Hmm.

If gold corrects, and sooner or later it will, a number of sources are talking about $1020 as the low. And maybe we get near 80 on the dollar index. The high that follows will be meaningful - either we get to a new all-time high (possibly near $1250) or we get a lower high, increasing the risk of a major decline.

As of right now a number of cycles have converged saying yesterday through the 18th will be a major turning point for equities. Gold could see some downward pressure as a result, and then the next high could be in December or early January. There is some chance we will see $1250 to $1350 into early next year, like March-April, and then a decline into October. Continued strength through the next decline will be quite telling.

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13/11/2009 by Philinje.

The dollar bounced then came right back down to 75 and bounced back up to 75.7. Gold got to a hew high at $1123 or so and came right back down to $1100 as the dollar bounced up again. What a see-saw.

The sentiment in forex markets is negative on the dollar because last Friday the Non-farm Payrolls report pretty much sealed the deal that the Fed would not raise interest rates, at least until Jan. That’s what caused the dollar to come right back down to 75 (actually a little under). But at this point that level looks like a double bottom, and who knows, there may be a decent rally in the works.

There is a hidden risk lurking behind the current reflation, and that is the newfound popularity of the dollar in carry trades. Everything seems to be counter-correlated to the dollar right now. Dollar goes up, markets go down. Dollar goes down, markets go up.

The reason is apparently because of the super-low interest rate on the dollar, currently at 0.25%. That is lower than the Euro, GBP, AUD, etc. and about on par with the Yen. This means that it has become popular for traders to borrow dollars to purchase other assets or other currencies - at least until things turn.

And that’s the risk. If there is any kind of scare from bad news, all those “short” dollars will be un-borrowed in a hurry. Last October that is what caused the Yen to spike so dramatically. The dollar spiked also, partly because so many obligations or assets are denominated in dollars (and were reversed in a hurry) and partly because it is a safe haven. Now, the dollar is competing with the Yen as the carry trade currency of choice.

This is why some notable commentators have declared a rally in the dollar in the near term. Here is an example from Nouriel Roubini:

http://www.nakedcapitalism.com/2009/11/roubini-predicts-mother-of-all-carry-trade-unwinds.html

Note that he makes the point that so many financial assets and commodities are being fueled by borrowed dollars. It’s clear that with gold, its recent move higher is following directly from dollar weakness. But you could say the same thing about oil and equities. Because it is so easy to make a big profit with money that is less than free, this is the best game in town in the trading world. “Less than free” refers to the fact that paying next to nothing to borrow dollars and parking it elsewhere gives you an excellent rate of return - it’s like being paid to borrow money.

That is, until things turn. Keep in mind that greed characteristically leads to large leverage, which means with a certain amount of collateral people will borrow 2x, 3x, 4x… 100x the amount in dollars to play the same game. When de-leveraging occurred last October, look what happened to the dollar. What happens now when the leverage with the dollar is X times larger?

Forex traders are watching the Euro and dollar to see if the dollar strengthens or the Euro weakens to a point where carry trades would unwind. That would be just above 80 in the dollar index. On Eur/JPY that level might be 120, maybe lower. But on the whole, people expect the dollar to continue moving down because there is no expectation at present the Fed will raise interest rates.

At least one analyst is predicting a small bounce in the dollar to 82 or so. That could be a test of how stable the current house of cards is.

Regarding gold, we may be at a turning point now, or dollar wekaness will prevail and we might get a blow-off top in gold. One target was $1120, another is $1350. If the dollar bounces with some gusto, we could see gold at $1000, and then maybe the blow-off top happens. Or dollar shorts could cover explosively and gold could get hammered down to $960 or lower. Still, in any calamity, gold will do comparatively well. But a 40% hit is still painful, if last October repeats itself.

Another thing to watch is bonds. 30-year US Treasuries seem fairly strong, and it seems they could get stronger. But if they break below 112, look out below. That would add fuel to a dollar rally and then we get potentially explosive de-leveraging in the dollar. If there is a market crash at the same time, whoa.

So, that is why my mood is cautious. Maybe the recovery really is working, or maybe the finance industry is gorging on free dollars. If the latter, then the current picture is quite fragile indeed.

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