26/02/2010 by Philinje.

This week saw another bout of risk aversion sending currencies crashing against the Yen and dollar. Equities got a good jolt as well, bringing the Volatility Index out of its slumber. By mid-week, it was looking like things could really head south.

Gold got whacked down to below $1090, taking out all the stops below $1100. But on Thursday, there were some signs of unusual strength. Well, unusual lately at any rate. Gold stood strong against a rising dollar, and even rose with the dollar for brief periods, while equities were swooning. This is starting to look like gold pre-Oct 08, when it used to be a safe haven against crashing markets. Of course, back then the dollar was generally weak, but there have been some extended periods in recent years when gold and the dollar rose together.

So now, if we see gold rising when the dollar is rising due to flight to safety, that is a sign that gold is re-gaining its former status as a safe haven, as opposed to behaving like a risk asset being fueled by the reflation trade. Sure, if the dollar keeps heading north in a big way, gold will suffer, but it may suffer less than in the recent past. Let’s keep in mind that what gold has demonstrated since 2002 is how it gains relative to all currencies. Yes, when the Euro is weak gold is strong in Euros while being weak in dollars. But over the past 8 years, gold has been relatively less weak than all currencies, as you can see in charts of gold in all currencies. In fact, gold has been amazingly strong in all currencies since 2002.

Think of it like this: currencies are gradually losing value due to unrestricted money printing. So gold may be weak in a given currency for some period of time, but it loses less against that currency than other currencies lose against that currency. Conversely, gold gains more than each currency loses over time. Its relative strength has been profound.

Now, what about that projection of $1350 in April? My gut says the chances are now better than 50-50. Maybe 60-40. Of course, we may only get to $1190 before markets crash and the dollar carry trade gets unwound in a panic. We almost got there this week with the Yen. The Euro-Yen pair dropped to just below 120, which is a critical level. Below 120 there is significant risk of Yen carry trades being unwound in a panic, which would look a lot like Oct 08.

My guess at the moment is that we may have flirted with disaster and the markets will try to put that behind them for a few weeks. It is now undeniable that equities and the Euro and pound are critically wounded. But we might get a bounce, and it could be a strong bounce. For gold to hit $1350, there would have to be some change in character like we saw yesterday, back to its safe haven roots. The Yen will be strong, and the dollar may be less strong but still strong, and equities are teetering on the brink. But either there is a huge return to the reflation trade, or things get dicey again soon and people flee to gold, like the old days. Both of those scenarios make the $1350 projection plausible.

Or, the hot money flees from everything as everything crashes, and gold suffers but not as much. That is also possible, if not likely. But that may happen a bit later this year. The next month to six weeks will be interesting. Stay tuned - to the market.

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09/02/2010 by Philinje.

Just a quick note that while the brief rally ended quite suddenly last week, the decline seems to have gone to the bottom of an A-B-C wave pattern (in many things, not just gold) as of Friday. We are seeing a muted consolidation now.

Most importantly, the neckline for gold was hit and has held. This could be the bottom before a peak in April. If gold goes lower than $1040 in a convincing manner, that theory is invalid.

See Art’s latest chart:

Art’s latest chart - we hit the neckline

Active traders could play this prudently. Or if you were considering selling some long-term holdings, you migt want to see what happens over the next few weeks, into early March.

I give this about 50-50 chances now because there are reasons the dollar could be weak in the near future. Basically, the robustness of the US economic recovery has been called into question to some degree by recent data. That means the likelihood of a rate hike in the near future have receded.

As we’ve seen over the past three weeks, risk aversion can hit suddenly and with great effect. So be careful.

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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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