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AT
A GOLDEN CUSP Well, give credit where credit is due. Ted Butler, Mike Bolser, Dave Morgan and Adam Hamilton called this one right on the money. Each used different methods to come to exactly the same conclusion. Both Ted and Dave have never missed yet with the Commitment of Traders Report. Mike Bolser used the DIVG (dollar index value of gold) and other proprietary moving averages to come to his decision…and Adam Hamilton used non-confirmation of the HUI to predict the sell-off in the precious metals that we had last week. So that leaves us…. .where exactly? Let’s look at three charts…. courtesy of www.stockcharts.com. The first is the HUI. This is the three year chart and lays out most of the up move in gold since the bottom in 2001.
Note the RSI (Relative Strength Indicator) graph at the top. During this correction it came down from about 75…and at the bottom of the move it kissed the bottom line at exactly 30. At that very same moment, the HUI touched its 200 day moving average. If you examine the bottom of every HUI down move for the last three years, you will note that the bottom is basically in when the RSI hits 30. Of course there has to be an exception to every rule…and there’s obviously one here. That’s the monstrous hammering that the dealers handed out starting on April Fools Day and ending during the first week of May…getting down to under 20. We all remember it well. It’s pretty easy to glean from this that if you select your buy points the moment that the RSI indicator touches or violates 30 on the RSI scale; it’s time to load the boat. However, using the top of RSI graphs, picking the tops isn’t anywhere near as easy, especially when gold is in a bull market run like it had starting in the middle of March 2003 and ending during the first week of December. To pick absolute market tops, one has to refer to the MACD (Moving Average Convergence/Divergence) graph at the bottom of the chart. On this three year HUI chart there are two unmistakable tops that stand out like beacons. June 2002 and December 2004. Both times the MACD line broke (slightly) through +10 on the scale. Those were ‘sell everything you own’ signals extraordinaire! You will also note that most market bottoms occur when the MACD touches or slightly violates the -5 line, with the obvious exception being the ‘Royal Beating’ starting April first. On this HUI graph, it looks like this correction in gold shares has just about run its course. The MACD point of about +8 during October was only an interim high, as it did not violate the +10 mark. On this graph you will note that the MACD is reported as -4.89. Yesterday…14 December…it violated the -5 point on the graph by just a hair. Now let’s take a look at the three year chart for gold itself.
For the most part, the RSI indicates the bottoms in the gold price pretty well, and the MACD line indicates the big bottoms and some of the big tops, but is weak when there is a long bull run…just like the RSI and MACD for the HUI. But when the MACD is +6 or higher, the rising gold price is definitely on borrowed time, and a sell point should be looked for…just as it’s a good time to buy when the graph gets below -3.5. But the really interesting part of the gold price is what happened since the last top…starting in the first couple of days of December. The dealer engineered sell-off ran into a brick wall at the 50 day moving average. The gold (and silver) bulls mentioned in the opening sentence are somewhat cautious as to whether this gold price correction is over…and I don’t disagree. The dealers desperately want the specs to cough up their longs so they (the dealers) can cover their shorts. Mike Bolser’s proprietary work in this area indicates that this rise in the gold price and the HUI is just temporary…and we gold bugs are just being set up by the Fed for the next move down. He could be right, but the jury is still out on that one. If they (the dealers) can still engineer it, then a price that would force the specs to puke up all their longs would be somewhere under $410…which would be right on the TA up-sloping straight line that started in 2001. Whether the dealers can do it, is also an open question right now. However, if the dealers can’t do it, because…in the face of a falling US$...the physical market is eating them alive, then we’re going to see some real action in the gold pits in the not too distant future. The problem I personally have with a gold price of under $410 is that in order to reach that price, it would in turn violate the already positive RSI and MACD graphs for both the HUI and silver (which I’ll get to in a moment). A comment by a reader over at Jim Sinclair’s web site tonight asked exactly that question, but in a slightly different way. Let me quote it… Mr. Sinclair: For those of us (I believe I'm speaking for many of your readers) who were caught in the lengthy correction in the shares earlier this year, we're looking to avoid a replay. Short-term indicators are oversold and turning back up. However, we have long-term negative crossovers in many of the gold indices. The question is determining whether this will be a snapback technical rally of modest size, to be followed by another leg down, or an early return to the uptrend. Is it safe to say that a USDX close below .8190 would justify holding for a run at a new POG high? If not, is there something else that might tip us? Thank you. Golden Comet Frank Jim Sinclair’s answer was very long and convoluted. If you wish to read it, it will be posted somewhere at www.jsmineset.com under today’s date…15 December 2004. Now let’s look at silver. Here’s the three-year chart:
As Ted Butler said in his weekly commentary issued the other day…“It is interesting that in the sell-off so far, all of silver’s moving averages have been violated; while in gold, the big 50, 100, and 200 day moving averages have not been violated (yet). It is the violation of the moving averages that causes the tech funds to act. Therefore, it would appear that silver is more advanced in the liquidation process, at least in terms of contracts to be possibly liquidated, if not also in price. If gold does violate its big moving averages, heavy tech fund selling should be expected.” The monster sell-off starting on April first, took nearly five weeks to run the silver price down from $8.50 to $5.55 the ounce. During the latest correction this month, the dealers got the price from $8.05 to $6.68 in four days! What’s the rush this time? But like gold, the top at $8.05 came when the RSI just violated the 70 point, and ended when it just touched the 30 mark. You will note that the RSI barely broke below 30 when the silver price got smashed last April. Using the MACD line, it’s more than obvious that a price top was in, as the MACD was in the 35 range, and at the bottom of that price ‘correction’ is was around -45…probably an historic low. For this month’s smack-down the MACD is only at -15…and this time the price was smacked down even faster…and the MACD trace has already started to turn up as the silver price recovers. So here is the quandary. Silver has already technically corrected back to the point where it is what Ted Butler calls “dimes to the down side and dollars to the upside.” The Commitment of Traders will tell us a lot on Friday. The HUI is also in the same boat. Both of these charts are very positive. That only leaves the gold price hanging in mid air, slightly above its 50 day moving average. I’ve never seen gold and silver correct at different rates. They pretty well peak together and trough together. There has been the odd exception, but nothing as glaring as this. It is sooooo obvious!!! No wonder everyone is nervous about it. One other thing that stands out like a sore thumb on both the gold and silver price charts…the silver price is a wonderful looking parabola starting at the left edge of the three year chart…and gold is starting to look parabolic starting with the end of the correction in May of this year. A correction in the gold price back to under $410 would put an end to that. But unless the dealers can force the tech funds to sell out to them, that parabola is not going to change one iota. In the long run, it really doesn’t make any difference if the bears or the bulls are right on this one. But there is one thing for sure…if I’m reading these charts right…the next major move in the precious metals price is going to be a big one…really big…and it will materialize quickly, and Bill Murphy’s ‘limit up’ six dollar rule will be history somewhere along the way. This current top that’s been engineered by the dealers is an interim top in both the gold and silver price. And it’s my opinion that we won’t be in an oversold position again until gold is north of $500 and silver is in the ten dollar range. Back in late November, I took a bunch of money off the table. I bought back into the silver market on December ninth. I’d like to think that that was the bottom. Right now silver is at $6.90 and gold is back over $440. In the face of what’s happening out in the world, I want to be 100% invested now that this correction is over (hopefully). I’m never a happy trader, as I’m a ‘buy and hold’ kind of guy. I’m keenly aware of what Doug Casey had to say about traders earlier this year… “The skilled speculator and the experienced investor, however, take a longer view. The key is to identify major trends in the markets, understand why they're occurring, and stay with them for as long as possible. Jitterbugs that worry about daily movements will eat their capital up with commissions, fees, taxes, and bid/ask spreads in the process of whipsawing their accounts to death with the vagaries of their own psychology.” Knowing myself as I do, I could certainly fall into that category if I wasn’t careful. Even my dalliance into the sphere of buying and selling during the last month was hard on the nerves, as now that I’m back to being (virtually) fully invested, the gold price move wasn’t significant enough to generate the profits I was expecting. The only person who was happy with all my trading, was my broker. Now he, along with his entire family, will have a good Christmas this year. But at least he was kind enough to thank me before I hung up…you’re welcome William!!! So unless the Fed can generate a strong rally in the US$ above 82.5 cents over the next couple of weeks, I wouldn’t want to be either out of the market or short the precious metals (or their shares). Because, by the end of April, we will see an entirely different gold and silver landscape than we have now. I’m glad that my little three-week foray with some of my money off the table is over. During this next move up, I’m going to pretend that I’m Jesse Livermore. I’m going to “be right, and sit tight.” And if I get the urge to trade something again, I’ll just think of what Doug Casey had to say…then I’ll take a pill and lie down until the feeling goes away. Right now I’m just prepared to live with the fact that over the next couple of weeks I could be wrong. I’m more than happy to agree with Bob Bishop in one of his latest commentaries where he said “My view is that sell-off in gold would not likely exceed $430 for any length of time, principally because the dollar’s problems are so relatively large and that dead cat, intervention-inspired bounce is likely to be about the best the dollar can muster in light of its over-owned and still over-valued status.” Bob’s entire article is hyperlinked here. Having ridden this precious metals bull market for the last four years, I can tell you that if one tries to get too cute about jumping in and out of one’s stock positions, you could find yourself chasing this market in short order. Most market participants in this arena that are currently sitting on the sidelines will find that out during the next thirty days or sooner.
Ed
Steer,
Director |
