*Continuation chart prices may reflect front month adjustments to more active back months ranges. Closing price levels are the Globex afternoon close: 5:15 PM ET.
Today marks both a monthly and a weekly close on the continuation charts. Since notable factors have occurred in both timeframes, we want to present a quick look at both charts. The monthly continuation chart below provides some longer-term momentum perspective and price action analysis.
The monthly chart is much as we showed it in our September 22, 2011 comments except that we have omitted various annotations that referred to retracement potential relative to the high-to-date in the uptrend phase that dates from either 2008 or 2009. We did leave those potential retracement values in the inset box. Readers may refer to that box to keep in mind where the gold market may go in the event that factors, discussed below, influence prices further to the downside.
With September finished, we can see that the long-term momentum backdrop is now negative. The monthly 14-period stochastic oscillator has decisively turned down (arrow on indicator). Indicator readings are declining at elevated levels (dark blue line %D = 86) that imply an “overbought” momentum backdrop and thus the potential for downside price vulnerability. Note the dashed magenta line at the 68 level on the indicator. That is the minimum %D value that occurred before prices bottomed on significant corrections during the 2001 – 2008 uptrend phase. The sole occasion during the entire up cycle to date where indicator values were below 68 was at the 2008 low. The %D reading then was fractionally above 50. We interpret these factors to imply that the gold market has started either a period of high level consolidation or an outright corrective phase that will include a price level below the September low ($1532.70 basis the nearby Comex futures).
With that prospect in mind, let’s discuss September price action. First, the market reached a new high ($1920.70) for the entire up cycle that has followed the 1999 price low. Second, buyers were unable to keep prices at an elevated level: the subsequent sell-off from that high reached below the previous month’s low and September’s close is below that of August. Trading in September thus established an expanded “outside” range top reversal. Some analysts would call that a “key” reversal that signals the end of the underlying uptrend but the term “key” is meaningless to us since much time must pass before one can determine that a long-term underlying trend has been reversed. However, regarding top reversals in general we will state that in our experience it never pays to downplay the negative trend implications of a reversal.
During September prices traversed $388 from high to low, surpassing the size of the, until now, record large range of January 1980. September’s range was also greater than the entire range of the 8-month long correction of 2008. Note that the up price cycle that topped in 1980 did not feature a monthly top reversal but the January 1980 range was $332 (we are using the “true” range value since there was a gap between the December 1979 close and the January 1980 low). September’s range was preceded by August’s also large range of $307.90. The combined back-to-back August-September sequence is comprised of two out of three of the market’s historically largest ranges. That sort of price volatility is more often associated with interim price tops than interim price lows.
Shifting to the weekly gold charts below, we want to focus primarily on trend momentum. We are using a 10-period ADX trend indicator that is shown beneath the weekly price continuation charts.
As you can see on the right inset chart, the indicator peaked the week ended September 16, 2011. The peak reading was fractionally below 64 and it was the highest reading in this weekly indicator since the 1980 price cycle high when there were three consecutive weekly readings above 81. The dashed magenta line on the indicator shows maximum readings (61.5) that have been associated with interim price highs that have occurred in the advance that started in 1999. In only one instance, shown circled in 2008, has the indicator turned down from above 60 then quickly scored a new high. Thus, a weekly ADX downturn from above 60 is probably not a whipsaw. Thus the indicator downturn of 2 weeks ago implies that the uptrend phase that preceded price highs above $1900 is unlikely to see a quick resumption. For informational purposes we have included most of the 1980 price cycle as well as its ADX indicator that we scaled the same as the 2005 – 2011 indicator (left chart). Please realize that the ADX shown is not an uninterrupted series even though it appears to be so.
Before moving on we want to make a quick observation about outright uptrend development. Observe the 1978 – 1980 period. We drew a freeform red curve below progressively higher price lows. Uptrend development in this case accelerated through time: the higher prices went the faster they climbed. Now look at the 2008 – 2011 timeframe. Here we drew a red straight line below progressively higher price lows. We could not configure a curved line. The contrast in the two time periods is significant in that the move up to the 1980 high was clearly a classic case of an accelerating blow-off whereas the move up to the September 2011 high, while remarkable in its magnitude, does not have the appearance of being a blow-off.
To summarize, both monthly and weekly momentum conditions in gold have begun to deteriorate against the backdrop of record price volatility with prices at new all-time highs. In the dynamic environment in which we are now operating almost any imaginable, and some not so imaginable, macroeconomic or geo-political event can occur that might propel gold prices further into new high ground above $1920. However, as we currently weigh intermediate- and long-term technical developments we conclude that traders and investors who are counting on quick and sustainable uptrend resumption are likely to be disappointed.
We have previously discussed potential downside price prospects relative to the current uptrend that dates from 2008-09. Technical conditions have not improved since then. Based on the analysis in this essay we expect further volatile high level consolidation that is, at best, contained within the September extremes at $1920 and $1532, basis the nearby Comex futures. Before the current consolidation/correction is over we expect that the market will establish at least 2 monthly closes that are progressively lower and that are below today’s close at $1624.70. Additionally, monthly 14-period stochastic %D values should decline to the 68 area, in a best-case scenario, before prices develop lasting upside potential and to the 50 area in a more protracted corrective scenario.
September 30, 2011
©2011 Eidetic Research
This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any commodity, futures contract, or option contract. Although the statements of facts in this report have been obtained from and are based upon sources that are believed to be reliable, we do not guarantee their accuracy and any such information may be incomplete or condensed. We do not assume responsibility for typographical or clerical errors in this report. All opinions included in this report are as of the date of this report and are subject to change without notice.
Was just looking at Harvey Organs latest write up on the cot report and was surprised to see his thoughts on Gld and Slv, which I believe are in direct contrast to your own Tom Its the first time I have actually looked at his report, so not sure where he stands on the credibility ladder.
The two ETF’s that I follow are the GLD and SLV. You must be very careful in trading these vehicles as these funds do not have any beneficial gold or silver behind them. They probably have only paper claims and when the dust settles, on a collapse, there will be countless class action lawsuits trying to recover your lost investment.
There is now evidence that the GLD and SLV are paper settling on the comex.
Thus a default at either of the LBMA, or Comex will trigger a catastrophic event.
bought GLD Dec. 17 put options a week ago at a reasonable price.
Hedgefund deleveraging, and redemptions concerns me, since it implies liquidation of all asset classes.
near term bearish on gold. medium term bullish, since I see commodities as an inflation hedge, until USD reserve currency status is replaced by IMF SDRs backed with currencies from current account surplus nations.
@bdang
I’m hoping to buy potash & gold producers after a market crash.
@bdang
2 other ideas are ACI & BTU
@Bart
GLD remained very strong today, despite wide market, and gold mining selloff.
I think big money is playing a sovereign CDS-GLD trade. They are bettting on sovereign default, but hedging with GLD, in case more euro are printed.
Perhaps this explains the decoupling between GLD and the gold mining stocks.
I’m still hoping hedgefund deleveraging, especially by Paulson Fund, after Oct. 30, will collapse GLD by Dec.
Why not match IAU with SLV ??
How to price gold, apparently, http://seekingalpha.com/article/309523-gold-exactly-how-it-s-valued-a-required-yield-theory-mechanism “required Yield theory”, near bottom is a link to a more detailed pdf version.
16% error claimed over several decades, patented, relates to world GDP.
A comment on what may (sorry, should) affect near-term price is:
The near-term keys to gold price are real rates and inflation expectations with minor exchange rate impact. If real rates fall along with potentially lower world growth outlook, gold will rise. However, since lower inflation expectations, unless offset by massive QE, tend to go hand in hand with lower growth, these will work against gold. Bottom line: not great upside for gold from here with plenty of downside if inflation expectations fall faster than real rates do. If the latter happens, downside to stocks makes the gold mining companies’ downside greater than that of gold itself. I’d be long DUST, the leveraged gold miner ETF if you believe that near-term growth and inflation prospects are falling.
What’s happening today (11/21/11) as I write is that the USD$ via the DXY is up .3%, real rates are falling, BUT expected inflation is falling FASTER via the TIPS spread to like term Treasuries, so gold is off nearly 3% EXACTLY as the model predicts.
Anyone see sense ./ opportunity? But with 16% error this won’t be tactical I guess.
PS: It helps to know that DUST is a BEAR (x2) etf!
The “patent” is ridiculous — basically claiming the right to use a computer to model the relationship between GDP and certain factors or prices including gold? Huh! There is prior art on that subject matter including from YOURS TRULY! I’d love to see him just try to enforce this patent.
In general I don’t think the model has strong predictive value for many reasons including data fuzziness (nobody really knows how much gold is out there to better accuracy than 1-2 billion ounces) and false feedbacks. Inflation expectations cannot be simply gleaned from something like TIPS rates or yield curves. In effect, unreasonable expectations will yield unreasonable predictions.
That said, the relationships upon which the model has been built seem to be generally true. I have a number of times here at MA and before pointed out essentially the same thing that this guy has supposedly discovered by himself — which is that nominal GDP and gold prices have a practical relationship in the long term and you aren’t going to see them move more than a given range away from each other (which can perhaps be gauged on the historical relationship but perhaps not). For example, if the global nominal global GDP is US$50 trillion then you are probably never going to have the total price of the world’s nominal gold supply exceed $50 trillion (assuming 5 billion ounces that would mean $10,000/oz gold so such a wide range isn’t particularly useful). This is simply because gold can only BUY things (besides its decorative and industrial use) and it WILL when those things get TOO cheap in relative terms.
To be more precise, we can observe that on a historical basis I don’t think gold has ever exceeded 25% of nominal GDP even — that would effectively place the current limit around $2,500 at $50 trillion notional GDP. Maybe we can go to $3000 for a short time but without a global upheaval such as the USD no longer having reserve status such a price probably could not be maintained, at least if we go by history.
Of course if we get hyperinflation on a global scale, the notional GDP will skyrocket and the gold price can as well. Same thing if we get a major breakthrough in productivity — such as “free energy” or a one-size-fits-all cure for every illness (or the human need for sleep) — as that would probably boost real GDP and therefore nominal GDP would rise as well.
Also I agree with the general premise that gold has more or less kept pace on a per ounce basis with human population for significant periods of history (now ~5 billion ounces and ~7 billion people). I, and many others, have been pointing out this interesting relationship for many years and so I don’t appreciate this guy taking sole credit for noticing something so obvious.
But really beyond that the whole deal is nonsense and as I already mentioned the relationship itself will break down (temporarily at least) if the system itself breaks down. Of course many gold bugs and even non-bugs own gold in case of such an event which the model says nothing about. The fact is that global debt levels mean there must be a fiat collapse (which would be a positive for gold relative to other assets) OR significant and long-term inflation (of the 70′s type or perhaps something different that none of us can guess). There is probably going to be back and forth between which happens and maybe the music can continue playing for years (the Roman empire took centuries to collapse) but at best a quantitative model like this “patented” one can be used only within the bounds of the system. Yet doing so for gold is antithetical to the very purpose for which it is mostly owned (and it is not to earn the “required yield” or even to protect against mild loss of fiat value but instead for the very reason that would make the model no longer work which is a system collapse).
Last but not least, I did have a laugh when he claimed the model was able to predict a 3% drop in gold on a given day!!! Like I said, we don’t need a patented model as a guide, we just need to understand that while the system is still in place there is a relationship between gold and nominal GDP.
One final jab — if this model is so great, why is it telling him to go short gold stocks NOW after most have already fallen out of bed (though I suppose the majors are still holding up very well).
Okay one more final jab from the explanation of how the Gibson Paradox is solved by this method:
“This is the reason why, empirically, deflation has been observed during strict gold standard periods and baring discoveries of easily accessible large gold deposits.”
In other words, deflation is due to periods of low gold production in between major discoveries! That’s the funniest BS I’ve heard in a long time.
You know this reminds me of Prof. Fekete and the gold basis. It is a great tool but it has limitations including at times when interest rates are almost zero at which time any basis signals except the very strongest ones are going to be buried in noise. I tried to work and reason with the professor that the gold basis has a time and place and will again but it had apparently become a religion for him and even James Turk, Dan Norcini and others were eventually misapplying it. I haven’t mentioned the basis because it simply hasn’t done or shown anything relevant in many months but instead owing to the low interest rates if anything it is constantly giving false signals. So I wonder to what extent this guys “Required Yield Theory” that claims deflation under a strict gold standard is due to running out of gold to mine has become a religion as well, being applied to areas of science where it simply does not belong.
@silverax
Not that I spent much time on it, but I came away thinking that this was a complicated way of saying the well-known “it generally costs an oz of Au to buy a decent suit”, give or take.
As the price of gold is not actually fixed by his formula it can only be (at best) the calculation of the “likely equilibrium” price given the statistical outcome of a bunch of people using different factors to gauge their own value calculation (there is nothing to stop some additional new circumstance from affecting the price, at least temporarily) – I can’t decide whether it is empirical (observed to be what tends to happen, even though not curve-fitted) or really derived from first principles though.
On the patent front though, just because some similar qualitative knowledge is publicly known, is your country-specific patent law knowledge sufficient to state that a quantitative expression of a more over-reaching relationship can’t be patented – just a bit of newness maybe sufficient I fancy. It never ceases to amaze me what can be patented.
He doesn’t actually say it is telling him to go short miners now, and his disclosure is that he is long RUSS (Russia bear), not DUST, he stated what you should do if you think real rates will rise (I think).