By Clive Maund
Thelast update posted on the 29th November called a top in gold, whichoccurred just a few days later. This was actually quite easy to dogiven the overbought extreme that then existed and the fervour ofbullishness spilling over into the mainstream financial media. Gold hassince reacted back heavily and our task now is to decide whether thisis just a reaction in an ongoing and possibly still acceleratinguptrend, or whether it marks an intermediate top, or worse the onset ofa full-blown bearmarket.
The easiest way to be popular in thisbusiness is to tell people what they want to hear. Goldbugs fall intothis category. They want to be told that gold is going up, and that anydownturn is just a correction and another buying opportunity. They havea special class of writers catering to their needs, known asPermabulls. The Permabulls have their bullish arguments, which arepretty convincing it must be said, sometimes with generous helpings ofconspiracy theories to spice things up, which they repeat at regularintervals, and their targets at $1500 or $3000 or whatever.
Inrecent weeks the permabulls have been basking in a glory of adulationand have practically been carried around in sedan chairs by theiracolytes. We don't cater to this class of investor, exceptcoincidentally on those occasions when we have good reason to be ravingbullish too - so if you are a goldbug, who wants to be told that goldis going roaring up, you are advised to click out of this article now.Our analysis is aimed at pure traders - those who don't care whetherthe market is moving up, down or sideways as long as they are on theright side of the trade. Remember that you can make money even in asideways trading market by playing the range or writing options.
Sowhat's going on now - is that it? - has gold topped out already? Thereis a very wide range of opinions out there on this topic and quiteoften the investor is left feeling even more befuddled after readingthem all than he was before he started. For instance, we have Elliotwaver Ron Rosen, whose articles appear on Kitco, who is very bearish ongold over the medium-term, predicting that gold will collapse back to$640.
It is hard to take him seriously though because he hasbeen saying the same thing since before gold broke out to embark on itsrecent strong uptrend. At the other end of the scale we have goldsuperbull "Fractal Dave" whose articles also appear on Kitco, who ispredicting a spectacular ramp by gold, with an objective at $1420 nextMarch, en route to a much higher target in 2011. So far he has beenright but even he is calling for gold to rest in a triangular patternhere for perhaps a few weeks before the advance resumes.
Thenwe have Bob Moriarty of 321gold, who has a good nose for marketextremes, and called the recent top in gold a shade too early as thewriter did, who is now believed to be looking for a significantreaction. Next, Adam Hamilton, who is right most of the time, even ifhis essays take an afternoon to read, is looking for a hefty reactionin the broad stockmarket on the grounds that it has had a long,uninterrupted rise, and also a reaction in the PM sector.
Finally and of course most importantly we have Maund himself, lookingfor a potential parabolic advance in the PM sector fuelled by asuicidal attempt to stave off powerful depressionary forces bymanufacturing money to maintain liquidity and paper over the cracks,but keenly aware that the situation is now dangerously unstable andgrowing more so by the day, so that a major catalyst could trigger adeflationary implosion at any time - like last year, only worse, whichcould result in Ron Rosen's dire predictions coming true. This is whywe ride the beast, but keep a close eye on the position of the exits,and why we take so seriously developments like the breakout in thedollar last week, and during high risk periods like the current oneresulting from the dollar breakout we step aside and awaitdevelopments.
While we were looking for a reaction in gold inthe last update, we were not, at that stage, expecting it to be anymore than that. There was considered to be a high probability that goldwould react back towards, or to, its parabolic uptrend shown on the1-year chart below, and then turn up again to commence another upleg.Now, however, the latest evidence - in particular the convincing dollarbreakout, which we earlier considered likely, is suggesting that goldcould be in for a more prolonged decline that will likely take it backat least to the top of the recent 20-month consolidation pattern, i.e.to the $1030 - $1050 area, and if we see another deflationary scare itcould of course drop to considerably lower levels.
Abackground bearish factor that we have not made enough of in the recentpast is the failure of both silver and PM stocks to confirm gold'sbreakout and race to new highs. This was because we expected to them tostart playing catchup before gold peaked, but it didn't happen. Neitherbroke out to new highs - instead silver appears to be completing abearish Rising Wedge and PM stocks may be forming a Double Top. This isbearish.
The next bearish factor that we can see on the goldchart is that gold plunged back following a "throwover breakout" out ofits rising uptrend channel - such breakouts often lead to failure andreversal as they are a symptom of an over-excited market close toburnout. While there is no volume shown on this gold chart, the volumepattern in SPDR Gold Trust, whose movements normally track goldclosely, is powerfully bearish as we can see below. Once the turn camethere was an all-out stampede for the exits, with GLD dropping back onpersistent very heavy volume which suggests that it, and gold as wellunless there is "something going on" in GLD, is destined to drop toconsiderably lower levels.
Finally, we had a convincingbreakout by the dollar from a bullish Falling Wedge following a longdowntrend. In the last update it was stated that while this might seemimpossible on fundamental grounds it could happen anyway like lastyear, for reasons that later become apparent. It would appear thatwhile the dollar's fundamentals are awful, those for the euro are evenworse, with Greece getting a ratings downgrade or close to it, andBritain close to the rocks - in these extreme circumstances the dollarcould wind up being the best of a bad bunch. Whatever, the dollarbreakout is seriously bad news for gold, especially as it portends arise in the dollar index perhaps as far as the 90 area, which couldeasily happen if there is another deflationary scare.
Fortunatelyfor traders in these difficult times we have clear parameters, foralthough the latest evidence suggests that gold is going to breaklower, the uptrend has not failed until the parabolic support line, andthe trend channel support just beneath it are breached. Until thathappens there is a chance that the uptrend will resume. However a clearbreach of these support lines will be viewed as a general sell signal.Before closing, traders should note the short-term oversold extreme ofthe MACD histogram on the gold chart, suggesting that a bounce islikely soon even if gold goes on to break down.
The situationas we went into the close of 2008 was very different. At that time wewere on the verge of steep declines in both the dollar and Treasuries.The article Bye bye dollar, bye bye Treasuries correctly predictedboth. What was rather curious though is that after rapidly plungingtowards our target zone the dollar rallied back up again to exceed itshigh of November '08 before reversing into this year's severe declinewhile Treasuries briefly rallied higher before reversing into a severemulti-month decline.
Courtesy: www.clivemaund.com