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Big round numbers are irresistibly alluring. There is some kind of psychological
gravity about them that captures people’s attention. Remember when the Dow 30 first
breached 10k (March 1999) or oil first exceeded $100 (February 2008)? These were major financial-media events that spilled widely into the
mainstream consciousness.
I suspect the next great big round number to be achieved will be $1000
gold. While gold did indeed close
slightly above $1000 for two days in March 2008, it has never been able to
sustain this key psychological milestone. Even at the climax of its late 1970s
bubble in January 1980, gold only hit $850 in nominal terms (about $2300 in today’s dollars).
Gold’s quest for $1000 has proven exceedingly elusive.
With this tantalizing target perpetually eluding gold, why is it
finally within reach now? A
powerfully bullish convergence of fundamentals, technicals, and sentiment has
rendered it all but a fait accompli.
Gold’s fundamentals, declining worldwide mine production in the face of growing global investment demand,
are the primary reason why gold will soon exceed $1000. I wrote a comprehensive essay
analyzing the bullish gold fundamentals late last year if you’d like to get up to
speed on them.
Today I want to focus on the technical and sentimental aspects of
gold’s quest for $1000.
While fundamentals can give us a rough idea of which way a price
should move on balance (up) and for how long (many years), they are too
abstract to offer much insight on trade timing. That’s where technicals and
sentiment come in. And they are
suggesting gold $1000 will be decisively breached soon, probably within
months and almost certainly before 2009 gives up its ghost.
Given gold’s troubled history around $1000, a technical
wasteland where rallies die violently, I realize it seems foolhardy to most
traders to expect sustained $1000+ gold anytime soon. Yet I think if you compare
gold’s technicals today with its technicals at previous $1000 attempts,
the bullish case for a near-term decisive $1000 breakout is very
compelling. Walk through the
charts with me and then decide yourself.
Despite the feeling that gold has been struggling with $1000 forever,
this quest is actually pretty new.
March 2008, just 16 months ago, marked the first-ever $1000
attempt. Since then there have
been two subsequent attempts in 2009, both unsuccessful. But for a variety of technical reasons
(which help drive sentiment), each subsequent attempt has a higher probability
of finally breaking the $1000 shackles.
The first attempt at $1000 had its roots back in August 2007. Gold had spent much of that year
consolidating between $650 and $700, and by mid-August it was again
languishing near $652. At the
time, most traders were very bearish on gold. Its highs were drifting lower and
calls abounded for a steep washout selloff. But this excessive bearishness proved
to be fertile soil from which the biggest gold upleg of this entire secular
bull emerged.
Gold initially shot to $835 by early November, a stellar 28% gain in
less than 3 months. Then it
consolidated around $800 for about 6 weeks, before heading off to the races
again in late December. On the
first trading day of 2008, it closed at $857 to achieve a new all-time
nominal high. This garnered
widespread media coverage and got many new investors excited about deploying
in gold, an important precedent for the coming $1000 breakout.
Gold continued surging on balance, rarely looking back after blasting
through its January 1980 high. By
March 2008, gold briefly climbed over $1000 for the first time ever. But its $1005 close had the misfortune
of happening the day before Bernanke’s Fed cut interest rates by 75
basis points instead of the expected 100bp. This took pressure off the US dollar
and sparked a sharp commodities selloff.
Over the next 3 days after the Fed’s “moderation”,
gold plunged 9.3% and hopes for $1000+ were quickly crushed.
But the circumstances of gold being repelled at $1000 on its first
attempt aren’t anywhere near as relevant as the rally leading up to
it. Between August 2007 and March
2008, gold had rocketed 54% higher!
This was a stupendously big and fast move dwarfing anything that came
before it in this bull. It works
out to a 0.4% per day average gain.
Yet in gold’s entire secular bull before this, since April 2001,
its average daily gain had only been 0.1%. After such an epic run to $1000,
traders were understandably wary.
Less than a year earlier, they had perceived $650 to $700 as being
“normal” for the gold price.
So $1000 then looked way overbought to almost everyone, even many
hardcore gold bulls. In addition,
as you can see above, $1000 was way above gold’s uptrend’s
resistance. It is tough, if not
impossible, to sustain new highs in such a scenario. After any abnormally large rally to
new highs, backing and filling is necessary to gradually get traders
comfortable with the new prevailing levels.
This high consolidation after a huge and fast rally helps redefine
norms for a price. There is a
tug-of-war between sellers and buyers as everyone is trying to understand
whether what once seemed like crazy-high levels are now sustainable. The longer a price consolidates high,
the more traders come to accept these levels as the new norm. In gold’s case, it consolidated
around $900 for several months after this first $1000 attempt. Going from a $675 base a year earlier
to $900 was a big jump.
But traders soon acclimated to the new higher prevailing gold
levels. In July 2008 as
commodities prices surged to record highs, gold caught a bid and was driven over $975. But this extra-trend spike fizzled out
before it became a full-blown $1000 attempt. It didn’t come within 2% of
$1000. Commodities were
correcting and gold started plunging in the bond panic anomaly preceding the
stock panic.
A year ago this month, there was a panic in the bond markets as the
massive US GSEs (Fannie and Freddie) backing mortgages were on the verge of
bankruptcy. Big foreign investors
rushed to sell bonds and bought US dollars (to buy US Treasuries), kicking
off the biggest and fastest US dollar rally ever witnessed over such a short
span of time. The result was gold
got crushed, first by the bond
panic and then by the stock panic.
I wrote about this crazy episode in depth in October and May if you want some more background on its gold impact.
These back-to-back panic anomalies were the result of pure fear, not
fundamental weakness in gold. So
once the fear bubble started abating in stocks, gold started climbing back up
into its trend. The first true
stock panic in 101 years must be viewed as an anomaly in commodities including gold. The hyper-fearful sentiment spilled
over from the stock panic, but soon after that gold’s anomalous lows
quickly unwound. Realize the sole
reason a second $1000 attempt didn’t happen sooner was this panic.
Between mid-November at its panic low to late February, gold again
blasted 40% higher. Not only was
this a huge move, but it was also very
fast. It averaged 0.6% per day,
6x this gold bull’s average pace prior to August 2007! The lion’s share of this spike
was driven by heavy GLD gold ETF buying by stock investors, and it was enough to carry gold
to $992 by late February. But
again external factors short-circuited gold’s ascent before $1000 could
be breached.
The stock markets were slumping into despair in late February,
spawning fears of a renewed panic.
Washington, instead of helping investors, was targeting us for
radically higher taxes, suffocating new regulations, new government bailouts
of bad players who should fail, and much other anti-free-market pro-socialism
nonsense that sapped confidence.
So investors again fled all markets, including gold.
But regardless of the reasons it failed, again the most relevant
aspect of this second attempt is where gold came from technically. It had rallied hundreds of dollars an
ounce in a very short period of time.
It looked overbought on a short-term basis at $1000 and it was above
trend. Extra-trend spikes seldom
lead to sustainable highs because a price is naturally so overextended after
such a move.
But since that second attempt, several remarkable things have
happened. First, gold
didn’t collapse after it.
Instead it consolidated high, averaging $927 since February in its
highest base ever witnessed.
Second, gold actually made a third attempt at $1000 in early June. The time between $1000 attempts
compressed dramatically. This is
the natural result of gold’s uptrend inexorably pushing it ever closer
to $1000. The rising support
line, sans panic anomaly, clearly shows this trend.
And $1000 gold is finally within
trend! This is a really big
deal. The great majority of
investors and speculators use technicals, they consider recent price action
within chart context before making buy and sell decisions. And a price within trend, no matter
how psychologically significant it is, is always more comfortable than a
price out of trend. Traders are
not likely to sell until resistance is hit, and now that $1000 is finally
under resistance the odds of it being decisively breached have never been
higher.
Provocatively these technicals are fractal in nature, they appear
similar and work similarly at many different scales. The first gold chart above looked at
gold’s technicals over years,
showing gold getting ever closer to breaking above $1000. Interestingly, if we zoom into each of
these 3 previous attempts on multi-month
charts, the same phenomena become apparent at this scale too. Until now, $1000 was always overextended
and above trend.
Gold’s initial March 2008 attempt at $1000 was well above its
short-term uptrend. $1000 was a
technically uncomfortable place then, too far outside of normal price levels
at the time and hence likely to spark technical selling. Even without the Fed’s surprise
decision that hammered commodities the day after gold peaked, gold was just
too far above its uptrend’s resistance and 200-day moving average then
to sustain $1000.
Gold’s second attempt at $1000 almost a year later in February
2009 looked similar on short-term charts. It was a spike well above trend driven
by heavy hedge-fund buying in GLD.
But after soaring 22% higher in just 5 weeks, a staggering average
rate of ascent of 0.9% per day (9x this bull’s average), there is just
no doubt that gold was looking overbought on a short-term basis. And indeed it soon plunged back into
trend.
The third attempt in early June was much less extreme. Gold simply did not rally as far (just
13%) or as fast (6 weeks or 0.4% per day on average) as it had in its first
and second attempts. And not
surprisingly given this more modest ascent, gold’s post-attempt
pullback was much milder in recent weeks. Since it wasn’t overbought, and
since it remained within trend, there were no technical reasons for traders
to sell aggressively so gold just modestly drifted lower.
And now, just like in the first multi-year chart, $1000 gold is finally within trend for the first time
ever! Gold’s next $1000
attempt will not require an unsustainably big or fast rally nor will it carry
gold into technically overbought territory. Because of this, and all the time gold
has been spending up in the $900s basing this year, traders are not going to
consider $1000 excessive like they did in previous attempts. Gold’s short-term support is
also nearing $1000, corralling gold ever closer to its decisive breakout.
I realize plenty of folks (but almost never speculators) discount all
this technical chart stuff as nonsensical mysticism, totally irrelevant. But they are mistaken. It is sentiment (greed and fear), not
fundamentals, that drives short-term price movements. And overboughtness and oversoldness
creates this sentiment. And these
states are only recognizable in price context, and this context is best
provided by price charts. Recent
price action drives sentiment, and even financial news, influencing most
trading decisions.
So if you are skeptical on the incredible importance of $1000 finally
being within multi-year and multi-month trends for the first time ever,
carefully consider a real case study from earlier in this gold bull. It centers on gold denominated in
euros. For years, gold attempted
to break above the critical level of €350. And for years it failed. So €350 became a huge
psychological hang-up for European gold investors. It was their equivalent of $1000 in
the States today, a pivotal level that seemed impossible to breach.
I was writing many essays in the early
2000s telling investors to buy gold and gold stocks to ride the
then-new-and-unknown secular gold bull.
Invariably after an essay was published, European investors would
e-mail me and claim that what we saw as a gold bull in the States was merely
a US dollar bear. They
were partially right of course, gold was rising much faster in the States
than elsewhere as the dollar slumped relentlessly. But it still truly was a global gold
bull even then.
I’d always ask the Europeans to not only consider the
extra-trend extremes, but the preponderance of the trend. It is the center-mass of the trend
that matters, not fleeting outlying spikes or slumps. I pointed out to them that euro
gold’s secular support was well-defined and rising, and it was driving
euro gold ever closer to €350.
I not only advised them that the €350 breakout was inevitable,
but that it would spark huge new investment demand and usher in Stage Two of this gold bull where global investment demand, not the falling
dollar, drove gold higher worldwide.
This next chart is a new update of one I ran in a euro gold €350
essay in June 2005 when the breakout was finally starting. The analogies between the long quest
for €350 and today’s quest for $1000 are quite compelling. The €350 breakout that kicked
off the current stage of our gold bull eluded investors for years, but
finally happened the very first time
that €350 was within trend and not overextended.
Euro gold first tried for €350 in early February 2002. But this was a big extra-trend spike,
not only well above trend resistance but after a blisteringly-fast
rally. Euro gold actually
consolidated high after this, making a second attempt in May 2002. But these levels were too new to
traders, euro gold was just too overbought, so speculators wouldn’t
chase euro gold higher. The
psychology for a breakout wasn’t there.
The third attempt happened a year after the first in February
2003. But it was again a sharp
extra-trend spike well above resistance.
It soon collapsed and headed all the way back down to trend support,
much like we saw dollar gold do after its second attempt at $1000 in February
2009. After this third failed
euro gold €350 attempt, European investors were really
discouraged. They figured
€350 would never fall, that European central banks would sell enough
gold to cap the metal under 350 euros per ounce.
The fourth attempt was over a year later in March 2004. But €350 was still above euro
gold’s secular uptrend’s resistance, and the metal had surged
sharply to get there. Traders
weren’t comfortable enough that €350 was sustainable to deploy
additional long positions above resistance at a level that had been a
graveyard in the sky for years.
European gold investors’ discouragement naturally deepened.
But by late 2004, euro gold’s uptrend had finally climbed over
the vexing perceived resistance at €350. And interestingly, the very first time
that euro gold went over €350 after
it was finally within trend, the long-awaited breakout happened! That was June 2005. And this breakout wasn’t feeble,
once it finally happened euro gold never looked back. So far
in 2009 euro gold has averaged €684, nearly twice the level of its
initial breakout that seemed so impossible for so many years!
This comparison’s strategic parallels to $1000 today are very
compelling. €350 failed for
years and seemed insurmountable, just like $1000. But gradually gold was basing at
higher and higher levels as its bull’s support drove it inexorably
higher. And when €350 was
finally within the uptrend instead
of being overextended and requiring overbought sentiment to get it there,
gold easily punched through.
We’ll probably see a similar thing happen with $1000 soon.
The most important benefit of the €350 breakout was its
catalytic nature. The great
majority of foreign investors had not yet been interested in gold, but once
€350 was exceeded the coverage captured their attention. Foreign gold investment surged
dramatically, pushing gold into its global Stage Two bull. After breaking above €350, euro
gold didn’t take a breather until it exceeded €550 almost a year
later! I suspect $1000 will have
a similar catalytic effect on American investors today.
Despite gold nearly quadrupling since early 2001, it largely remains
the realm of contrarians. Most
mainstreamers have zero gold exposure in their portfolios, they haven’t
even thought about owning gold yet.
But when $1000 decisively falls, the coverage of this event in the
financial and mainstream media will probably be extensive. Nothing attracts in new investment
like major new psychological highs, and $1000 gold sure is a big one. It will probably unleash a deluge of
new gold investment, driving this metal rapidly higher.
Remember that oil didn’t collapse once it broke above $100, but
powered on to $145 within 5 months.
And without the stock panic last year, I suspect it would still be
over $100 today. Investors chase
performance, and a breakout above a big psychological round number really
catches their attention. All
kinds of capital flocks in to ride the momentum that is suddenly obvious to
everyone.
At Zeal we’ve been riding this gold bull in elite gold stocks
since its very beginning in April 2001.
And since the stock panic, we’ve been gradually layering in
positions that have already rallied nicely. But it isn’t too late to buy. Once $1000 is broken, and technicals
suggest it will be soon, there will likely be a rush to buy elite gold stocks. You can subscribe to our acclaimed monthly newsletter today, see which gold stocks we are buying (and
when and why), and position your own portfolio to soar in the inevitable
$1000 breakout.
The bottom line is gold’s quest for $1000 is nearing
fulfillment. Not only are its
fundamentals very bullish (including big inflation coming), but for the first time ever its technicals
support such a move. $1000 is no
longer overextended or overbought, but actually within multi-year and
multi-month trends. It
won’t require much buying by traders to push it over $1000 now, and
$1000 won’t feel excessive given gold’s high base.
And gold $1000 is not just a curiosity, but a potential major driver
of large new investment demand.
Big round numbers are widely reported, which drives interest among a
far greater population of investors.
$1000 could even prove, in retrospect, to be the point when gold
investment started growing desirable among average mainstream investors. It is a critical psychological
milestone with very bullish implications.
Adam Hamilton, CPA
Zealllc.com
July 24, 2009
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