Looking Back At The Last Month In Gold

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Published : September 26th, 2011
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( 3 votes, 4.7/5 ) , 2 commentaries
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Category : Market Analysis

 

 

 

 

On August 23rd of this year I made a bold call. That call was to short gold. Never before in the 3.5 year history of my blog did that one post result in so many emails telling me that I didn’t know a thing about what I was talking about. Although the post itself only attracted 10 comments publicly, I can assure you that my email box was flooded 10 fold. Why those that bothered to take the time to email me didn’t post their views publicly is not for me to judge but suffice to say that perhaps they too were feeling the heat and didn’t want to publicly go out on a limb and make the wrong call. Here’s what I wrote:

This brings us to Gold which is, technically speaking, the safest currency. However the rise in gold in the last 60 days has been so steep that even I, a staunch gold bull admits that we will see a significant correction in the yellow metal before we continue the upward movement. To say one expects gold to retreat does not make one a gold bear. However, take a look at the chart of gold below and come to the realization that nothing goes straight up despite what many perma-bulls will tell you. Gold might get to $2,000, $2,500 or $5,000 an ounce….who knows… but it will not get there tomorrow or the day after. The last parabolic move we saw came at the expense of silver and we all recall what happened last May. Silver was off significantly today and what failed to inspire me in the recent gold rally was that silver did not follow the lead as Gold continued to make new highs.

This was written on August 23rd. The internet is a buzz about the CME Margin hikes that were announced at the close of business Friday and point to that as the significant factor as to why gold was clobbered. No. Sorry. That is the wrong way to approach these things. Remember, gold looked considerably over-bought a month ago … not three days ago.

In any event, I tried to tell anyone that would listen to take a step back, and not get carried up in the nonsensical talk that gold would go to the moon and never stop. Even I, an investor in junior exploration companies and the shiny metals never bother myself with corrections when I have a firm grip of the underlying fundamentals. For some passionate folks out there though it has somehow become criminal to even mention the words “gold is overbought”. My warnings have gotten me booted off the ever popular Zero Hedge BlogSpot. I suspect my posting there that the gold pumpers needed to get a grip and prepare for what could be a harsh correction was what did me in. You see, anyone who goes against the tide at that site is immediately labelled a “troll” which is discouraging. I really have no time for people that shoot down commentary with a simple “F-off troll”. It shows me just how ignorant those people are and how they perhaps don’t even know what their reasons for owning gold are. You see, alarmist headlines and sensationalized commentary attract visitors and web-hits. People follow without doing their own homework and then somehow someone trying to give them a different perspective is demonized.

I’m not trying to smash my chest here or wag my finger in an “I told you so” moment. I am simply trying to remind people not to get blinded by what they want to see but to analyze things as they are at the moment. liken it to a football handicapper/bettor who also happens to be a NY Giants fan. A poor handicapper will pick the Giants to win and then handicap his bet using only the statistical data to make his selection look stronger and make him sleep at night while all the while paying little to no attention to the statistics that tell him that the opponent is perhaps the better bet on game day. Gold investors, and I refer to the extreme bugs, look to a target price for gold. A number that most of them can’t even formulate themselves. It is a number they read somewhere on some other website or like a Zero Hedge for example. That investor becomes so consumed with that target and with that one way train of thought that they become blinded to data telling them otherwise.

This is not unlike the crash in silver as it approached $50.00. To the die hard and blinded silver bug, $100 – $200 silver was a reality. Those poor souls bought all the way down during the correction and now almost 5 months after that parabolic move ended, not ONCE did the price of silver come close to breaking $45.00.

You see, one can not be blinded by what they want. You can always tell a conspiracy theorist in a debate. Any rationale position is shot down with another excuse. “Aha! Gold was smashed because of a margin hike and people were tipped off!!!” Come on. Look at the chart. The warning signs were there as I said, back in August. An excuse is always at the ready when something doesn’t go someone’s way. Learn to ignore the masses who are piling into the metals trade without really knowing why. Look at Max Keiser’s “silver army”. All that garbage about buying an ounce of silver to bankrupt JP Morgan has turned out, as expected, to be horse manure. The same goes for gold. I buy gold as a hedge against inflation and as a store of wealth for the future but let us be honest here … it as been in a 10 year bull market, far surpassing anyone’s expectations. A massive correction should not have caught anyone off-guard.

In my original piece I posted carts of gold’s recent move. I also stated:

What I want you to focus on the green line I have drawn. Notice how gold can technically correct to $1,725.00 an ounce yet still maintain the uptrend that it has been on. To say that gold was not overbought recently in light of its move since early August is being naive. This parabolic move that gold has had the last 3 weeks or so was the main reason why I initiated a short via GLD puts that I posted the other day. Perhaps what is more concerning to me though is the move since July. We saw a move of over $400.00 an ounce since July so a $200.00 correction in the price of gold would not necessarily mean that the run is over but that a healthy consolidation has taken place. Gold needs this in order to maintain a healthy ascent. I will state again, before today, prices had surged 17 percent in just three weeks.

Also look at the moving averages and note how far above them the price has moved. Take note of the 50 day moving average in blue at $1,623.34 and the red at $1,475.00.

Did you catch that? Why wasn’t anyone screaming on the long side when gold moved 17% in 3 short weeks … something that has never happened historically? When these moves happen and everyone and their sister is screaming that gold will continue to climb and then vehemently opposes anyone trying to give reason to the equation is the first sign that the asset is in bubble phase. People didn’t want to hear that gold was due for a massive correction. Anyone even trying to point out any bubble like tendencies was getting hammered with criticism.

Then it happened …….




The signs were there at $1900 and then again when the double top was formed for anyone who WANTED to pay attention. To those that didn’t and were blinded by their notions that gold was only going to continue to climb have gotten smashed. Again, these signs were there before Friday’s margin hike.

Here’s the chart posted on august 24th noting that gold had gotten away from the trend it had been following for the last 3 years … that is that it had moved exponentially above its moving average. I pointed out that every time it got away, it moved back to straddle the MA.




Where will gold go from here? Remember what I posted before … that gold could fall to the $1,725 mark and still maintain its upper trend. Well … it did that and more. Significant technical damage was done to gold this past week and especially on Friday. Gold may bounce and I fully expect it to. As a gold investor what I would want to see is for gold to find a tight range and trade within that range for a while to clean up the chart and to prepare for what is hopefully a move higher. Realistically though, it still can test the 200 day MA which sits now at $1,522.00 which would bring us close to where gold was back in July,

As for liquidations, I don’t doubt that banks, hedge funds and governments who were invested in gold did in fact liquidate. Heck… why not? Nobody can give me one compelling answer as to why anyone wouldn’t want to liquidate gold a one year 47% gain? (Better than a 100% gain over a 3 year period). In a liquidation scenario you take your best performing and highest percentage gain assets and you sell those to raise cash. The headlines are there for anyone who cares to read them. Banks need money. People are scared. Credit may tighten up. You still can’t pay your bills with gold…at some point one needs to convert their gold to cash in order to use it.

Make no bones about it. The next few days are going to be interesting. I expect the US dollar to correct a bit after the massive move it had and I expect gold to perhaps have a small down day Monday as the remaining margin liquidations come in following the margin hikes at which point, gold should bounce. Whether the correction will be swift is still to be seen but if Europe continues ahead with its plan to print their way out of the debt crisis and if the United States follows with their own additional money printing exercise then yes, all the reasons for continuing to own gold continue to be in play.

But if we head into a slowdown globally, don’t expect the swift comeback for silver and copper. You see, the difference between those two as has always been argued by silver bugs is that silver, unlike gold, has many industrial uses. If the need for industrial usage declines due to an economic slowdown then silver and copper will continue to face massive headwinds. Because gold has an investment place in a portfolio and is not industrially driven, it may continue to move. What happens next in this messed up global financial system remains to be seen. However, I do want to keep some of the long held beliefs about gold in check and I don’t want my readers to be blinded by the notion that gold can only go in one direction.

Perhaps a 10 year bull market creates complacency. Perhaps the fact that so many people are talking about it keeps people’s interest in the metal. Perhaps the fact that every second commercial I hear on Sirius talk radio stations is about gold, owning gold, people willing to buy your gold or sell you theirs or perhaps the fact that even my barber is now asking me if where he can buy gold is keeping people complacent. However remember this … at the height of the real estate bubble everyone was talking about how you could never lose money by buying real estate, how you could afford 4,000 square feet when you only needed 1800, how you could borrow for the cheap without any collateral or how no property was bad. Perhaps you recall every second show on home and gardening channels was about flipping homes in 30 days for 30% gains with only minor fix-ups done inside. Hey, real estate would only go up!!! Remember that?

I love gold. If the price falls I will add to my physical gold. However please…do not be blinded by greed and don’t let fear get in the way of deciding to sell some now and then if you are up significantly on your investment.

One thing is for sure … next week is going to be very interesting.

P.S. Before my inbox is flooded with hundreds of angry emails from gold hoarders and those who claim I’m an idiot, read my 3 year long thoughts on gold. I’m not a hater folks … I’m a realist. Yes, the world financial system is going to hell in a handbasket and reasons for owning gold are ever present. However, what is the true value of any asset? Answer? What someone is willing to pay for it. Know your reasons for owning gold and never be afraid to go against the crowd now and then when the data is telling you that you should.

 

 

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Goodluck ... the moment you move away from the theory that everything is rigged is the moment you will start to make better and more informed decisions.

Physical gold is only worth what someone is willing to pay for it. The market was overbought and leveraged to the moon. You don't need to be a genius to have spotted that.
what is overbought? If someone has sold other has bought? How it became oversold? Pl note that the rates on trading forum are not physical but imaginary, thus all manipulated, Physical gold can not change abruptly. The point is Gold is measured with Dollar, which are recently printed in trillions with no base! Is not all this rigging, especially when FED & central banks are hiding the bullion record of gold price manipulation!
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