GOLD TOP?
By Bruce Gwyn ,Level III Trading (courtesy of Hedgefund.net)
As most people know, gold has been in a raging bull market for more than 10 years rallying from about $250 per ounce to more than$1,250 per ounce. Many people are now wondering if the world’s currencies have any value at all and are flocking to gold as the only hard asset that historically has always had value.
Gold coin purchases are at an all time high. There are people walking up and down city streets and in shopping mall, holding signs saying “We Buy Gold.” There are even vending machines where people can purchase gold bars. Of course, there are the ubiquitous commercials on TV about gold.
Does a contrarian look at all these factors and take the other side? Possibly, but the problem is most of these factors have been present for more than two years and gold has rallied more than $400. Why would gold be any different now?
I believe the psychology of the gold market is in a dangerous place, but manias can go on longer than people think. This happened in the real estate market in 2005 when everyone rushed in. Real estate TV commercials ran nonstop, many were buying second homes as an investment with no down payment, bankers were giving loans to anyone.
It took about three years for it to finally come apart. The gold and real estate markets are not related, but the mass psychology is eerily similar.
Are we finally at that tipping point? I believe we are.
Until two weeks ago, gold had been in a steady uptrend since February. It was going up because of inflation or deflation; it was going up because Euro weakness or Euro strength or it was going up because of stock market strength or stock market weakness. People on CNBC have even said gold will never go down.
But close inspection of the gold market at this time show many technical difficulties that may bring it down. Below is a candlestick weekly chart of the gold market.
Source: Barcharts.com
Gold set the all time high of $1,264.80 per ounce during the week of 6/21/10, but that week also formed a candle stick called a “hang man”. This is when a market breaks off the highs but then runs all the way back up to the previous daily or weekly close. The next bar is critical because it must run back down and close under that previous low. As you can see, this is exactly what happened.
The chart below also shows some import reversal patterns. This is a daily candlestick of gold. On June 21, gold made an all time high but closed below the previous day’s low. This previous day was the all time high. This can bea very bearish sign. Also notice it happened againjust five days later.
Source: Barcharts.com
There have also been some major divergences recently. The Gold Bugs Index bug index (HUI), a basket of un-hedged gold stocks, topped out in March 2008 just as gold did. From there, both markets had severe sell-offs. Since then, gold has come back to make new highs in November 2009, and then another rally to an all-time new high again in June.As you can see, HUI has not confirmed this high, not just once but three times. This triple divergence is also very dangerous.
Source: Barcharts.com
Source: Barcharts.com
The last component I analyze closely is the Commitment of Traders Report (COT). The rally in gold this year has gone to new highs but buying from managed futures traders (the purple line) has not had the buying enthusiasm that accompanies these type of rallies. The large spec (the green line) also has been a reluctant buyer. The commercial trader (the red line) set an all-time record on the short side in March. This type of selling from commercials does not pinpoint tops, but it does put you on alert for possible market failures.
Source: Barcharts.com
Calling tops in a raging bull market can be very difficult and painful,but with so many yellow flags, there seems to be a great trade from the short side. If gold closes below $1,170 per ounce I think the gold market is in for a large fall.
Bruce Gwyn
Managing Partner
Level III Trading
web: http://www.level3trading.com
email: bgwyn@level3trading.com
Bruce Gwyn is the Founder and Managing Member of Level III Trading, a Commodity Trading Advisor. His 25 years of experience in the futures markets, starting out working on the floor of the CBOT to running his own hedge fund, has allowed him to gain great insight into the working of many markets. His trading decisions are completely discretionary, based upon technical and fundamental analysis along with inter-market and intra- market relationships
Mania? That is laughable. Look at all of the people calling for the demise of gold. In manias/bubbles that simply does not occur. The love is universal in a bubble. Remember tech stocks in 2000/2001? Who was hating on tech stocks back then? 2 or 3 people? Gold is far far from that. Not to mention that gold is not just not overowned, it is still underowned. Show me portfolio managers other than a handful of hedge funds that own it significantly? They don’t. Show my the millions of regular investors that own it in their retirement plans or IRAs, etc. They don’t. Is it getting a lot of exposure? Yes and rightfully so. But that’s it. Per Bill Fleckenstein, physical demand is there as can be seen by looking at the small difference between front month futures and spot prices. Finally, TPC, we have gone back and forth on the inflation/deflation argument. I’ve maintained and continue that inflation and deflation in different areas are battling each other which is why we aren’t seeing more dramatic changes in price. However, as we have seen through history, inflation can remain muted through periods of massive money printing…until it doesn’t. In Weimar Germany, they had printed money like crazy with no inflation and then boom. That is why Parsson’s book is all the rage among central bankers today. Gold, is a hedge not just against inflation, but against widespread currency destruction. You can have many currencies stay in a relative range against each other and get crushed against gold. Look at the Euro/Gold trade for example or look at gold rising in the face of a rising dollar. JMO
Gold is a terrible inflation hedge. Considering even a moderate estimate of a 3% average inflation for at least 150 years, ask yourself why gold isn’t equivalent in value of any currency (let’s say GBP since its the oldest existing currency) compounded at 3% annually?
Gold is perhaps good for those with an apocalyptic mindset. That is until the apocalypse hits and its worthless like just about everything else that isn’t required to sustain life. Moreover, I love to see what happens when people rush to sell their physical and all of a sudden that “very dependable gold dealer who always has a ‘We Buy Gold’ sign up” decides he’s not a fool and either doesn’t buy gold or buys it at such a huge spread that leaves nearly no profit and perhaps even a loss.
If you want a case scenario of a what happens when a “thin” market that’s overbought reverses, take a look at oil in Mid-2008. And that’s a commodity that EVERYONE uses and is actually consumed from a finite supply.
A 10 year run of higher yearly returns and over 400% gain to date constitutes a Bull Market. I don’t know of any Bull Market that has simply just fizzled out on negative bearish sentiment. A Bull Market will typically increase 10-20 fold (See Japan, Nasdaq, Oil to name a few) before before they crash and die out. They tend to go out with a parabolic bang accompanied with euphoric bullish sentiment across the board. I doubt we’re anywhere near that.
Absolutely no bias in this comment (cough, cough), but I own a gold exposed security, or two.
if you believe the eur has been saved, the world economy will go up from here, bernanke understands the monetary system and is not pressured by politicians who also understand the monetary system, all the historical charts of DOW/gold /recessions do not apply anymore,this time is different,housing is about to come back and human nature has changed and we are all rational and informed about finance and world currency markets…….
then gold has topped.
I find it hilarious that gold bugs are so married to their position that whenever someone talks about it not going higher, they genuinely get pissed off, like you just told a Tea Party guy that taxes actually do some good. Then when gold actually sells off or doesn’t go higher, they start saying that there is a massive central bank conspiracy to keep it down. True story, I went to a gold conference here in NYC back in 2003. There were a lot of junior mining companies and the I-banks that cover them, but the retail gold bug crowd was like something out of the OTB parlor.
Plenty of truth in that statement, but It’s not unique to “gold bugs”, every eventual bubble has it’s “bugs”, I remember being a passionate “.com bug”, wow that was a wild ride
The key, obviously but difficult, is to not ride that baby back down to where it all started from.
I find it hilarious that gold bugs are so married to their position that whenever someone talks about it not going higher, they genuinely get pissed off, like you just told a Tea Party guy that taxes actually do some good.
A lot of the internet goldbugs are political extremists, and some of those are Christian end timers. For them, it isn’t a trade or an investment, but an ideology.
They really do get emotional about it because ideologues get agitated when their religion of belief is challenged. The idea that anyone could possibly disagree without being evil or blind to their “Truth” is inconceivable to them.
And they do seem to love the internet. Presumably, they tend to be ignored in real life, so they crave an outlet where someone will listen to them.
gotcha axios.
“The fact that gold has become a popular topic of media conversation does not make it a bubble. The chirping of naysayers usually comes from assorted wallflowers that have simply missed the boat. Against a backdrop of wilting confidence in financial assets, gold is under owned by central banks, institutions, and individuals. One must distinguish between a near term overbought condition, to which any investment class in a secular bull market can become prone, versus a full scale mania. We are a long way from silly season when it comes to gold.”
john hathaway
funny how all the socialist democrats hate gold….oh,thats right, the gov’t gonna save us, just like FDR did…………………………..and then there’s the “i got a tip on this corp stock” boys…..yeah the dow just takes off from here…..no problem say the sheep that can’t see we are pushing on a string………………
what a charade
I said gold was in a rising wedge when it was in the 1200s and it still is.
It’s been overbought, and it’s been making divergences. I call for triple digits in the price before it hits 1350.
what do you think will happen in a year when the 1trillion $ euro bailout money is gone and the germans are asked to re-up again this time 2-3trillion$?
oh thats right another realestate boom will save us all……….or was it another .com……..or another tech
spare me………..i’ll steal my 84 yr old mom’s credit cards n make me n her a pile if gold goes below 1000 …….pray for that day i
LOL @ Gold bugs w/ spot price down 20 bucks today. Learn to trade, don’t just buy gold and pray for the end of the world.
@ pork
Yes! it dropped to 1160 today! Here is my bet: gold goes down to $1100 in the next 2-3 weeks. Continues there until “Black October” 2010 hits (when QE2, housing market starts to sing the tune of the shadow inventory glut, and the employment #’s stay bad, oh – and the “failed” stress tests of the banks in the Euro/TwilightZone begin to show their flowers).
We may be a resilient economy and full of strength, but you can’t start an engine that is out of gas – even though it is ready to roar.
You don’t buy gold b/c you are a “bug” and you don’t buy gold to day trade. You buy a certain amount to hold and forget about for 20-30 years and then hope you can get back what you paid for it. Think in terms of a durable good rather than an equity if you get my drift. Dude, sort of like a house (also a non-equity, non-asset, but a durable good). The only diff? The vaulting costs are trivial to maintaining a house…
Gold may stink as an inflation hedge (obvious hot debate among you all), but it does seem to track to currency destruction (inflation, etc.). You don’t buy gold for the purposes of praying for the world to end, you do it and pray for the world to be OK! Trust me, we all die in hyperinflation, even the cartel of Big Bank. What you want to do is to preserve wealth over time periods that are long, and in that regard gold seems to pretty ok (despite the early 80′s). As an asset class, gold stinks – it does not make money well. And when it does, run for cover. The best thing is to be able to recover your original price back 30 years from now – wealth preservation. Use other devices for Making money. But mostly, crank up your savings rate engine and stop expecting to get it from the asset classes – that’s a crap shoot – Vegas style.
very well said my sentiments exactly
I’m bearish as hell on gold, but I just bought this dip for a whip up. To many weak shorts out their waiting to see if this is the big sell off… They gotta feel some heat IMO. The bulls still have the ball….
Advice: Ignore your assumed emotions analysis and focus on the technicals. Buying long at this point could be potentially painful going forward. There is a very obious “hole in the wall” gap setting on this baby. Very bearish on the technical side.
As far as technicals here is chart I posted on this site back in May. Chart is still valuable.
http://theleadernews.com/images/GLD_2010.jpg
Gold was obvious at a top back in May-June. I got a lot of criticism from the gold bugs over suggesting a short. There was ALOT of love for gold in the air. I’d look at going long on gold but only when the Bearish sentiment reaches peak. We are no where near extreme bearish sentiment. We are only seeing the tip of the iceburg to golds decline in the coming weeks. There are far more reasons for gold to go alot further down at this point and very few reasons for gold to go up. BOTH Technicals and fundamentals are now both bearish for gold. Sentiment is neutral but will most likely go full blown bearish in the coming weeks.
As I noted before. Gold DOES NOT hold up going into deflation. It only moves up coming out of an extreme deflationary situation.
Sorry gold bugs but I was right.
@ J Dukate
Hate to bother you with this?
But could you go into a little more detail on the reasons for gold to go down vs. up? I checked your chart and could not identify the “hole in the wall” (sorry trader dumbie here). So I am not getting the point you wanted to make on the technicals either.
I spend too much time over at kitco.com – it’s a bug site; so I am not going to get a balanced set of data from there. They said gold was driven south by (options) contract expirations (just like at the end of June when the portfolio managers were forced into a sell-off to do the quarter close). I don’t find that very believable.
Thanks for your help in advance!
I understand that argument that people make when they say gold is something you buy and bury for 30 years, but I just don’t subscribe to that mentality. I am a trader first, and an investor second. I don’t care if it’s pork bellies, silver, or horse manure, these are all just things to trade in and out of. You accumulate when it’s cheap and you dispose when it’s expensive. Investing is just another way of buying cheap but with a longer time horizon of waiting for the trade to work out. I guess the macro argument that I’m making is that I don’t believe any asset is sacred or exempt from market movements, and if we have inflation or deflation a) everything will move (yes that means gold too) b) A trading mentality will enable one to accumulate wealth or cut losses better than a mythical “catch all” of just buying gold. If we get into an extreme situation of social order breakdown, I don’t want gold, I want lead. Safety through superior firepower.
I think we (violently) agree.
I just want a portion of the portfolio sectorized into a wealth preservation format.
I can’t be a trader, I am too dumb and inexperienced. I let mutual funds that shift their portfolios around to do that.
And amen on gold in a social breakdown. It will be pretty worhtless. It’s only value is to dump it as things are going into the toilet. Then you buy your lead, and I buy my water (grin).