Monday, August 11, 2008

There is a Tsunami Coming in Gold

11 August 2008 (updated 13, 15, 17 & 28 August 2008 & 20 August 2011)

I could say much more about the topic of gold's recent sell-off and dramatic plunge below its 200-day and (bull market-defining) 65-week moving averages, but just allow me to say this.

With gold trading today in the $820.00 range, and silver in the $14.60 range, no investor could possibly go wrong buying either at today's prices.

There is a tsunami coming in gold.

The same goes for the gold and silver miners.

There is a fantasy that the US credit and accounting problems have been fixed, and that they will be mostly in the background by September.

Not true, as Nouriel Roubini has demonstrated. You might also have gleaned this by reading my recent post on "Wimpy's Rule." (If one borrows hamburgers and chooses never to pay back the lenders, then every borrowed hamburger is a legitimate addition to your profit statement - thus, the more you borrow without plan of repayment, the greater your profit - according to FASB standards - and if you are not entirely embarrassed to be behaving like an out-and-out bum!)

Both gold and silver will double from these levels in a fairly moderate period of time (1 - 3 years, and I favour the shorter side of the time frame).

I think the above chart might work out as a head-and-shoulders bottom. Of course, I could also be wrong.... Tune in tomorrow for more information!

10:20 P.M.: Here is an end-of-day note.

Based on several technical indicators, gold is at its weakest point ever in the 8-year history of its bull market. Specifically, the MACD (moving average convergence-divergence) oscillator is extremely low, meaning that the price is further below its 50 and 200-day moving averages than it has ever been during the past 8 years. The same is true for the relative strength indicator (RSI). Click on the chart below for more details:

To be honest, I didn't believe that the gold price would ever be this weak again. But, here we are. In bull markets, strong runs are often preceded by hard selling. By my analysis, we have just witnessed the hardest selling that has occurred in the gold market in 8 years. I think the implications for gold bulls are clear... this is the kind of move that precedes a doubling in price.

Unless you believe that the crumbling US financial system has been repaired by bailing out the investment banks and the GSEs (Fannie Mae and Freddie Mac) with taxpayer money, this is a buy signal.

If you believe that a $2 trillion credit loss unwinding process is not yet all over - this is a buy signal.

In brief, this is the strongest buy signal in gold that we have seen in the past 8 years. It probably portends a powerful upward move when the selling (by short-term focussed investors) is over.... And, that could be soon!

Oh, and I keep forgetting to add, with global recession on the horizon, energy and materials costs are now in decline. This portends lowered costs of production for gold and silver miners, so the fundamentals are now looking stronger still for this sector....

13 August 2008: With gold now slipping below $800.00, it remains its most oversold of the entire 8-year bull market. The current price is so far out of line with the fundamentals, comment does not seem to be required. I will say this - this is what Tsunamis do. The sea level falls. It might bounce back, then fall some more. But we know why. It is because the massive wave is coming. The decline is temporary, and its severity is a clue to the magnitude of the incoming wave. Gold is making ready for something huge.

Remember that early August through early February is seasonally the strongest period for gold. Current prices are a giveaway, plain and simple. I honestly can't comprehend who would be selling at these prices, but the buyers will certainly be rewarded in short order. This is a reward package that should have a short waiting period!

15 & 17 August 2008: There is now much talk that gold could be entering a major correction phase, with a lull or end in its bull market. In fact, I am among those who believe that such an event could occur. Gold corrected 50% in the 1970s bull market, from $200 to $100 per ounce, over a period of about 1-1/2 years. Of course, in the world of investments, anything can happen. The current 25% correction is on the order of gold'
s 26% correction in May 2006. Neither correction is anywhere on the scale of the 50% correction of the mid-1970s.

However, I do not believe that gold is due for a correction of significantly greater than the current magnitude here and now. The truth is, given global fundamentals, the run-up in gold has so far been quite modest. If there is to be a major correction, in my view it will have to occur from a far higher and more vigorous ("overbought") top than it has so far seen. I do not know why gold has fallen so far so fast at this time, though seasonal weakness remains an obvious factor. We have burned through a series of stops, forcing further selling. But I don't see the kind of volume at these levels that suggests a capitulation. The present trend is not in my view of the kind that would presage such a primary (50%) correction.

However, continued or strengthened selling at these levels would indicate that something untoward is afoot, so watchfulness should certainly be exercised!

At risk of belabouring the obvious, gold's forced selling low today of $775.00 to $777.70 (I find different figures from different sources) brings us back to a major trendline established in July 2005. I don't have charting tools to draw the line, but if you click on and enlarge the chart below, you will see that gold is presently sitting exactly on this trendline. It is no secret that investment vehicles have a habit of returning to such trendlines, and the function seems to be to wash out speculators who have overextended themselves through margin borrowing or other forms of leverage (such holders do not provide firm enough support for strong bull moves). Certainly, gold could continue to hold "low" to this trendline as a base for a period of time, as it did in 2005 and 2007, though to my eyes, the present steep descent with multiple gaps doesn't look like the kind of downtrend that is likely to persist for long.

James Turk, of GoldMoney, notes that while there is forced selling on the "paper market," physical gold and silver are presently unavailable from essentially all sellers, due to a dramatic spike in demand for the precious metals as a physical investment product. He indicates that this kind of physical demand is likely to push the price sharply higher when the now presumably-forced paper selling (due to leverage and margin) exhausts itself - as all such trends eventually do.

Mr. Turk adds, "To give you a true picture of just how bad inflation has become, here is what John Williams of Shadow Government Statistics reports in his latest newsletter: 'The SGS-Alternate Consumer Inflation Measure, which reverses gimmicked changes to official CPI reporting methodologies back to 1980, rose to a 28-year high of roughly 13.4% in July, up from 12.6% in June.' It's no wonder that the demand for precious metal coins and small bars is so strong!"

Note that the present link will take you to Mr. Turk's current market commentary. You may then have to search the site for an article with this title: "A Fabrication Bottleneck or Something More."

Fortunately, I have also found an illustration of that 2005-2008 trendline in the gold price in Mr. Turk's above-cited article, illustrated here:
Now, if the next move in gold sees a dramatic spike top, then a 40-50% retraction would not constitute atypical bull market behaviour. It is now easy to forget (and I have written previously) that Dell Computer was the best performer of the 1990s tech stock bull market, soaring 27,500% from 21.7 cents per share ($0.217) in mid-1993 to $59.69 per share in early 2000.

Note that Dell first fell 72% in the beginning of 1993 (from 77.9 to 21.7 cents per share) before taking off from its $0.217 low. However, Dell never looked back over the next 7 years, until finally blowing out at its $59.69 peak price in 2000 - except, if you look closely, for its 50% pullback from $1.54 to $0.72 in 1995-96. This example is the kind of greater correction that might still be coming in gold, but again - in my opinion - not from gold's current levels!

It is no secret to seasoned bull market investors that when spike lows of this kind exhaust themselves to confirm a trend of greater than 3 years' duration, one very likely outcome is the emergence of a new and steeper uptrend. That is, my thinking is that from here, gold is most likely to move up more steeply than it has already done, and that could take us breathtakingly higher over a modest time frame. This is what I mean by a "tsunami" in gold. And of course, it would not be unusual to see dramatic subsidence in price levels after the tsunami strikes (as was the case in Dell's share prince in 1995-96, as previously discussed). But this is exactly what I mean. In bull markets, dramatic pullbacks follow tsunamis. They do not occur following gradual upward surges, such as the gold bull market has seen so far.

What will trigger the tsunami, and how will we recognize its peak?

For a moment, let's follow the tsunami analogy further, with this description from Wikipedia:

"There is often no advance warning of an approaching tsunami. However, since earthquakes are often a cause of tsunami, any earthquake occurring near a body of water may generate a tsunami if it occurs at shallow depth, is of moderate or high magnitude, and the water volume and depth is sufficient.

"If the first part of a tsunami to reach land is a trough (draw back) rather than a crest of the wave, the water along the shoreline may recede dramatically, exposing areas that are normally always submerged. This can serve as an advance warning of the approaching tsunami which will rush in faster than it is possible to run. If a person is in a coastal area where the sea suddenly draws back (many survivors report an accompanying sucking sound), their only real chance of survival is to run for high ground or seek the high floors of high rise buildings."

The following photo illustrates the maximum "trough" (dramatic drop in sea level) prior to the impact of the
third and strongest tsunami wave at Kata Noi Beach, Phuket, Thailand on December 26, 2004 (sea visible in the right corner).

May I suggest that the trigger - or "earthquake" - has already occurred - and that is the $2 trillion (or more...) US credit meltdown that is now in process. My best guess is that the cresting wave of the tsunami will first be spotted on the horizon when the easy answers (such as, "the credit crisis will be mostly over by September") begin to lose credibility in an environment of recurring financial market instability. The concern is most likely to be the growing perception that the problem is a bigger one than even the world's still-richest economy can master (which in fact it is).

Here is just one current piece of data critical to the continued pressure on US financial markets. Delinquencies on both mortgage loans and loans generally more than doubled in 2007, As Doug Casey at Casey Research has demonstrated (see following chart).

Given such developments, the gold market could soar to irrational heights (it has certainly not yet done so, particularly when the gold price is viewed in inflation-adjusted terms). Gold could then pull back from an irrationally high price level by a factor of 50% or so. But again, that is for another time, and as I see it, certainly not for the current correction from the still very modest peak gold price level of 2008.

With the US dollar's surge over the past month from $71.31 to $77.15 on the US Dollar Index (USDX), it has crossed my mind that this dance above the 200-day moving average may constitute the greenback's "last fling" before falling further into its debt-fuelled abyss.

Now, I don't know if gold will fall below its current 3-year trendline support (trendline breaks happen all the time, and are sometimes meaningless; also, we have not yet seen a conclusive spike low in gold, suggesting that more downside is still possible next week), but current price levels do represent primary 3-year support for the current gold price. (If you look at today's closing silver price of $12.93, the same is also true in silver.)

See the chart below for an illustration of gold's "spike" low in mid-June 2006 (and note that in 2006, gold held at its 200-day moving average support level, clearly indicating that no tsunami was indicated in 2006 - the later September-October dip below the 200-day moving average was modest and brief):

Or consider gold's August 16, 2007 blow-off low, also supported by the 200-day moving average:

Now look at the spike down of August 15, 2008. The current fall of $214.60 (21.6%) from July 15, 2008 through August 15, 2008 is unprecedented in the current gold bull market, in that the drop did not occur from the March 2008 peak price level, and the price has plunged through the presumed strong support of the 200-day moving average. Of course, the harder selling now occurring may also require a more definitive "blow-off" spike at its bottom than those we saw in 2006 or 2007. But we are certainly nearer the bottom than the top of the present move, as is dramatically illustrated below:

Relative to its 200-day moving average, gold has never been this cheap during its entire 2001-2008 bull market, as Adam Hamilton's chart (below) illustrates quite dramatically (the red line is the "relative" gold price). Be sure to subscribe to Mr. Hamilton's exemplary service in order to access this and other insight-generating technical charts!)

I will say this in conclusion. We bought both physical gold and physical silver today (in a 60/40 ratio) from Kitco (through their Canadian dollar pool account). And if the price falls further, say to the level of gold's 2006 peak of $730.40, we will obviously buy some more at even better prices. As they say, bargains like this don't come along every day. Think about it - a return to the levels of just last March would represent a 50% gain on our purchase today (this due to silver's extreme 42.6% retraction, moreso than to gold's 24.8% pullback, each from their March highs of $21.44 and $1033.90 respectively).

I've been around too long to expect us to recover gold's March 2008 price levels instantaneously. However, if there is in fact a tsunami coming, we will then be looking back from a price point far higher than that achieved in March of this year!

28 August 2008: Enough time has passed to confirm an apparent head-and-shoulders bottom taking shape in the gold price, as I initially speculated on August 11. In any case, this is Clive Maund's view, and he is on target in his technical analyses more often than not.

Click here for Mr. Maund's full review of the technical charts.

And while you're at it, check Pamela and Mary Ann Aden's recent analysis here.

The Adens conclude that the critical 65-week moving average is continuing to provide strong support (following a brief plunge lower (which is the point where we added to our gold and silver position).

15 September 2008: Much has happened since posting this August 11-28, 2008 blog entry. Gold has clearly fallen below its 65-week moving average bull market support level (though the 20-month moving average, watched by some, is holding so far). There is wide sentiment that the gold bull market, if not over, has at least entered a bear phase - though not all think so. The gold investment conferences are again as deserted as they were during the vicious 21-year 1980-2001 precious metals bear market. It is presently as though the gold bull market never happened - despite gold's being, even here - at three times its 2001 price level! My updated thoughts on the gold tsunami (it is still coming) are presented here.

20 August2011:
I suppose it goes without saying. The gold tsunami is now here. This is it.

Hope you are making the best of it.

Ride the wave!

My gold tsunami posts are as follows:

There Is a Tsunami Coming in Gold

Gold Tsunami II: Anthropomorphizing Gold

Gold: Safe Haven in the Approaching Perfect Storm

Gold Tsunami III: James Kunstler's Use of the Analogy

Bond Prices: The Seismic Shift That Triggers the Gold Tsunami (IV)

Gold Tsunami V: The $23 Trillion Bailout... and Counting

Gold Tsunami VI: Looking for Patterns in Gold Price Advances

Gold Tsunami VII: This Is It

Gold Tsunami VIII: Gold Mining Stocks Now Participating

No comments:

Post a Comment