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Submitted by HereWeGo on August 17, 2006 - 11:24am

All right, folks, what the heck is happening in the gold market? Is gold every bit as much a bubble as housing (yet much, much more liquid)? Is the gold market therefore ripe for profit-taking?

Submitted by rocketman on August 17, 2006 - 1:36pm.

Gold follows oil. Do you see $55.00 oil again in the future? Sorry, I don't think so.

Submitted by qcomer on August 17, 2006 - 4:55pm.

Gold follows inflation, soaring oil prices add to inflation and hence help gold indirectly. Gold has risen because interest rates had been going down and liquidity had been increasing throughout the world for the last few years.

For gold play, note that you pay much higher long term tax on gold. If you held gold or gold ETF for more than a year, you still have to pay 28% tax whereas the tax is almost half of that for stocks held more than a year. This is because gold is considered a collectible by IRS.

Submitted by Chris Johnston on August 17, 2006 - 5:24pm.

Chris Johnston

If gold does break 574.50 on a closing basis the game is over for good in that market. Until that time the long term trend is still up. I do not see a short term buy spot at this point, it is basically in a range here. However, as per a blog post I submitted awhile back, this chart pattern is eerily reminscient of many great commodities tops if it breaks that low at 574.50. Huge parabolic run up, then a sharp drop, then a rally up that fails to make new highs. The key to that is that it has the break the low of the first sharp pullback to complete the top pattern.

Interesting times there right now. The bulls need to show up fairly soon. I have been recommending looking for short term buy patterns, but none have developed yet. That recommendation will be cancelled if that low goes.

Submitted by HereWeGo on August 17, 2006 - 5:26pm.

But hasn't worldwide inflation been relatively tame during most of the recent gold run-up? It does seem that gold tends to follow oil (for whatever reason,) save for the past few months. Worldwide demand for gold, measured in mass, is about 83-84% of 2005 levels.

Gold has risen because interest rates had been going down and liquidity had been increasing throughout the world for the last few years.

Isn't that tantamount to saying that gold has bubbled up?

FWIW, the chief investment strategist at Schwab suggests taking profits in more high-risk areas like commodities

Submitted by rankandfile on August 17, 2006 - 7:45pm.

Rocketman, a quick Google search for "historical oil prices" will help you get some info on oil price history. One of the top results of that search is this site:

Here you will find that oil prices were over $60/barrel in 1981 and dropped to less than $20/barrel in 1998. Back during the oil embargo of the 70s, and shortly thereafter, pundits said that oil would never drop again.

Submitted by Chris Johnston on August 17, 2006 - 10:45pm.

Chris Johnston

Gold prices are driven by inflation. I spent several pages in a past newsletter covering this very topic. Inflation has been picking up during this gold rally off the lows of a few years ago, just look at the CPI index over that time.

Now we are hearing the jawboning about reduced inflation pressure, and bingo down goes the price.

Submitted by powayseller on August 17, 2006 - 10:57pm.

For me personally, gold has more value when the dollar weakens. In my mind, as my concerns mount over a weak dollar, and no good alternative, only gold comes to mind. I think some day the markets will realize also that gold is a safe haven for a declining dollar. Perhaps that's the reason gold rose with inflation: any time the dollar loses purchasing power, investors want to own gold.

So it shouldn't matter that the loss of purchasing power is due to inflation or a rising trade deficit and budget deficit, right? A weaker dollar should lead to higher gold prices.

I am waiting for a good entry in gold. I would feel more financially secure if I had more gold and fewer dollars. I really would. Am I going nuts? Or am I being intuitive?

Submitted by qcomer on August 18, 2006 - 1:27am.

There has been inflation all over the world in the last 3-4 years, not only the US. Housing and real estate has jumped multi fold in US, Australia, Europe & China/India. There has been inflation in stocks and general living standards throughout the world. Do you have any data to prove that inflation has been tame for the last few years? By tame, do you mean the govt inflation numbers that excludes housing, food, energy? and as always, speculative investment has come into gold in the last year or so to add the push to the price. I am not justifying lofty gold prices, just explaining why they are where they are.

Everyone in the US should hold cash in a portfolio of gold/euros/aud/yen along with dollar. Simply put, why should we pay for the stupid fisccal policies of this govt spending billions on war? BTW, dollar weakness adds to inflation, as being the biggest consumer, we import so much of natural resources from around the world. What is the range you are looking to enter in gold?

Submitted by Chris Johnston on August 18, 2006 - 6:37am.

Chris Johnston

I am a trader, so I look for price patterns in the marketplace. There are no patterns that are in my playbook setting up in Gold right now. Since we are in a trading range, I would require a breakout back to the upside, and then play the first pullback of it. If it stays in a range the only other play to make is to buy against the lows of the range, with a stop just underneath.

That is not a trade I would do based on the big picture bearishness that would be in place if we test that $574 area. From a traders standpoint, this market is in no man's land right here. If you visit my blog you can see a buy pattern that was set up that was never filled due to this selloff we just had. It is from 8/14/06 and is the fourth or fifth one down on the left.

It shows a pattern that was setup as a buy that the price did not rally enough to fill the order, it was a buy stop above the market.

Submitted by powayseller on August 18, 2006 - 8:53am.

Chris, from your view, gold could even go back to $300, couldn't it? There is a real lack of interest now in gold. Whatever caused it to rally up to the 650s, went away. Why?

Submitted by technovelist on August 18, 2006 - 9:04am.

I'd bet a lot of money that gold won't go back to $300. However, if it does, I'll back up my truck and fill it up.

As for what "went away", the answer is: nothing. What has actually happened is that the short-term traders have again been taken to the cleaners by the "big boys". This is of concern only to those who have weak hands and/or margin accounts. I have neither, so I don't pay too much attention other than to buy on these pullbacks if I have some spare cash lying around. In my opinion, gold is going much higher, and I don't really care about the timing.

Submitted by Chris Johnston on August 18, 2006 - 5:30pm.

Chris Johnston

PW - I do not know about $300, but if that 574 level were to break there is no telling how far it could go. It would be a major top pattern that would indicate lower prices by a significant amount. One way of projecting would be to take the distance from the high of over 700 minus the 574 low and take that amount and subtract it from 574. That is one possible target if it broke down. The other potential target is that same number above subtracted from the highest high it has made recently which was 682. That would give the ABC correction symmetry in the Fibonacci world. People also use 1.27 and 1.44 and 1.618 extensions of these numbers to get to magic points in space. The other way they do it is to take the high less 0 then take .382, .5 and .618 retracements of that difference.

I am not a believer in Fibonacci projections but that is how many people make these projections. Trend is still up for now, but no immediate pattern. If I see one set up I will put it on the blog.

It this all sounds confusing, do not worry these projection techniques although touted as the grail, do not have good track records. I was fascinated many years ago with this school of thought and learned through the school of hard knocks that they are not of much value. If you draw enough lines on a chart something will happen at one of them.

Submitted by rocketman on August 18, 2006 - 7:55pm.

Chris, I appreciate your advice tremendously. It is nice to get the sophisticated opinion you offer. As an average investor, I can only go by the tools presented to me by a few different resources. I see that gold (gray ) has been increasing in value, paralleling prime (blue) and oil (brown). The aberration in the 80’s was due, I believe, to a falling dollar. Now with the problem we foresee with real estate, China and the deficit don’t you foresee that the same psychology will apply in the next year or so. Of course maybe the price will fall a bit, but drop >150 after 574? Would you give me some more feedback on this? - Thanks

Submitted by Chris Johnston on August 19, 2006 - 9:39am.

Chris Johnston

Thanks for the nice comments. My research over the years has told me that the real cause effect relationship with Gold has been inflation. There are certainly economic links to the dollar and inflation, but to keep it simple I focus on inflation as the intermarket driver of gold.

Just looking at the CPI and how it has dropped from the mid to late 80's down into 2000, that in my view is what drove Gold downward. The main point I was making with those projection numbers is that I do not use them. They are widely used in the financial community by "experts." I just threw them out there as possible destinations. I think I said that I do not use them, I did not reread my post.

I wish I could post charts, every time I try to it just shows as a bunch of wierd looking code. I would love for someone to help me figure that out.

Many big picture tops in commodity prices have been formed by that big run up like is shown in your chart. Then followed by the sharp drop, then another run up like we are in that fails. That is why I am focused on the 574 level. I think if that level breaks the whole run is over for good, so price could drop a long ways if that occurred. It would probably go further than those projections if this happened.

For now the long term trend is still up. The commercials are sneaking back to the long side as of yesterday's report so this may set up another nice buy spot soon.

The RE/China/Budget deficit angle to this may in fact be correct, it is just not how I as a trader analyze trades. I want to base my decisions on things that are objective, not subjective. I have learned over the years that is the approach that works best for me. I have friends that take the "story" approach that do well, and some that do not. Analyzing the story is a tough undertaking due to the number of different variables that can be considered. It just becomes information overload for me.

In many years past it just seemed that I would often either incorrectly analyze one variable, or leave one out that turned out to be the one that told the tale. There are alot of assumptions out there about big dollar declines, China's demand equation, and the deficit. However, alot of those are what we all assume is going to happen. There is a saying in the trading world that goes something like this. "What we all assume or are sure will happen, never will."

In summary, my view is the following on GOLD. The trend for Gold is still up and remains so as long as 574 holds. It appears the "insiders" are starting to buy this dip. If the commercials get over 90% long and a shorter term entry pattern sets up, I will be a buyer of Gold on a breakout of it. If 574 breaks, I will only be looking to short rallies afterward as the game will be over on the long side.

Submitted by powayseller on August 19, 2006 - 3:42pm.

Gold must follow the fake inflation, the CPI, not the true inflation. Inflation has been rising for the past few years. Maybe that's why gold started its most recent run. If gold followed the true inflation, it would still be rising. So I think it follows the CPI. Any comments on that Chris? I am waiting for a good buy spot to put 10% of my net worth in gold. I am scared holding dollars. I don't see how dollars can stay strong. As soon as the Fed lowers rates, in our recession, the dollar will weaken again. What do traders and FCBs buy whenever the dollar weakens? Any data on that, Chris? Do you have friends who are currency traders?

Somebody should make a true inflation number. Just take about 50 things that we all buy, like housing, insurance, tuition, music lessons for our kids, and don't strip out the steaks (for the meat eaters out there, I'll stick with tofu) and gas. Track this over time. I read a funny blip on The Big Picture, about a bunch of traders that kept a trader CPI. They kept track of price changes in a trader's basket of goods: dry cleaning, WSJ, martinis, golfing. No matter how you set up your index, you will come up much higher than the government CPI, which minimizes the weightings of things we consume, and strips out the rest.

So the question is: does gold track true inflation, or just the government doctored numbers?

Submitted by HereWeGo on August 19, 2006 - 6:39pm.

If you look at recent gold trends, the value of gold seems to oscillate rather strongly about the trend line. If you truly believe gold will trend up in value, this is as good a time as any to buy, as gold seems to be in a local trough. If the price of gold does not fall on Monday, it's probably a good buy for the inflationists hereabouts.

Submitted by Chris Johnston on August 20, 2006 - 9:45am.

Chris Johnston

Yes, the CPI index would be the best overall easy way of evaluating this. You could construct your own proxy index, but you have to be careful when looking back at what it "would have been" at certain times. Often components of things change over time so the "look back" for back testing relationships can lead to false conclusions.

I suggest keeping things as simple as possible, hence the CPI. I do agree it undermeasures true inflation, but still gives us an up or down trend. The trend is what matters more than the actual values themselves.

I do have currency trader friends, but they are very short term. They just keep the money in T-bills in between trades much like I do. Every trader has his own take on what relationships are causitive of price movements. I just urge two things. First, be careful of assumptions just based on an opinion or a belief in what will happen in the future. That belief could be wrong. Second, do your own research and be decisive. Once you make up your mind on something, take your course of action and do not listen to anyone else. It is easy to be dissuaded from your path on things. There will always be very bright people who disagree with your assesments. Stay the course, and go with your convictions.

If you are wrong, learn from it and do not make the same mistake next time. This is what I do. Here is a specific example. Through my research I had determined that a short position in bonds should be put on the very day the McCulley from PIMCO came out and said, "Do not short bonds."
I never once considered not taking that trade due to this.

He has alot more money than I do, and is perceived as a bond guru by people around the world. How could I be short when he said that it the first thing not to do. Well, the market went on the next day to have 6 consecutive down closes. I was right, he was wrong. Now, if I had followed his advice I would have missed a profitable trade.

For those of you that think the dollar is going to get beat down heavily, and we are going into recession, have the conviction to place your money consistent with that outcome. I do not have any magic for this because I do not share that view. Who cares what I think.

Do not look back, do not be swayed by anyone who disagrees. Pull the trigger, and do not look for others to reinforce the view. You have done the research, take the trade!

Submitted by SDbear on August 20, 2006 - 12:26pm.

Anice theory on the recent gold movements

Submitted by HereWeGo on August 20, 2006 - 3:55pm.

Then again, as Keith over at Housing Panic notes, the recent price chart of gold currently forms a disturbingly clear "Head and Shoulders" pattern, generally associated with a downturn.

Submitted by rseiser on September 27, 2006 - 11:28am.

I just got an e-mail from my friend who is the best contrarian indicator I know. (He was able to buy some stocks at exactly their top.) He was just passing along the bad news about NEM and that he thinks it will drop to $30 or even $20. Coincidentally, the e-mail came minutes before gold rallied to $600. Could this be the bottom in NEM again?

Submitted by rocketman on September 27, 2006 - 3:33pm.

I was wondering what was going on with NEM myself. I found this article from NewsWatch today. It looks like they're going to be having problems for awhile...

"NEW YORK (MarketWatch) -- Newmont Mining Corp. Wednesday said it expects equity gold sales to temporarily decline before increasing once development projects in Nevada, Ghana and Australia reach full production rates in 2008 and 2009. Denver-based Newmont now expects equity gold sales of 5.6 million to 5.8 million ounces for 2006 and of 5.2 million to 5.6 million ounces for 2007. The company cited lost sales from the Zarafshan-Newmont joint venture and lower than expected production from the Yanacocha project in Peru for the decline. Newmont also said it expects costs related to sales for 2007 to rise between 20% and 25% from its anticipated 2006 level of between $290 and $310 per ounce. The company also said it expects to generate pre-tax gains of about $295 million from the sale of its Black Gold heavy oil property in Canada and the Martabe project in Indonesia. It expects the gains to be partially offset by a $94 million non-cash write-off of the Zarafshan-Newmont joint venture due to the Uzbek government's expropriation of the company's assets. The company also agreed to acquire a 40% interest in Shore Gold Inc.'s Fort a la Corne joint venture, located in Saskatchewan, Canada, for $153 million."

Take a look at some of the other players like NXG, SA and EGO. They're not having any problems and are making gains.

Zeal said to start accumulating.

Submitted by powayseller on September 27, 2006 - 6:27pm.

I don't subscribe to Zeal Speculator, so I've got to wait for October 1 to find out what to accumulate. Can you give me a heads up?

Submitted by Wiley on September 28, 2006 - 9:07am.

Gold is all in the dollar.They are completely inverse eachother with the short term exceptions of the hedge/momentum players pushing too far either way.

Inflation=increase money supply. I think there is little doubt we've had plenty of that. I believe we'll have even more when the foreigners stop buying our debt and the fed starts monetizing it. If they haven't already.

If you cut out all the noise and look at every instance in history that a country (well empire) debased it's currency as we are then you have to be gold bullish.

Chris, I like technical analysis also but I truly believe without a fundamental view it won't work.

Submitted by rocketman on September 28, 2006 - 10:03am.

Zeal Speculator thoughts.

PS - Adam has tossed us a few bones this week but tells us that the ZI is going to have a lot more trades since it only comes out once a month.

He likes Breakwater Resources in Toronto trading on the OT here in that States as BWLRF. Yesterday it was trading at .94.

He considers EGO Eldorado GoldCorp as the crem de la crem of gold stocks that is dirt cheap. Northagte Minerals NXG is also a big thumbs-up right now.

Zeal said that even though he really can't call a bottom, some of these stocks have hit their 52 week low and should be consisdered for stradeling - keeping your trailing stop loose - and "slowly" accumulate rather than just jumping in with both feet. He does think we are going to see a turn soon. If you want more info on Breakwater, let me know.

Hope this helps. Gold was at $608.00 this morning.

Submitted by lewman on September 28, 2006 - 7:52pm.

I'm with Zeal and agree that I can start accumulate for the long term. But take a look at the gold chart. Since mid July, Gold's in a well defined down channel with top of the channel currently at around $630ish. Until it breaks, it's probably not going to go very far. But the drop is quite gradual. Marking the tops since mid-july you have gold going from $660 in mid-july to $640 in early september, and if gold does rally this time back to $630 you're still talking about just a $30 drop or approx 5% in 3 months.

With overall weakness in commodities in general, there's a good possibility that gold could be trapped in a range for months before a breakout on the upside could take it to the next level.

So I think there are both long and short term opportunities here. I intend to play the range for the short term. And when it hit the bottom of the channel I'd also accumulate for the long term.

Let see if it works out.

And note to Chris:
You may recall previously on your blog we had a discussion about your $574 warning. As I mentioned, similar pattern existed in 1973 which turned out to be an excellent buy opportunity. So I'm wondering what objective measures do you use to determine that a decisive break has indeed occurred ? I read somewhere that some traders would for example require price to stay below the target level for X trading days but would you be kind enough to share yours ?

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