Thomas
DeChastelain
Memorial Archives

A Detailed Look at the Gold Complex
posted Mar 25, 2005 at 02:23PM

Introduction

When I was writing the last weekend commentary, you could probably tell by my "tone" that I really wanted gold to have a good week. It needed a good week to put in some nice IT buy signals on weekly charts. Any such hopes were dashed, as most things gold got pummeled early and hard, with no let up, despite oversold conditions.

As mentioned in mid-week commentary, there appeared to me to be the faint aroma of deflation in the air. Now we are talking "aroma", not even a deflation scare, much less deflation itself...just a whiff, a slight stench in the background. A few days trading action can quickly dissipate it. Or maybe there are some real dead bodies rotting under the floor boards waiting to be discovered.

Given Greenspan's sudden concern for inflation, sniffing deflation may seem to be off the mark. However rest assured, that like all pundits, I do have a certain rationale.

First there was the market and particularly the gold market's reaction to the prospect of higher interest rates. In other words the market is afraid that higher interest rates will not only kill current inflation, but go too far and pop various asset bubbles. Indeed real rates have moved from negative to positive. Now it is one thing to buy gold when real rates are positve, but the trend is moving towards negative. It is quite another to start buying gold assets when they have just moved from negative to positive.

The CRB has experienced what may, and I stress, may be called a blow-off top....gold did not confirm the new high in the CRB and that is a bearish divergence. Greenspan rasing rates even in the face of a CRB that is just correcting to its 200 dma would again put upwards pressure on real rates.

The housing numbers during the week were through the roof. The kind of numbers you see at the start off secular bulls, but also the kind of numbers you would expect in a blow-off top as the last market participants buy their houses before interest rates rise. The tepid response of the housing index does give credence to this possibility

From an elliot wave perspective there are some convincing charts that show a lot of the stock market indices looking like they may have completed five waves up of major degree .large cycle B waves...or even 5th wave supercycle tops.....the Vix is starting to giggle upwards for the first time in years suggesting fear is finally re-entering equity market.

Of course this has happened many times before. Inflation friendly sectors get overbought, the deflationists come out of their caves and say that is it... the top is in. The sectors start retracing, often savegely giving everything the look of impulses going down. Inevitably though these have always turned out to be standard corrective retracements within larger bull market movements.

So for now, there is no reason to think that isn't what is happening now. At the same time prudence dictates that we should take care that we don't get sideswiped on the chance that the stopped clocks are actually correct.

Gold Daily



Bullion is on short-term sell. Again going directly to the 200 dma from here should see it in oversold condition while still maintaining all trend-line support. A technically sound place to add or re-enter positions.

It is interesting to note that if gold rolled over at almost the same technical condition which did in the US Dollar.... it is now quickly approaching the techncial condition which saw the USD rebound.

Gold Three-Year Chart



Major trend-lines do remain in place.

Gold Weekly



The weekly charts are bearish.

Gold Monthly



Bullion is now contending with multi-decade price resistance, so some consolidation/ reloading should not come as a surprise.

A Channel busting move through this resistance would be a signal that a new phase of gold's bull market has begun. At the same time the description of gold as a "contrarian" market is not correct. The first major leg of a potential bull market has been completed. What one is waiting for is evidence that the second leg ...the confidence leg is underway. This legm if and when it occurs, would be too expensive NOT to participate in. It should be the longest and strongest so one does not have to be in a panic or rush to jump in.


Some perhaps would argue that the contrarian view here is that gold has topped. Always a possibility but not one I hold. First and formost is that technical "condition" is similar to past tops, but the fundamental environment is totally different. Even at the end of the very worst that the 70's bear and OPEC boycotts could throw, the fundamental state of US finances, social and economic support infrastructure, and government policy were immeasurably superior to what exists now.


Today despite a 25 year bull market, and creating many of the technologies that fueled that boom, America finds itself staring into the abyss, finanically, ethically and politically.

Current US policy is such that in order to keep things going, (GDP growth, corporate profitably) it must, if anything, exacerbate everything that is destroying the foundation pillars of the country. The internal contradictions inevitably result in Soviet like implosions.


HUI Daily



Now below key moving averages, which have become resistance. At the same time is arriving at trend-line support in oversold condition. Buy and holder are losing thier hair, but a good environment for swing trading.

HUI Weekly



Again the weekly charts have a bearish hue. Again lots of EWA counts out there to back up whatever view one may have, but the one above seems to fit according to my untrained EWA eyes.

HUI-Gold Ratio Snap-Shot



Still within the confines of a corrective triangle.

HUI-Gold Ratio Big Picture



If this correction is simply a "spread-out" version of the previous one, then one could expect a return trip to the resistance trend-line, followed by one more shake-out.

If this scenario is the one playing out then we still have a few months to wait before "buy and hold" starts making a more appropriate strategy.

Dollar Daily



On short-term buy. From EWA perspective looks impulsive. I would say that one could expect a short retracement followed by one more push up into resistance.

If we see bearish divergences developing, then that should really bode well for golds.

Bond-Dollar Analysis





In a new confidence phase of a bull market gold will be able to rise in the face of higher yields and against all currenicies. That is NOT the situation as it exists now.

The market paridigm is very much that higher rates are seen in the context of popping asset bubbles and inducing deflation, vice the Fed's ineffectual attempts to reign in inflation.

Everything that I have seen, convinces me that if genuine deflation were to hit, gold would not do well.

Dollar Weekly



Flip-side of the bullion weeklies. With the last retracement out of the way, the dollar has now established some rising trend-lines. Until they get broken to the downside, or the charts starts looking really toppy, there won't be anything "dramatic" to say.

Dollar Monthly



Again, the flip-side of the bullion commentary.

Trading Thoughts and Strategies.

We are still in an environment where swing trading is a more appropriate tactic. As such I took the chips out of my "buy and hold" gold experiments (flat going up and down) to top up my trading slice of the pie.

Going forward what I would like to see is a bit of bounce followed by one more plunge into, and maybe a little through trend-line support with bullish divergences appearing on the technical indicators. (Think throw-over). O course that is on the sector charts. Specific stocks need to be traded on thier own specific charts.

Everyone has thier own strategies. Perversely I tend to take larger positions on swing trades because I am thinking short-term. That is mitigated by tight stops and equally anal entrance criteria.

For those whose circumstance or investment strategy does not suit short-term trading, I would suggest simply laying back and waiting for the the HUI/Gold chart to play out until the triangle resolves itself in one direction or the other.

Good trading,

Bullet Bullet Bullet