Thomas
DeChastelain
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Bullion Charts and Commentary for May 7
posted May 7, 2004 at 11:27PM











Commentary to follow as time allows. Interpretation can follow various routes. I remain in cash.

There are a few possibilities of where the gold market is.

One: This is just a correction, albeit swift and deep, within an ongoing bull leg up. This must be considered as 65 week moving averages are still holding and the USD has yet to convincingly break its own 200dma.

Two: Gold is still in a secular bull market but in the process of retracing the entire move up from its $255 bottom. Of course in this case even 50% retraces can feel like bear markets. A 50% retrace in the USD would bring it back up to 102. Nothing dramatic when looking at historical monthly charts, but certainly a move that would be destructive to the gold price. In Elliot Wave terms we are talking a wave two of major degree. Trouble here is a wave 2 can, theoretically, retrace the majority of the move up. (The retrace of gold after the initial announcement of the Washington Agreement for example is labelled by many as a wave 2 of minor degree)

As well the Washington Agreement was renewed but with selling quotas upped 100 tons/annum. Not disasterous, but a move in the wrong direction for the bullish case and it may take some extra time to fully digest.

Three. The bull market is over. This would be supported by those who point out that the recent double top coincides perfectly with the expected 8 year cycle top. And then there is the monthly chart above which has definitely taken a turn for the worse, and is bearing an uncanny resemblance to the 87 top.

Four. The Prechtorian View. There never was a gold bull. That in the multi-decade scheme of things, the last three years has been one giant corrective move up. Let us dispense with the fact that I believe Precther is the most overrated guru out there. That in pumping his deflation ideology since 87, he has missed the biggest rallies in tech and gold during that period. I can't help but notice that gold may have peaked at 430, a level at which he once stated he would turn bullish on gold. (Think Sinclair dumping his gold investments) Outside of horrible timing though, is there any merit to this view?

Unfortunately for gold bulls I don't think it can be completely dismissed out of hand.

One. Although POG did squeak higher than its 96 high, it took all time historic highs of open interest and record levels of producer dehedging to do so. Even after the past few months, open interest is comparable to those levels reached when gold hit $800. The recent top of $430 coincides to a 50% retrace of the move down from its all time high.

One could also argue that the recent price rise in gold had more to do with the dollar bear market than actual demand, which has been described by the bull camp in terms of "potential"....with China replacing Japan as the new mystical source of demand.

There is the example of South America where numerous currencies were blowing up, with ample warning, and yet safe haven buying did not occur. Gold could have saved the entire middle class in those countries, and yet it either did not appear on thier radar screens, or the mechanisms to transfer wealth from currency to gold were not available to average citizens.

The fact that not one voice in the gold industry has remarked on this strategic failure tells me the industry still has its head in the sand. South America could have been a shining example of how gold is not the refuge of Armageddonist, "war against ideas" quacks, but a very real CONSERVATIVE asset class that can protect against currency fluctuation in a free market that uses complex financial instruments to fund technological and social progress.

Until then gold will remain a trading vehicle in which one trades futures against relative levels of speculative enthusiasm. Agh but to get off my soap box

Of course the other argument is that there are gold and silver companies that simply should not exist, who could not make money even at much higher prices for gold and silver. Look how many companies the internet bust took out, leaving only a few survivors. The purpose of bear markets is to eliminate weak companies, and the fact that they are still around, may mean there is still work to do.

Right now my thoughts is that this is not the first scenario. The price action is too bearish for a simple "correction". As well there are new variables. During prior corrective bottoms job growth did not exist and there was no expecations of interest rate hikes. This time we have had two good employment reports and interest rates hikes are a matter of course for most traders. No there will be no spike in interest rates...but more a kind of water torture..where rates are raised a quarter point at a time...leaving the market anticipating the next one.

As well for the first time there is concern and discussion, warranted or not, about the potentially deflationary effects that real estate bubble popping, either in the US or Asia, might have on currency. Then there is the concept that debt is a Huge dollar short position that may get squeezed before dollar bear resumes is another factor acting as a head wind. Red herring or not it affects the perceptions of speculators who may not want to jump right back in.

More concretely, from a technical analysis point of view, gold stocks have yet to out perfrom bullion, another sign that things have yet to turn. Keeping an eye on the HUI/gold ratio is something I attach importance to.

As for the last two scenarios, It IS hard to see gold in a multi-year bear market. For that you would have to consider the USD in a bull market, and that is a mighty, mighty tough road to hoe even for contrarians.

In the end I think one needs to be cautious here on the long side. Daily momentum indicators are near useless for all but the shortest term trades. They can stay overbought in a bull market...but the reverse will apply in a bearish environment. Extreme readings on the weeklies are safer in this regard. At the minimum I would be looking for positive technical divergences on the dailies.

Using price action..support/resistance levels, pattern formations, trend line bounces/break-outs are better criteria in my mind. Liquidity of the stocks has greatly increased in importance, as well as the use of protective stops. I certainly would not hesitate to take any profits available until some kind of bullish trend has re-established itself.

Good luck to all.

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