Currency Wars Detonate; Gold Refuses to Budge
Commodities / Gold and Silver 2015 Aug 28, 2015 - 12:36 PM GMTBy: Sol_Palha
The person who lives by hope will die by despair.
Italian Proverb
Over the years we have frequently stated that every that every major bull market will experience at least one back breaking correction. Usually the correction culminates with a 50% pullback from the highs. In the case of Gold, this would equate to a pullback to $960. The precious metal’s sector had a splendid lope that began in 2003 and ended with spectacular dash in 2011. To think that the Gold bull would continue unabated would be to put it mildly wishful thinking. Sadly, many Gold bugs opted for this line of thought, rather than dealing with reality; the reality being that it was time for the entire sector to let out some steam.
Gold bugs have a dangerous knack for losing contact with reality and embracing the illusory. When Gold topped out in 2011 and started to correct, they started to recite “the buy on the dip” mantra. When it appeared to have put in a bottom in the middle of 2012, they became Euphoric and start to hum “death to the dollar”. However, this euphoria should have faded when Gold refused to trade to new highs, and instead put in a series of lower highs (look at chart below). A series of lower highs, after a very long run, is usually a negative omen. The Gold bugs were however unfazed and continued to sing “Kumbaya”, but alas no one was listening and the correction gathered steam.
We are using the ETF, GLD for illustrative purposes; it mimics the price of Gold fairly well. Note when a market is in a bullish phase, it does not put in a series of lower highs; this is a signal of exhaustion. This occurred twice over the past 10 years; the first incidence lasted from 2008 to 2009 and resulted in gold shedding 30% of its gains. The second time, the topping formation was much wider and gold from high to its current low hashed roughly 43%. History has a tendency to repeat and the repeat pattern (on a much wider scale) from 2008-2009, served notice to the astute investor that all was not well, and that it was time to bank some of those profits. We noticed these signals and the many negative divergences that our indicators were generating and advised our subscribers to close the majority of their precious metal positions in 2011.
From approximately Feb of 2013 to March of 2015, the Gold bugs discovered religion, and started to pray for a turnaround. When you find religion in an area that does not merit it, the result is always calamitous. The Gold camp was in turmoil, and chaos became the order of the day; how could Gold drop when the Fed was creating money at an insane pace? Unable to explain these strange phenomena, they opted for the illusory; magical incantations, looking at tea leaves, skull bones, etc., etc. Based on this strange behaviour, it was obvious that Gold would continue to trend lower; an assessment with which Jim Rogers seemed to concur.
“There are still too many mystics in the gold market who think gold is holy so cannot decline. When/if they give up and throw their gold out the window because ‘she lied to me,’ gold will make a firm bottom,” Rogers said.
To add pain to misery, Gold traded below $1100 briefly, and religion was abandoned, in favour of fear and desperation. Hopelessness is setting in, for the Gold bugs cannot fathom how against the backdrop of trillions of new dollars being added to the money supply, Gold continues to take a beating. Embracing the mass mindset is a dangerous affliction, for reason and logic are abandoned in favour of misery and panic. It brings to mind a certain phrase we used recently “welcome to my world said the spider to the fly...... to which the fly responded which one." What the Gold bugs have failed to understand and come to grip with is that we have two worlds coexisting together, the illusory and the real. The crowd (horde) has embraced the illusory, so the illusory supersedes reality. The masses actually believe money is created from trees as opposed to sweat and labour. This means that the Fed can continue debasing the currency, and the masses will be none the wiser. They do not want to or refuse to grasp the concept of “Fiat Money” and trying to educate them is an endeavour in futility. They idiotically and fallaciously assume that the valueless pieces of paper backed up nothing are just as valuable as Gold. History is replete with examples clearly illustrating how the masses are forlornly optimally positioned to be used as cannon fodder. The mass mindset refuses to study and learn from the past; secure in their knowledge that the past offers nothing of value, they are doomed to embrace a future which is nothing, but a replay of the past they so candidly repudiate. While the masses embrace the paradigm of ignorance and bliss, you have the option to differ.
Gold is not going to drop to zero, not in the face of the largest currency war the world has ever witnessed. Years ago we labelled this war, as the “race to the bottom”. We stated early as 2003, that nations would be forced to take this path, as they sought to maintain a competitive edge. Now, the war has taken on urgency not seen before, as nation after nation joins the battle. China decided to finally embrace this war with open arms, and stunned the markets by devaluing their currency twice in two days.
The two devaluations come after a run of poor economic data and have raised suspicions that China is embarking on a longer-term slide in the exchange rate. A cheaper yuan will help Chinese exports by making them less expensive on overseas markets. Full Story
More nations are coming to the “devalue or die party”. Vietnam joined the bandwagon, and devalued its currency twice to maintain its competitiveness. Indonesia has been allowing its rupiah to literally collapse since Jan of 2013.
The psychological outlook:
Gold issued several psychological signals that a top was close at hand in 2011, and that a top was in place in 2012. The first signal came in 2011 when Gold put in a series of new highs; instead of exhibiting signs of caution, the sentiment in the Gold camp was filled with Joy and elation. The 2nd signal came in 2012, when Gold failed to put in a new high, and pulled back strongly after trading past the $1800 ranges, the gold bugs exhibited no signs of distress.
The technical outlook
From a technical perspective; the surge to new highs was not confirmed by several technical indicators, and the negative divergences these indicators generated were rather large. When we combined this with the psychological developments mentioned above, it was time to take money of the table. Many judicious investors took this route, or like Jim Rogers they opted to hedge themselves against the coming decline.
If we zoom in and just examine the period from 2011-2013, one can clearly see the topping formation in progress. Over a period of one year, Gold continued to put in a series of lower highs. The first zone of support (1820-1850 ranges) was breached around Sept of 2011, and each attempt to trade past it after that failed. Gold then went on to trade below the second zone of support (1750) and continued to put in lower lows. In August of 2012 when it looked like Gold might have bottomed, and was ready to mount a strong rally, it failed to even trade past 1850; the first zone of former support turned into resistance. After, failing to trade above 1850, it rapidly traded below the second former zone of support, which now had become another zone of strong resistance. Investors had ample time to bail out from 2011-2012. We are not talking about getting out at the exact top. Trying to time the exact top is a process best reserved for imbeciles with plenty of time on their hands and a large capacity for pain. Any exit from 1750-1900 would have made for a great exit point.
Going back to the first chart, we see that Gold has violated its long term uptrend line, and this automatically indicates that the bottoming phase is going to be just as frustrating as the topping phase. In other words, many early bulls will be crushed as every bottom they predicted, continues to be violated. A bottom will take hold, but it will not be a smooth process.
We could list an overabundance of fundamental data as to why Gold should fly. Every Gold analyst and every Gold connoisseur over the past five years has done this continually, and all to no avail. If you are eager to process this regurgitated information, a simple Google search should yield a plethora of results. The sentiment readings right now are conducive to market bottoming action; however, the technical outlook indicates that there could be more downside. This downward move will serve to reinforce the imprudent perception that the Gold bull is deceased. Every bull market undergoes a back-breaking correction, and Gold is no exception.
Levels of support:
We are going to revert back to the chart of GLD. If Gold is unable to rally and stay above $1180 on weekly basis, then the next level of support that comes into play is around 100, which correlates to a level of roughly $1000 for Gold bullion. A weekly close below this level should take the price of Gold down to the $960 ranges completing a back breaking pullback of 50%. In this age of extremely volatility, there is always chance that Gold could overshoot this mark. On the other hand, it could hold steadfast above $1000. The point is not to fixate on absolute prices; if it’s a good deal jump in and buy, instead of trying to save a penny and losing a pound. The shrewd investor will use this phase to open up new positions, instead of complaining. The Idiotic investor complains/whines that they would have done things differently given the opportunity. ... Off course the truth being that given the chance they will react in the exact same manner. It’s a real life example of the movie ground hogs day.
This is the advice we offered our subscribers recently.
The drug pushers in the media are giving the news junkies their daily fix; they are catering to the twaddle scenario that the world will end. Step back and reflect on how lucky you are that individuals of such calibre exist; ones that seem to feed and thrive on this rubbish. Every time you run into an idiot be grateful for it’s those idiots who make your life infinitely easier. Most do not see this part of the equation or story; they focus on the false premise that idiots make their lives harder, when, in fact, the opposite is true. Market Update July 17, 2015
Our trading methodology focuses extensively on mass psychology and technical analysis. From the mass psychology perspective, Gold is very close to putting in a bottom. Sentiment investors, contrarian investors and investors who are familiar with the concept of mass psychology should consider taking a closer look at the precious metal’s sector now. From the Technical analysis perspective, the potential for more downsides is still there.
We have been advising our subscribers to deploy small amounts of money into Gold because we sold close to the top, and so we are using profits to get back in. If you sold Gold in the 1700-1900 ranges, then it might be prudent to start nibbling at this sector now. On the other hand if you were dreaming of better prices when Gold was trading north of 1800, you don’t have to dream anymore. Incidentally, we did warn our subscribers to close the bulk of their positions in Gold, Silver and their entire Palladium bullion position in 2011. Just for the record, selling close to the top was not something we were attempting, and attribute that more to lady luck than anything else.
Conclusion
The markets are extremely leveraged today and this leverage does not refer to money only, but emotions such as stupidity, fear, greed, etc. There is a lot more in terms of useless emotions involved in today’s trading than in yesteryear. The fixation should not be on trying to spot the exact bottom; looking for the exact bottom is like trying to find a needle in a mound of cow dung; a malicious and stinky process where the odds of success are rather low. If you adored Gold at $1800 or $1600 or even $1200, then you should simply be mad about it now that it is trading well below $1200. Do not impersonate the horde (mass mindset), whose sole role is to sell when it’s time to buy, and buy when its time sell. These people always make the following statement “I wish I bought when the markets were falling apart," but when that situation finally presents itself, these very same individuals are the first to head for the exit.
There are some analysts offering haughty targets of $10,000, $15,000 and some are even over $20,000. While we are at, why not suggest $100,000. We are sure some analyst will come out and issue such an inane target, as was the case with the lofty target of Dow 30,000 being issued years ago. This begs the following question. How many generations would have to pass before Gold ever hits those targets? Those guys waiting for the haughty predictions issued on Gold in the 1980’s, are still waiting for those high-end targets to be hit. Why the focus on such high-ceilinged targets when Gold has not even touched the $2000 level.
The targets we issued years ago still stand. Our first target of 1500-1800 has been hit. The next stage is for Gold to trade to $2000; once $2,000 is taken the next phase of the true bull will begin. Our high target is in the $5000-$5500 ranges, with a possible overshoot to $6,000. The focus now should be making sure you are in the market and not jabbering about how high Gold will trade. As the saying goes “you need to be in it to win it” The trend is your friend; everything else is your foe.
A man's doubts and fears are his worst enemies.
William Wrigley Jr.
by Sol Palha
Sol Palha is a market analyst and educator who uses Mass Psychology, Technical Analysis and Esoteric Cycles to keep you on the right side of the market. He and his partners are on the web at www.tacticalinvestor.com.
© 2015 Copyright Sol Palha- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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