where next for gold?

davefairtex
By davefairtex on Sat, May 18, 2013 - 7:42am

Now that the rally off the April crash lows has almost vanished, its probably a good time to see where things are currently regarding the various indicators that might help us to project PM prices going forward.

One month after the April 15 crash, it would appear that "paper" contracts and the attendant leverage are once again driving market prices in PM.

This is visible in premiums.  Premiums on silver have slowly retreated; currently, 100-oz silver bars are back in stock, and are selling for $1.50-1.75 (7-8%) over spot.  Silver eagles (in tubes of 20) are about $3.75 (17%) over spot, generic 1 oz rounds are $1.75 (8%) over spot.  In silver, it is clearly form that drives premium rather than shortages of the metal itself.

Gold eagles are $65 (5%) over spot, while kilo bars are $20 (1.5%) over spot.

Based on the fact that premiums are retreating rather than exploding higher, I'm going to conclude that we aren't likely to see a COMEX default in gold or silver in the near future.

So in an attempt to divine future PM prices, I'm going to focus on the paper PM market.  I look at four different indicators in my attempt to read the tea leaves for the future:

* gold/silver ratio

* COT report - producers

* chart support levels

* sentiment - gold & miners

Gold/Silver Ratio

When PM is in a bull market move, the gold/silver ratio tends to drop, as silver is preferred over gold.  Gold/Silver ratio appears to do a reasonable job forecasting bull market moves - a declining gold/silver ratio is a very positive indicator.  Currently, the gold/silver ratio appears to have peaked at about 62, which historically (over the past 15 years) is about average.  During the 08 crash gold/silver was at 85, and when silver hit 50 in 2011, gold/silver was 32.  From the standpoint of "picking the bottom" I'd say this is neutral to mildly bullish.  I'd rate it more positively if gold/silver ratio started to actually drop.

COT Report

The COT report, and specifically the one having to do with Producers, describes the net futures position of the gold mining companies.  Producers tend to "go short" when they see high prices, since the futures market allows them to lock in the current market price for their production for the next months or years.  Currently, producers have reduced their net short position to almost zero, which was something last seen during the 2008 crash when gold was at $700/oz.  This I would interpret as very bullish.

 

Gold Price Chart

On April 15th, gold bounced off support at 1321, and did what traders refer to as a "dead cat bounce" rebounding high enough to hit the green line (the 20 day moving average) and then proceeded to drop back down towards the old low.  The most likely outcome from this maneuver is that next week gold will "retest" the 1321 low.  Odds are, the outcome will be negative; I base this on Silver, which is behaving worse than gold, tends to be an indicator for PM metals trends, and closed Friday just 20 cents above its crash low of 22.  From my observation of the intraday market, it would seemingly take very little for a big firm to hammer silver through 22, and if that happens, gold will soon follow.

Next support level for gold per this chart is the range 1160-1250.  This chart I interpret as quite bearish.  To change my mind, at a minimum gold would have to rally above its dead cat bounce high at about 1480.  Then it would have formed a "double bottom" which could signal the start of the next major move up.

 

Sentiment
Unfortunately I don't have any sentiment charts; typically sentiment is a contrary indicator - when sentiment is bullish, its a warning sign, and when sentiment is very bearish, that's positive.  Currently sentiment on gold and gold miners in general is almost uniformly bad - lower than during the 2008 crash, which was its previous low point.  I'd interpret current bad sentiment as quite bullish.  Sentiment isn't a very good timing indicator; sentiment can stay down for a while before things change.  However, sentiment is rarely this bad, which suggests a bottom is near.  Articles which proclaim that gold is dead and will go to $500 are helpful in this regard too.
 
Conclusion
Its a mixed bag.  Chart-wise, in the immediate future, things look bad.  And yet sentiment and COT-reports are wildly bullish, suggesting the current price cycle is nearing a bottom.  Gold/Silver ratio is more or less neutral; no help, unfortunately.
 
Scenarios:
"more likely": gold will fail to hold support at 1321 next week; likely that means a quick drop down to 1250. This outcome depends on the enthusiasm of the big firms for moving the market in that direction.  Silver likely plunges through 22 first, dropping down to 20 which looks to be strong support.  Gold "should" rally from there, eventually.  It is possible that gold makes a rapid move through 1321, and then an equally rapid bounce back.  That would be quite bullish, perhaps even signaling that the bottom is in, depending on the force of the bounceback.
"less likely": gold 1321 support holds next week; gold rallies but short of 1480 dropping back down to 1321 again, forming a descending triangle.  This just pushes off the "more likely" 1321 support failure forward in time.
"not so likely": gold 1321 support holds, gold then rallies through 1480 forming a double bottom signaling a new uptrend in gold.
 
I don't see a COMEX default, or any other "physical gold" Deux Ex Machina to rescue PM at this moment.  However, given enough time, the horribly negative sentiment and the COT report should prevail and gold will recover.  But we may well get a new low prior to this happening.  From my "market is evil" sentiment perspective, a move through 1321 may crush the spirits of enough goldbugs to provide the fuel for the next rally.
 
And that's what the market is all about.  Fear, greed and despair - manipulating your emotions so that the big guys can make money.
 
If we do see a break of 1321, it might be a decent time to pick up some more metal.  Premiums shouldn't be too elevated since a bunch of buying happened after the crash and people may start to worry that gold really is dead.  My only concern is the move in the buck - its been strong of late, due to sharp moves down in the Yen, Euro, Aussie and Canadian dollars, and that might restrain gold's recovery if the dollar continues to move up.
 
I update most of these charts and more at http://mdbriefing.com/gold-rumors.shtml

8 Comments

Rob P's picture
Rob P
Status: Bronze Member (Offline)
Joined: Oct 8 2008
Posts: 85
At this point I keep these

At this point I keep these things in mind:

1. The historical volatility of PMs.  They can and likely will, at some point, rapidly retrace all these losses.  Volatility, will also, likely, increase in the months and years ahead.. All the crazy movements to the downside have been and will again be just as crazy to the upside.

2. Nothing has changed on the monopoly-money front except they're printing even more of it - everywhere.

3. The dollar will likely strengthen temporarily with all the problems in Europe and the Japan situation. I agree with Rickards, however; they (the fed) cannot allow it to rise too high for too long as exports are still a critical factor in the fragile  GDP.  Real currency wars are coming, no doubt.

4. Any sort of unexpected or black swan event - think nut job in Korea, the middle east, or ??? - has the potential to change everything rapidly and unpredictably, so fragile are things now.

5. Bond market is in the biggest bubble of all time - rivaled only by the equity markets.  This is unprecidented and insane.  It will not last and it will end badly and largely, though no-one knows exactly when or how.  As I heard it put yesterday: "Everyone thinks he (or she) will get out before all the others" which is, I think exactly right.  Think about it.  What a set up.   Be glad your holding something real.

6. I believe China is acculmulating phsycial gold in an attempt to become the reserve currency (or something like that).  As long as they have the economy and the means to do it, they will continue to accumulate massively.

7. Lastly: PMs are cheap and possibly getting cheaper. It really is one of those moments. It takes courage BUT I don't want to look back someday and think "if only I had bought at that time".  In regard to PM Mining stocks, you can pick up lots more shares (which is the critical issue) at bargain basement prices; or in regard to physical, MORE ounces.  In the end, this number - the quantity of ounces - is what matters.

Stay spiritually grounded. As Sartre put it "In the end nobody gets out of here alive" anyway. All the PMs in the world won't save you from that reality. So, get straight in your mind about what's important and what's just passing.  I'll be gardening this morning and thankful for the opportunity to enjoy it. I'll also spend some quality time with my wife. I might not even look at the markets for a week or two. Did you notice how hummingbirds are such interesting little creatures?

Just my two little copper pennies.

Cheers ya'll

 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5072
the more i look at the COT report...

The more I look at that Producer COT net position, the more bullish I feel.  I feel like a Roman Augur reading entrails to divine the future.

The folks responsible for pounding down the market in mid-April may well be net long by now.  Perhaps my favored scenario now is, one last push by the big guys to wash out the new longs at 1321, then a brisk bounce back, and then its back to a steady move up now that they're all long.  But who can say for sure.

I hate to sound like King World News, but ... I'm feeling more than a little bullish right now.  Timing, however, is uncertain.  Historically, this sort of level has indicated a rally, but it may only pick the month that it happens so - be careful out there.  If you buy stuff based on what I say, make sure to put a stop in there in case things turn out differently.

And if you prefer not to worry about such things, you can always just go out to the garden and watch your hummingbirds.  Its a lot less stressful to be sure.  :-)

 

Grover's picture
Grover
Status: Platinum Member (Offline)
Joined: Feb 16 2011
Posts: 800
Thanks, Dave

Dave,

Thanks for putting this information out in front of us and providing your analysis to show where we're at concerning the different measures. With all the paper shenanigans going on, I'm most worried that there are too many promises for the amount of physical in the world. As Rob P noted, a black swan event could cause a sudden rush to the exits. If/when a rush occurs, only the most nimble (connected) will be able to secure physical. The rest will have to accept FRNs or another fiat equivalent.

In other posts, you tend to focus on possibilities, rather than absolutes. You said that you're feeling more bullish based on the Producer COT net position. Is that enough to get you to pull the trigger and buy? Or is it just another indicator that is getting you leaning a few degrees closer? Does your gut give you any insight? What is it saying?

Grover

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5072
silver may be the "tell"

Grover -

Its nice to see that silver 22 level was crushed at the open in asia.  Silver closing at 22.20 was our clue on Friday.  Our friends are back helping clear out those longs from April 16.  Do they want to cause a waterfall move lower?  So far, the answer would seem to be no.  This does not appear to be a replay of the crash.  The rebound from the 20.25 low this AM is encouraging.  A move back above 22.20 would be bullish given the other factors in place, and an eventual move above 25 would make me think that a multi-year bottom in PM is likely in - again, assuming the other factors stay in place.

 

But so far its all just hope and talk; we must watch and see.  The market will tell us in the fulness of time.  Manipulators can alter the timing (to their own profit), but not the trend itself.

As for buying - my gut says now is a good buy level for physical silver, assuming premiums aren't too high.  I'm jumping the gun a bit, I suspect, but I'm often early.  We'll see what premiums look like when retail opens this morning.  Buying at retail is always less precise, and with the huge premiums (6-8%) it only makes sense to buy and hold and the timing of the buy is a bit less critical, assuming your holding period is "until things become rational again."

Perhaps to be safest, starting a dollar-cost-averaging program would be best.  And go all-in if/when silver closes for at least 2 days above 25 before all the dollars you've allocated to this plan are in.

But I wouldn't play with the rent money.  No buying physical on leverage either.  If you buy with leverage in the paper markets, you absolutely must use a stop-loss order, in case your timing is off, and its much better to wait for a confirmed "reversal pattern" to appear before jumping in because the emotional/psychological pressures of trading (including ETFs as well as miners) are quite different from owning an 83-pound lump of metal that just sits there and props your door open.

 

Last point.  I agree that the promises exceed the ability to fulfill them.  Nicole Foss talks about that process as "extinguishing multiple claims to underlying real wealth."  Its deflation in another guise - in this case, deflation of warehouse receipts.  That's true for bank deposits as well as COMEX gold contracts and unallocated gold holdings.  The whole subject might be worth exploring on its own; what might be the various triggering events, and how we might be able to track the pressures surrounding such events.

 
Boomer41's picture
Boomer41
Status: Silver Member (Offline)
Joined: Nov 30 2008
Posts: 132
Believe in the long term trend

Dave,

Your statement "Manipulators can alter the timing (to their own profit), but not the trend itself." resonated with me. I'm an engineer and have profound respect for the story inherent in graphs of variables plotted over time. In this case, I look at the historic 10 year gold chart (courtesy of Kitco) and see an almost perfect exponential curve from 2000 until 2011. Even the crash of 2008 is no more than a larger-than-usual glitch on this long term trend.

 

I don't have the data to back it up but my gut feel is that this curve is reflecting the increasing amount of fiat curency which is flooding the globe.

Then in 2011, the gold price suddenly departed from the trend line and began to fluctuate wildly for no good underlying reason that I can find. Although it may be wishful thinking, I believe that this is entirely due to manipulation by the 'too big to jail' banksters which will ultimately fail. If, or rather when, that happens, the price of gold should return to its former trajectory, which by extrapolation is currently passing north of $2000/oz.

In the meantime, I am resigned to the fact that the manipulators have so distorted the market that no meaningful analysis is possible. We are just going to have to sit it out and wait for the inevitable, with the comforting thought that our stash of barbarous relics will one day be really worth its weight in gold.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5072
things don't usually work out this quickly but...

Trough to peak - 20.25 to 23.10 - at the beginning of the day, a 14% move.  Again I may be early but...whoever it was who pounded the market down to this point isn't engaged in his usual tricks any longer except for this AM's funny business.  This perhaps is because the big guys are long, the small fry are short, and now they're going to be running for cover.

When a pounding is bought 100% and then some, with a day trading range this large, after a move down that has been this severe, at a good support level, when the COT report shows that the Producers (who are usually on the right side of the trade at market extremes) are as long as they ever get - looks like the stars are aligning bullish to me.

We really should wait for the close to be certain, however.  Last half-hour all sorts of interesting things happen sometimes.

If you live in the LA area, you can get your 10 ounce bars for only $1.75 above spot.  This is just an example of a shop that posts their prices online, not a specific recommendation.

http://golddealer.com

full disclosure: I don't live in the LA area :)

 

goldcoinnet's picture
goldcoinnet
Status: Member (Offline)
Joined: May 21 2013
Posts: 5
This is an

This is an excellent analysis, Dave. Thank you for this valuable information.

 

http://www.goldcoin.net/buy-gold-coins.php

agitating prop's picture
agitating prop
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Joined: May 28 2009
Posts: 854
Jim Rickards

http://jimrickards.blogspot.ca/

My personal take on this is-- premiums are down for bullion because all things precious metal are down, right now. But this is likely temporary and is a result of the sharp drop in price, which looks, in hindsight, like an engineered attack. Even holders of bullion lost their nerve.

I was just about to start rebalancing by using gold instead of cash to buy real estate, but changed my mind at the last minute. I purchased with cash and saved bullion. Am I a sucker? Maybe--but I doubt it. The govt's answer to all financial fiascos is to inflate, if they can. So if there is actual deflation, continued QE is a certainty.  The employment figures are still weak. If they raise rates even a hair, it will make that situation worse and stall the 'recovery'.

 

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