Gold: 14 Years & Three Patterns

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Gary Christenson - Deviant Investor

Gold peaked in August of 2011 and fell erratically into December 2013.

Was that the end of the collapse, or is there more downside coming in gold prices?

Bearish Scenario: Listen to the banks who are forecasting weak prices in 2014 and thereafter. “Nothing to see here folks, the dollar has weakened drastically since 1971, gold sells for 30 times its 1971 price, but it’s all good. Just move on and pretend… Gold will drop below $1000 before you can say 2016 elections…”

I’m not a fan of:

  • The bearish gold scenario when decades of Federal Reserve “printing” and US government budget deficits have all but guaranteed continued destruction of the purchasing power of the dollar.
  • Belief that even though dollar debasement practices have accelerated since the 2008 crash, gold prices will fall because bankers say so.
  • Propaganda that gold is useless and that unbacked debt based fiat currencies are solid and stable.
  • Large High Frequency Trading companies that short the gold market, loudly proclaim that gold prices will fall, dump a huge number of paper contracts on the Comex, quietly cover their shorts after the gold price crash, book huge profits, and then reverse the process as they push prices up. These traders are in the business of making profits so none of this is surprising.

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Instead of listening to self-serving banker opinions, let’s examine the data. The following chart shows monthly prices for gold since 2000. Note that highs and lows as listed in the monthly data are slightly different from actual hourly highs and lows. For this analysis over 14 years, the differences are immaterial.

This table shows the price and approximate number of years.

table3102014

Summary: The price of gold bottomed in 2001, rallied for 3.0 years, fell for 1.1 years, rallied for 2.8 years, fell for 0.6 years, rallied for 2.8 years, and fell for 2.4 years. Lows were about 4 years apart, highs were about 3.5 years apart, and the rallies lasted, on average, about 3 years.

Gold in December of 2013 had dropped to the lower logarithmic
trend line after falling for 2.4 years. The patterns suggest that the next move should be a rally that lasts approximately 3 years to new highs near the top of the trend channel well above $3,500.

But there is more: (If you distrust Technical Analysis, skip this section.)

  • Gold prices made a double-bottom in June and December 2013 thereby indicating a successful test of the lows formed in June.
  • The MACD – a technical indicator (first chart) which tracks the difference between two moving averages – registered a very low reading in December 2013. Further, the moving averages in the indicator have turned up. This is strongly supportive of the analysis that December marked a major low in gold prices.
  • The TDI-Trade-Signal line – another technical indicator (first chart) – registered its lowest reading in 15 years at the June 2013 low and has also turned up. This is another strong indication that gold bottomed in December.
  • The RSI – Relative Strength Index – as shown on the second chart was at a 15 year low at the June 2013 gold price lows. It has turned upward.
  • The disparity index, which is simply the deviation between the monthly prices and the 12 month simple moving average (second chart), was at a 30 year low and flashing a buy signal after the June 2013 gold price lows.

For those who have no faith in technical analysis:

Consider this GEM – Gold Equilibrium Model (thanks to Nick Migliaccio for the name). I summarized the model in this short article. The model is based on three variables and calculates the equilibrium gold price with no reference to oscillators or technical indicators. The GEM model projects a “fair” or equilibrium price for gold in March 2014 of approximately $1,580. Gold prices, based on this long-term model, are currently low and are likely to move much higher over the next several years. This long-term model produced an excellent statistical correlation with the smoothed price of gold over the 42 years from 1971 – 2013.

Conclusions

  • The GEM indicates that, over the next several years, gold prices are headed much higher.
  • The chart of gold prices since the year 2000 (log scale) shows a “megaphone pattern” of higher lows and higher highs. Currently the gold price is near the bottom of the exponentially up-trending pattern.
  • Technical oscillators indicate important bottoms in June and December – at levels not seen in more than a decade.
  • The disparity index shows that gold prices in June were well below the 12 month moving average. Similarly daily and weekly prices were well below their moving averages. Prices tend to regress to the mean – another indication that prices are likely to rise from the deep lows in June and December.
  • Short term prices could rise or fall a little from here – I’m offering no opinion – but gold prices should be much higher in 2015 and 2016.
  • Gold is for savings and investing, not trading. Dollars buy groceries while gold buys safety, insurance, and peace of mind.
  • As Darryl Robert Schoon always says, “Buy gold, buy silver, have faith.” It is good advice.

GE Christenson
aka Deviant Investor

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6 thoughts on “Gold: 14 Years & Three Patterns

  1. Gold is physically a metal which cannot be created nor destroyed. But the price/value of gold is measured scientifically with an invariant international dollar standard unit. The amount of food we take everyday cannot be more than a certain amount, but the price of food increases progressively. Theory of relativity brings in peoples’ intelligence that the capital gain on food stock reflects the loss of capital loss on the dollars in hand. Therefore the price of gold will go up on a relative scale.


    • Thank you for your comment. Yes, I agree. The price of gold will go up because the purchasing power of the dollar, and other fiat currencies, will go down.

      GE Christenson
      aka Deviant Investor


  2. I would like you to ponder the following.

    During the past few years since QE began, the Fed has created more then $4 trillion out of nothing and has used it to suppress the yield of the mortgage-backed securities and the US government bonds. It has mostly succeeded, too.

    The whole gold market is about $1 trillion.

    What exactly would prevent the Fed from creating another trillion or two, out of nothing, and using it (via the banks) to short gold futures and GLD shares? This will have the effect of forcing the gold spot price into whatever level the Fed deems necessary – just like it did with the bond yields.

    Note – I am not claiming that the gold price is (or isn’t) being manipulated. I am just asking you to ponder what the Fed CAN do with it.

    So, do you seriously believe that the gold price (in US dollars) would be allowed the moonshot you are predicting, if the Fed deems it “counter-productive”? And, if not, do you still think it wise to store the majority of your savings in it?

    As long as the US dollar remains the world’s reserve currency, the Fed can do with the price of gold (and the price of pretty much anything) whatever they bloody want. No country that can cause a collapse of the US dollar has the interest to see it happening (because a lot of what they currently own would become worthless). And even if it happens despite the best efforts of everyone involved, the result will be such economic chaos that the price of gold would be the last thing on everyone’s mind. Finding food for the next day would have a much higher priority.

    Yes, once the turmoil is over, gold would have probably managed to preserve the value stored in it. But many of the people buying gold today won’t be alive to see that happen. And during the collapse, gold will be useless at best and dangerous to own at worst.

    So, what’s the alternative? Own a little gold (no more than 5-10% of your net worth) for portfolio diversification purposes and invest mostly in whatever the powers that be seem interested in seeing going up. Stocks, real estate, whatever. And be nimble, because these things change quickly. What is in favor today might not be tomorrow.


    • Thanks for your response. Very interesting. I won’t try to refute what you say, but I’ll attempt to see it from a different angle.

      1) Yes, the Fed has created say $4 Trillion to suppress yield as you say. And as you say – successfully.

      2) So yes, they could create another $ Trillion or so and short the gold market. But I don’t think the Fed is all powerful. Nor can actions on this scale, I’m guessing, occur entirely in the shadows. I am assuming the news of that $Trillion selling short the paper gold market would get out. I think the immediate realization would be that:

      a) the Fed is desperate (very bad PR)
      b) the Fed can’t deliver on the short sold gold, so they are vulnerable
      c) If someone, say China, wanted to buy and stand for delivery, the entire COMEX paper short business could collapse. China reportedly has the reserves and they certainly have the interest in acquiring gold as inexpensive prices. The Fed would NOT want the Comex to collapse or go to 100% margin.

      3) Hence, it seems to me that the “blowback” from such a Fed orchestrated slam in the paper gold market would be highly detrimental and potentially counter-productive.

      4) Further example: The April and June 2013 gold crashes were accomplished by massive paper short sales to crush the price of gold. I assume the large traders profited from their shorts, but it appears that China used the opportunity to take delivery on much of western gold. I have read reports that much of the COMEX gold inventory is gone, much of the GLD inventory is gone, and much of the London gold is gone. Reports indicate that a huge quantity was shipped via Switzerland to be melted, recast into kilo bars, and sent to China, India and Russia.

      5) A further Fed induced crash could cause another mass movement from the west to the east. When does the available inventory of gold disappear?

      6) So to answer your question as to allowing the “moonshot” maybe the market forces in the world are larger than the ability of the Fed to repress the market. Maybe the Fed will decide they have more to lose by appearing to panic and overtly repressing the market than they have to lose by allowing it to rise erratically.

      7) re your comment that the Fed can do with the price of gold whatever they bloody want….. well maybe. But if so, why did they “allow” it to rise from under $300 in 2001 to over $1900 in 2011? If the Fed was so all-powerful why wasn’t the price capped well under the $850 peak from 1980? I submit that the Fed is immensely powerful but unable to totally control all the markets all the time, and that the gold market is much less important to the Fed than the bond and stock markets. I might be wrong in this assessment but that is the way I “read” the news and markets.

      8) And so what to do before and after the collapse? Not an easy question, and there is no simple answer that fits everyone. So I can only comment that hard assets have retained their value, more or less, for 5,000 years and I suspect they will continue to do so. Paper assets, including paper money, has often collapsed into worthless status. Some of today’s paper assets are likely to collapse again – you pick which ones.

      Thanks for your insightful comments.

      GE Christenson
      aka Deviant Investor


      • Answering the points where we seem to disagree.

        2) Since the Fed is the sole entity that creates US dollars, they can do ANYTHING to ANYTHING priced in US dollars. Including things people seem to believe are impossible. They can eliminate the US debt. They can prevent deflation. They can save the US bond market, let alone the stock market. Compared to that, the gold market is so insignificant as not to be worth noticing.

        The only thing the Fed cannot do is save the US dollar while doing all of the above (because all of the above would require the creation of a tremendous quantity of dollars). At best, they can “manage” its downfall – i.e., make it decline instead of crashing. I don’t know if they will succeed or not in doing this – and neither do you or anyone else. But if a crash happens, as I already wrote, the resulting economic chaos will be such that what will be on people’s mind will be survival and not investing in anything, let alone gold.

        I am not saying that the Fed will cap the gold market in secret. That cannot be done, of course. Too many people will know and somebody will talk or notice. No, they will do it PUBLICLY – just as they propped the bond market in a very public way.

        If a large holder of US debt tries to sell it and requests delivery on a large amount of gold futures contracts, the following will happen. That holder will be accused of “financial terrorism”, the mainstream media will explain how this bad someone is doing bad things to the world economy, so the Fed (and the US government) will fly to the rescue. The accounts of this large holder will be frozen. (Yes, that would hurt a lot of US companies, too. Collateral damage. Move along.) That holder will suddenly discover that he doesn’t really own anything but some computer bits that no longer flow in the direction he desires. Margin will shoot to the moon. Settlement will be postponed or switched to “cash only”. All “temporary” measures, of course, for the duration of the emergency.

        The end result will be that the gold will NOT go to China or anyone else and whoever started the move will find themselves in the poor house and bitterly regretting it. Accompanied with a lot of collateral damage, of course, but since when has that stopped governments?

        3) Heck, the whole propping of the bond and MBS markets was “highly detrimental and potentially counter-productive”. Savers lost billions. Millions of jobs were lost. And the problems weren’t resolved – they were just swept under the carpet. Did that stop the Fed?

        4) The sales of gold futures were not aimed to crash the gold price. They occurred BECAUSE the gold price was crashing (and exacerbated it). Their only goal was to make a quick buck to the big gold traders. They are NOTHING like what would occur if the Fed seriously decides to suppress the gold price.

        While it is true that a large quantity of gold is moving to Asia in different kinds of bars (the ones used there), you should take with a large pinch of salt the reports of the shrinking COMEX inventory and GLD sales. The people who write on these subjects generally have no clue how these things actually work. While “China buying gold” is a fact, the movements of COMEX and GLD inventories in no way support (or refute) this fact.

        5) When does the available inventory of gold disappear? NEVER. Practically all the gold ever mined is still in existence and is potential supply – at the right price, of course. That’s why the increase or decrease in gold mine production is totally irrelevant to the price of gold, despite what many gold promoters would have you believe.

        6) That’s a lot of maybes. Everybody trades and invests according to their own beliefs, of course. Me, I choose to believe the historical track record of the Fed and the US government instead of a bunch of maybes. I am not saying that in a positive way, mind. I am saying that if the the Fed and the US government think that they can screw up the rest of the world, I believe that they are right.

        7) They didn’t “allow” anything. They simply didn’t care about an insignificant market with insignificant economical and political impact. Inflation-adjusted, the price of gold never reached anywhere close to the 1980 highs. The “crash” (cyclical bear, actually) was a natural market reaction of the overstretched price. The Fed and the US government won’t start seriously screwing up the gold market until it really starts to matter. And I believe that they will succeed – just as they have succeeded in screwing up everything else they have put their hands on.

        8) Gold has retained its value for 5000 years? Well, maybe. Maybe you expect to be around 5000 years down the line to collect. Sadly, my own life span is more limited than that. For me, it is much more important how well gold will retain its value, say, 20 years from now. And we have already witnessed 20 years of gold price decline (1980-2000), despite the inflation increasing during all this time. So, apparently gold isn’t such a good hedge against inflation – at least on a shorter time scale. Hasn’t the Dow Jones, since 1980, appreciated more than gold has, percentage-wise? Despite the two bear markets in stocks since 2000.

        Please understand me correctly. Gold is a valid asset class. It helps for portfolio diversification, for instance. But always keep an open mind and do not get fixated on one and only one “sure thing”. Not gold, not stocks, not bonds, not real estate. There are no sure things. Be nimble and be in what is going up – not in what you think ought to be going up (but is going down). And, of course, always be on the lookout for something else – because these changes happen very fast.


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