Chart Symmetry

Last month an analysis of monthly charts showed that gold was near support in dollar terms as well as in Yen. Given the strength of the Yen, the latter finding is particularly important as is explained later.

No major changes has taken place over the past month, but this relative stability may well be the prelude to some rapid changes quite soon.

This analysis uses the principles of Chart Symmetry, as the foundation for exploring answers to the above two questions. CS is a system that that was designed around the observation that prices tend to change direction along certain preferred gradients. An article in the Gold-Eagle archives explains the principles of Chart Symmetry in more detail than the brief summary given below.

https://www.gold-eagle.com/south_africa/regional_analysts/joubert020699.html

All the charts used below are of the monthly close. The prices or values shown on the charts for the lines on the charts are therefore the values of the indicated lines for the end of September. These are not predictions that the price will in fact complete a move during September to reach that line, but provide the reader a measure of the move that could take place if the price pattern does develop fully in the direction of that trend line. The steeper the line, the greater will be the change in the line value over time.

The key point to remember throughout is that the gradients of all secondary lines were derived from the gradient of the master line. The scope for the analyst to 'do his own thing' and develop a pre-conceived pattern is therefore quite limited. The patterns that are shown in the analyses are inherent in the charts, but these are not the only patterns that can be derived.

Introduction

This month we repeat the basic analysis done in the previous report. Some of the analyses are modified from last time, mainly by leaving out some of the previous trend lines to concentrate on the essentials.

It will be seen that some of the charts have reached critical levels where strong reactions are possible within the near future, i.e. the next month or two.

Gold Price in US dollars. Monthly close. Last = $254.8

In the previous analysis, the master line from which all other lines were derived, was the overall resistance line from the high in 1980 to the more recent top at $405.6 in January 1996 – just the time when the hedge funds are thought to have begin switching from a "Yen Carry" to the "Gold Carry".

In this analysis, the master line is generated from the all time top to the intermediate high at $486 in December 1987.

Experience has shown that when a major pattern can be derived from the principles of Chart Symmetry, that pattern usually develops in a manner that is quite consistent for that kind of pattern.

CS triangles, for example, are identified when the one side of the triangle can be derived from the gradient of the other boundary. The fit within the boundaries is generally very good. Such triangles require 5 legs to complete the pattern, counting the legs from one boundary to the other. At the end of leg 5 the break takes place in the direction of leg 5.

In this analysis two triangles are shown. Triangle M-B encloses the whole of the main consolidation range following the high of 1980, with B a derivative of M. The boundaries of symmetrical triangle A-B are the inverse of each other. The break above line A in 1980 forms an exaggerated bifurcated top – a kind of break from a major pattern that occurs quite often. Bifurcated tops and bottoms can be disregarded in the identification of the pattern, except that the mid-point of the bifurcation has to lie on the pattern boundary, as in this example.

Observe that POG completed the fifth leg of triangle M-B and then broke higher, exactly as the normal development of the triangle requires. In principle, following this break upward from the triangle POG should over time have reached a target that can be calculated by the well-known rule of adding the length of the "flag pole" on which the triangle is suspended to the level of the break.

The break took place at $350 in April 1993, while the length of the flag pole, from November 1976 ($116) to February 1980 ($674) is $558, to give a target in the vicinity of $900/oz.

After quickly reaching $400 by July 1993, POG settled in a mainly sideways band. This interruption of the trend for a period of consolidation is not abnormal, but after extensive and volatile consolidation such as POG experienced within the triangle one would have expected POG to move substantially further than it did before began to consolidate again.

Then, late in 1995, POG started a move again, rising from $380 to $405 to reach a new intermediate high and thereby breaking higher from its trading range of the previous 30 months. That, of course, is just when the Gold Carry really kicked in and from then on POG was in a bear market.

Observe that within triangle A-B POG was on the rising leg 5, with a break above line A as target, when the Gold Carry put an end to the bull market and forced a break below the triangle at line B. This break against the presumed direction of leg 5 is abnormal; premature or abnormal breaks are often followed by steep and sustained trends – exactly as happened here.

POG has now reached support exactly at line F and could begin a rebound from here. There is however still a possible target of $241 at the bottom of a major pennant formation that is not shown here, but was discussed in the previous monthly analysis.

It is of course interesting that the chart patterns revealed by Chart Symmetry suggest that there has been external influences acting on POG since perhaps as early as late 1993 – which might well have been caused by a surge in producer forward selling. Keep in mind that at that time, in a stronger gold market, forward selling was the cheapest way of financing new developments at a gold mine, as well as to fund new exploration. IMHO that practice was prudent in that it sacrificed some potential profit on future production in exchange for increasing both mine production and reserves – achievements that would significantly increase stock holder value of the mine.

For 30 months gold went sideways before showing a new lease on life – and, just as it started to do so, the yellow metal had the legs got cut out from under it. Under guidance of the bullion banks, the hedge funds discovered the Gold Carry. They were at the point of exhausting the potential of the Yen Carry as the Yen was already getting too strong against the dollar and the risk imposed by the Yen Carry was mounting. Now they needed another new and safe source of cheap funds.

The hedge funds came to the gold market with a vastly greater amount of cash than the gold mines had sought to obtain for their own needs through forward selling. Whereas activities in the forward market by the producers during this 30-month period at worst kept POG in a sideways trend and gold even managed to show signs of new bullishness, the amount of gold the hedge funds shorted into the market was simply too great for the market to bear (pun intended!). POG started to fall and this of course was just the encouragement the hedge funds needed to continue the lucrative practice and to short even more gold.

This they continued to do with abandon, to the extent that today they have practically no chance of buying back the amount of gold they have shorted, for delivery back to the lenders.

An interesting question is, "Why did their risk control and risk management fail the funds in this regard and caused them to end up in this precarious situation?". Surely by 1996 most funds were practicing advanced forms of risk estimation and management? I have the suspicion that the LBMA has much to do with this state of affairs.

Early in 1997, after long operating under a cloak of secrecy, the LBMA suddenly announced their existence and the fact that they trade almost 1000 tons of gold daily. The PM market was in a flurry; evidence of the excitement this announcement caused is contained in a record of discussions on Gold-Eagle that was maintained by The Red Baron and that can be referenced in his archive in this website. The general conclusion was that this heavy trade was in physical gold, though I believe, on reasoning that can be referenced in my archive, that the LBMA turnover is largely (90%+??) paper trade.

Insiders to the LBMA were undoubtedly aware of this, but I suspect the hedge funds believed the LBMA and its high daily turnover meant they could comfortably short very large amounts of gold as there will be a ready source of the metal when they eventually intend to close their short positions. Of course, with POG sliding all the time, nobody really considered such a step.

Then, in late 1997 SE Asia tanked and POG suddenly went from $319 to $340 and I have the suspicion that some hedge funds tried to close their short positions by issuing buy orders in quantity to the LBMA. When they learnt their orders could not be filled, the proverbial fan suddenly ground to a halt.

That was when lease rates shot to new highs as funds queued up to lease more gold so that they could satisfy all the new panic demand and keep POG on the leash. Also, just three weeks later the Swiss central bank announced they would sell half their gold for humanitarian purposes. Initially the emphasis was on the 1300 tons that would hit the market and not on the constitutional changes and referendum that that would be needed before this intention could be realised!

To continue, after that side track to the LBMA: the conclusion is that POG has reached significant support at $254 and could rebound from here into a new bull market. There remains the possibility of a spike lower to $241 by the end of September in order to complete the pennant formation shown in the previous analysis. Whichever pattern holds true, both analyses of the monthly chart suggest that the down side for POG is limited, with a good probability of the new bull market starting within the next few months.

Gold price in Yen. Monthly close. Last = ¥27950

The analysis is similar to the one used previously, with some trend lines removed

Master line M is as before, with line F the second shallower derivative. Line S is currently the support line of the gold price in yen.

F-M is a large and steep pennant formation, with the POG in Yen reaching lower towards F on leg 4 of the pennant.

Two possibilities exist. The first is that leg 4 of the pennant will complete normally by reaching down to line F, currently at ¥21500. The closing gold price in Yen at the end of August was ¥27950, which means the POG in Yen has to decline by 23% to reach line F at the end of September.

POG can fall to $241, as was suggested in the previous analysis. That would imply a dollar-yen rate of ¥89 in order for leg 4 of the pennant to be completed by the end of September.

While the Yen is quite strong and seems to be getting stronger despite efforts by the BoJ to keep the Yen weak, this degree of strength seems unlikely. If the dollar should weaken to ¥90 or so, it is almost inconceivable that the POG could be at $241. It seems much more likely under those circumstances of a collapsing dollar to be at $280 or even $300.

If one alternative seems unlikely, it implies that the second possibility, namely that support at line S would hold, has a good chance of success. If POG in Yen rebounds off support at S to break higher through resistance at line M, the break would be taking place on leg 4 of the pennant. That would be a premature or abnormal break and should be volatile and sustained (similar to the break lower on leg 5 out of the triangle on the POG chart above).

For a break to take place, the POG in Yen has to move above ¥33180 by the end of the month. If the dollar is at or near, say, ¥105 at that time, this would require a POG of $315 or so. At the moment this too seems unlikely, since such a move would hardly take place without some more marked adverse developments for the dollar.

Alternatively, if POG remains at say $260, the Yen would have to weaken to ¥128 again for the POG in Yen to reach line M. This is perhaps feasible, but such a weak Yen is also seen as unlikely at the moment; there is already such an inflow of funds into Japan that the BoJ appears powerless to affect the stronger Yen and a decline to ¥128 seems remote.

With neither a move down to F or a break above M by the end of September seen as likely at the moment, it would appear that we have to await some new developments in both markets before either possibility could be realised.

Readers may note that the POG in Yen is merely the POG multiplied by the amount of Yen/dollar (or divided by the amount of dollar/Yen); it is therefore easy to keep a running calculation of the POG in Yen to see whether any of the targets that are mentioned here come into reach during the next few weeks.

US Dollar Yen rate. Monthly close. Last = ¥109.7

Here the chart is also a simplified version of the analysis in previous report.

The master line is the overall support line of the last stages of the 1970-1994 bear market in the dollar. Line I is the inverse of master line M. Line F is a steeper derivative of M, with F3 the third shallower derivative of M.

M-F is a large descending wedge formation. The dollar is now on the downward leg 4 of the formation, after some overshoot at the end of leg 3 at line F. This overshoot could be explained by the need to complete a new leg of megaphone F3-M, and even here there was some overshoot.

Megaphones develop as a result of major opposing forces acting on a market, taking turns to dominate the trend. Here the one force probably arises from the increasing outflow of dollars as a result of the trade and budget deficits, as well as an outflow of investment funds from US markets into the Nikkei on the grounds of a better risk-reward relationship. The opposing force can only be the efforts by the Bank of Japan to weaken the yen / strengthen the dollar – with some (doubtful?) assistance from the Fed.

Cooperation to ensure a weaker Yen was a key element of the trade agreement between the US and Japan in 1995. Their efforts triggered an appreciation of 75% in the value of the dollar since mid-1995, to complete the most recent leg of megaphone F3-M.

Normal development of the descending wedge, M-F, now calls for a move down to line M, where leg 4 will be completed. Such a move, which implies that the dollar could reach ¥55 or even lower, would also complete the next leg of the megaphone and set the dollar up for a major bull market against the Yen.

Last month the dollar closed just a fraction below key support at line I to give a medium term bearish signal – provided the marginal break is confirmed at the end of September with a close well below the value of line I, currently at ¥111.

A close well below ¥111 will almost certainly be a signal that the dollar will continue to weaken against the Yen, probably with a medium term target at the level of psychological support at ¥100.

A strong Yen/weak dollar combination without a simultaneous rise in POG will result in a break below support at line S on the chart of the POG in Yen. As the initial assumption has been that this support level will hold, a firmer Yen implies that the gold price should continue to increase, while the dollar struggles against the Yen. As the Yen is expected to remain firm against the dollar, POG too should soon begin to gain ground again.

A 7% drop in the value of the dollar to ¥100 by the end of September would require a POG of at least $280 at that time in order to keep the POG in Yen at or above its key support at line S.

US 30yr Treasury bond – Price index in Yen. Monthly close. Last = 18.08

We have just seen that a stronger Yen implies a stronger POG, provided support at line S on the chart of the POG in Yen continues to hold. One of the factors that ought to determine whether Japanese investors consider repatriation of their funds would be the state of the US bond market from the perspective of these investors. If US bonds valued in Yen continue to lose ground as a consequence of a strong Yen and a weak US bond market, the temptation to get out of that market could become irresistible.

While the Yen was weakening against the dollar, Japanese investors were mostly happy to keep their money in the US, as they were making profit on the exchange rate. Now that the Yen is gaining ground against the dollar and with a weaker bond market, the time may come when losses become so severe that the last of Japanese investments in US bonds will be repatriated.

The way the Japanese view their investments in the US bond market is revealed by the chart of the US dollar-Yen rate divided by the yield on the US 30 year Treasury bond. This results in a price index of the US 30-year T-bond in Yen.

For the chart shown here the time horizon has been reduced from the one shown previously to reveal greater detail.

Channel M1-P1 is the very steep bear channel in which Japanese saw their investments in US long bonds depreciate in value by leaps and bound as the US dollar sank against the Yen and US bonds lost value in the high inflation era of the late 60's through to the late 70's.

Since then the price index in Yen of US bonds have moved mostly sideways in a broad range. Initially, the trend was still bearish within channel P-M, but the steep gain in value of the dollar since 1995 carried the price index to the top of megaphone F-M.

The volatility of even this relatively stable market as of 1980 can be gauged from the fact that the recent increase in the price index to the top of the megaphone, from line M to line F, was equal to a gain of 140% for Japanese investments in US 30-year T-bonds.

Now that the price index has extended the break below significant support levels, the bottom of the bear channel at line M has probably become the next target. While the decline from the recent top at line F in August 1998 is already 34%, a move down to line M implies an additional 43% decrease in the price index. If M is in fact reached, the price index would have lost more than 60% in value from the recent high – the equivalent of a fall in the Dow to about 4500!

This steep rise in value of the price index of the T-bond coincided with the 'Yen Carry' and thus also shows how much capital profit Japanese institutions and the hedge funds would have made if they were into this market early enough, before the yen had appreciated too far against the dollar. And of course if they had sold at the right time.

Of the maximum 140% capital profit that could be made, only 58% remain to be taken if the Japanese investor sold out now and repatriated his funds. Latecomers to the market have even less profit left to bank if they get out now. Which means that pressure must be mounting on hedge funds and Japanese investors to get out as soon as they can, to avoid further reduction of unrealized profit.

Some mention has been made recently that as part of the 1995 agreement, US authorities undertook to purchase US Treasury instruments from Japan (BoJ??) if ever they should want to liquidate their holdings. In this way, pressure on the open bond market and, presumably, on the dollar, could be avoided. Apparently this request has now been made and the amount involved is rumored to be somewhere between $200 and $300 billion.

If confirmed, this news might well trigger repatriation of any remaining Japanese individual and institutional investments in the US bond market, which, of course, would have to be repatriated through the forex market and have an effect on the dollar.

Apart from placing the dollar under even more pressure, this raises the question of what is likely to happen to US bond yields if any further selling pressure should materialize?

Yield on US 30yr Treasury bond. Monthly close. Last =6.066%

The main feature on this chart is the very large pennant formation, F2-I, where line I is the inverse of master line M and F2 is the second steeper derivative of M.

Pennants, like triangles, typically complete 5 legs before the break from the pattern takes place. Observation over many years has shown, as mentioned earlier, that when the pattern fails to complete normally, there often is a violent and sustained reaction when the premature break eventually takes place.

In this analysis, the yield completed legs 1 to 3 very accurately within the pennant. In this respect it should be noted that lines I and F2 were not independently generated to fit the reversal points on the chart, but their gradients were derived from that of master line M. While the position from where these two lines are generated is under control of the analyst, their gradients were fixed by that of line M. The good fit of the two lines through key reversal points not only makes it clear that leg 4 – the last leg lower, that should have reached line I – was never completed, but it also offers evidence of how well Chart Symmetry works.

At the end of July, the yield had broken upwards from the wedge while technically still on leg 4. At the end of August the yield had recovered a fraction from the July close, but is even further away from the steeply descending pennant boundary.

On the weekly chart, not shown here, the yield is sitting just below very important market support at 6.09% If this support level is broken during the coming weeks before the end of September, the medium to longer term outlook for the US bond market will be very bearish. If this break should happen, then in conjunction with any further weakness in the dollar, most foreign investors – not only the Japanese – will be keen to sell off all investments in the US bond market and repatriate the funds.

Conclusions

The overall change in these long-term analyses during the month of August was quite limited – which is to be expected if some of the current positions are to develop as pivot points on the charts. A key event was the break of the Yen through resistance at ¥111, but the firmer trend in the Yen still has to be confirmed at the end of September. Although the Yen has recorded further gains against the dollar since the end of August, there is no guarantee it would not have retreated back above ¥111 by the end of this month.

If the Yen continues to firm against the dollar, it would add pressure to the US bond and equity markets. This probably would be good for gold, as we have seen that the Yen price of gold is right at significant support. If that support is to hold in the face of a stronger Yen, POG has to perform better that it has to date since hitting its lows just above $250.

On the other hand, if the Yen should also suddenly fail against the dollar, as the Euro has just done, gold too would probably continue to languish in the doldrums, which would make it vulnerable to further central bank selling or any other bad news.

However, POG itself is at or very close to significant long term support for the second month in a row and may just require a mild push to start moving higher. If this should happen in combination with an even stronger Yen, the incentive for further purchases out of SE Asia would be in place. That could really get the gold ball rolling!

The medium term future for US long bonds looks a bit gloomy, despite the lingering possibility of a rally to as low as 5.8% for the 30-year to give a goodbye kiss to the top boundary of pennant I-F2. On the other hand, a weekly close for the yield on the 30-year T-bond well above 6.09% would signal the resumption of the steep bear trend after a period of consolidation around 6.0%

It is beginning to look as if a number of factors are beginning to come together to create a situation where gold could begin to justify the confidence of its supporters. Investors who still intend to make use of current bargain basement prices for PM physical as well as equities perhaps should get a move on – time to do so might be running out!!