Come Hold my Hand Fantasy Land Hits the Wall of Reality
THE GOLDILOCKS ECONOMY REVISITED
Perhaps I made a mistake by referring to the world economies as being Fantasy Economies and not using the name that was popular the last time we were in this same position: The Goldilocks Economy, because everyone knew but only a very few related to the fact that the BEARS always come home. My use of the words Fantasy Economy did not give the same connotation even though I consistently explain the eventual outcome. Well HERE WE ARE - 2007 all over again.
WILL THEY EVER LEARN?
Once again history repeats, but nobody was listening (except us of course). I know I must sound like a broken record, but it bears repeating: If the cause of the bubbles was EASY credit and excessive money creation that eventually burst and brought us to where we were on March 9, 2009, how can doing more of the same produce anything else besides more of the same? All we have succeeded in doing is papering over the problems and kicking the can down the road a bit. But enough of all that. This is just an interim letter and if you were following my letters, we are all nice and short laughing all the way to the Bank.
The prime reason for this letter is to explain what has been happening to Gold. I suggest you all go back and read my commentary on Gold in the last three letters. I stated that the last run to its high was what in Elliott Wave Terms is called an Extension.
The Rules for Extensions:
- Extensions always pull back to the beginning of the extension, which in GLD terms is $101 (Check the Charts)
- Extensions are always Doubly Retraced, which means that after selling off to the beginning of the extension, it then goes back to test the High. It then either goes on to new highs if the Extension was a Wave 3 or goes back down to retest its recent low to create Wave 4. This usually turns out to be a diagonal triangle, sideways correction or it turns into either a simple ABC correction or a more complex double zig-zag correction.
WHERE ARE WE NOW?
There is always a reason FOR THE SHARPNESS of a correction. First of all, the high was reached amid wild exuberance and massive margin buying as new Gold Bugs came out of the woodwork and jumped on the wagon with projections ranging from $2500 to $5000. While it's true that my projection was and is $6250 (made 3 years ago and projected to be hit sometime between 2017 to 2021), keep in mind the Huge amount of Margin that was created into the last rally.
Secondly, we have the beginning of the Bursting of our Latest FANTASY Stock and Commodity Market Bubbles. This always results in massive margin calls and forced liquidations. At times, there is no bid on some stocks and brokers have the right to liquidate any positions that the under margined investors have in order to meet the REG T requirements. Gold always has a bid.
At the first Gold sell off, the liquidation is not all that bad and after a few days, Gold begins to bounce back. It then retests the lows in an orderly fashion and is ready to move up again. ONLY this time, the stock markets around the world begin to drop, led my China and the emerging markets. Now we have worldwide margin calls and the forced liquidations begin all around the world.
WHAT DO WE DO WITH GOLD NOW?
Do not look a gift horse in the mouth. You can either step in and buy tomorrow at $99 to $101 or take the more prudent route and wait a few days, let Gold settle down and then buy. You may pay a bit more, but you will be able to sleep better.
THERE IS NO CAUSE TO WORRY
Everything is unfolding almost exactly as expected and it is all positive for the price of Gold in the medium to longer term. My LT objective remains $6,250.
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UNCOMMON COMMON SENSE
Aubie Baltin CFA, CTA, CFP, PhD.
2078 Bonisle Circle
Palm Beach Gardens FL. 33418