A Top in Gold at $330 or simply a Chapter
in Gold's "Long-Term Bull Market?"
by James E. Sinclair & Harry D. Schultz
Fundamental knowledge of an investment item without market timing is a fine race car without fuel. Market timing devoid of fundamental knowledge is downright dangerous. Objectivity is the product of a deep understanding of the fundamental reason why the price of an item moves and a firm grasp of technical market discipline. In objectivity lies the key to successful navigation across the tempestuous seas of market participation. Timing and price movement potentiality must meet at the point of investment/trading action. This is what we are striving for in this review of gold as it declines from the recent $330 intraday high level.
We shall therefore review the fundamental "why" of gold, and cast this understanding against the longest-term technical reasoning of cycles. What we are looking for is convocation of disciplines both in terms of WHY & When.
This holy gathering of a cycle turning point and the beginning of supportive fundamental factors is a rare occurrence in any market. Logically, of course, the convocation must happen but their perception by the investor/trader is the key rarity. It was our belief that such a meeting was occurring in late 2001 that turned both of us expectantly bullish for gold's appreciation. This view was set in cement in a Forbes article December 10th, 2001.
The coming together of the cyclical turning points is support of a grouping of key fundamentals for any market is unreported headline news. This is what is occurring across the basic five constituent parts fundamentally required to build a long-term bull market in gold. It is this occurrence that has motivated us to attempt to save the gold producing industry from themselves in their ill constructed and potentially terminal destructive transactions.
The last time such a gathering of critical factors took place with the potential of today's golden convocation was in the early 1970s. It is the potent ingredient of 2002 that we have focused on in the many and complete treatises on derivatives already written for you. In the early 1970s, gold was the only medium in which global markets speculated, both in interest rates, inflationary expectations and currency destabilization. Subsequent advents of potential convocations were devoid of key fundamentals, had developed new markets in which speculation previously associated with gold could take place and/or lacked key technical items of necessity. As the result of no completed golden convocations since the early 70s, we have experienced 22 years of an on-balance bearish environment for gold's price.
What Makes Today Different?
Today, all the primary fundamental reasons for an appreciating gold market are coming into play along with convocation of cyclical turning points for long term support of these key building blocks. At the same time a new potent ingredient has the power to fully displace the development of interest rate sensitive and currency based new trading markets that have had the tendency to take speculators away from gold as a vehicle of play. That potent ingredient is the Mother of All short positions in market history; the size of the gold short spread derivative position. The unique characteristic of that position is not only its size but also its ownership. The gold producers are responsible for only 11% of this mammoth short position. 89% of the $280,000,000,000 (figure from the IMF & BIS reports) is from sources that have nothing whatsoever to do with gold production. These rogue sources are borrowing money, using the mechanism of gold about which they understand little. It also represents pure short spread positions of the carry trade. Due to the fact that the notional value of the derivative $280,000,000,000 becomes real value at a gold value of $354, we can expect risk control programs to be buyers of gold whenever the momentum indicators turn positive and the market is over $305.
We now have a golden convocation of all the technical and fundamental factors that constitute a long-term bull market in gold plus a potent ingredient (the derivative short spread position) that offer us years of a positive gold market.
A Time For Review
A new bull market in any item always climbs a wall of disbelief. Why should it be any different for a long-term bull market in gold? We have recently had an intraday high for gold at $330. The bears that were hard to find between $305 and $330 are now coming out of the woodwork. All of them claiming to have called the bottom, and now announcing the recent rally high as the high of this, as they call it, mini bull market in gold. Well, they are wrong. This is something entirely different in its construction, timing and convocation with potent factors new to gold.
Let's review what has occurred, and is occurring for gold. This is a good discipline. We will endeavor to make a review on each reaction, as you will be continually bombarded by those myopic enough to see gold as the enemy of their preferences in the market place. They identify gold as the enemy to be slain so that what they prefer, market wise, can rise from its ashes. Are the bears being objective? Let's review and see for ourselves.
The 5 Keys to a Long Term Bull Market in Gold
- The US Current Account must be in a Deficit position and growing. Yes, this is a present condition and shows no fundamental signs of reversing for a significant time. This is the account that measures the amount of US dollars in the hands of non-US entities. It is usually invested primarily in US Federal Debt instruments.
- An intact negative trend in the US Dollar overall must exist. It should have the characteristics of a bear market. This is in fact true for the US Dollar today. We have a classic long-term top called a Head & Shoulders formation, which was subsequently confirmed by price and volume action. Even the dollar bulls now are looking only for the dollar to stabilize at lower levels. This criterion is in place for a long-term bull market in gold.
- The general commodity market is showing in many ways, both fundamentally and technically, that it is in a base formation from which one can expect higher prices. We shall discuss the technical characteristics further to sustain that this ingredient has begun to support gold long-term.
- Trust in paper assets must be waning for gold to assume an investment role internationally. We see the recent decision against Andersen, the comments on GE and IBM accounting practices and Enron as examples of causative items, which have turned investors away from the absolute belief, in existence from 1980 until now, that paper assets were storehouses of value. We believe this ingredient is in favor of gold's long-term bull market.
- The momentum in the appreciation of the bond market must be decelerating. We see this ingredient as positive now to a long-term bull market in gold.
These five items as they gain in strength will further accelerate the underpinnings of a long-term market in gold.
It was the forming of these constituents of a long-term bull market in gold that has given rise in the move of gold from $260 to $330.
What is to come? The answer lies in long-term market cyclical events.
Cycles in market analysis are best understood as indicators of a market's propensity to follow a direction at a specific time. We turn to cycles when we have a need to know when to look for major tops and major bottoms. The following is a review to the cyclical inferences for gold's major ingredients for bull markets.
Gold itself: The 9-year cycle low for gold is in. We have that low established both in time and price. The opportunity for further lows passed in the first quarter of 2002. This concept is supporting the thesis of a
long-term bull market experience now in gold.
The US Dollar: The four year cycle of the dollar's high has occurred. The first low point in the dollar bear progression is not due until late in the final quarter of 2002. This ingredient is in support of the long-term bull market in gold.
Commodities: The 30-year cycle low point has passed. The 3-year and
9-year lows are upon us. Soon the general commodity market will have the propensity to rise on a long-term basis. This ingredient then is supporting our thesis of a long-term bull market in gold.
Bonds: The 10-year cycle high is in. The 3-year cycle high is now upon us. This is a means of judging cyclical performance in the current account, as a progressing deficit along with a lower dollar is not conducive to increasing demand by-non-US entities for US dollar denominated government bonds. We therefore see this ingredient as supportive to a long-term bull market in gold.
Where is in the potent new factor in the gold picture?
This factor is the huge Gold Short Spread Derivative factor that we have written on in great detail. We refer you to the archives of HSLetter.com. Tanrange.com, LeMetropolecafe.com, GoldEagle.com and Financialsense.com for copies of the copious review of this new gold bull market ingredient.
Now, What for Gold?
Gold will obtain increasing support from the traditional building blocks as the last half of 2002 plays out. As such the recent $330 top is unlikely to be anything other than gold's first overbought interim rally high point.
We see support in gold at 317, 312 & 305. Any one of these points can suffice to start the next upward move.
At some point in the career of this new long-term gold bull market, the huge short position (gold short spread derivatives) will impact the market and overvalue gold. That price could establish a new all-time high for gold (i.e. $850/oz).
June 19, 2002
James Sinclair can be reached at www.tanrange.com
and Harry Schultz at www.hsletter.com
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