GOLD – WHAT HAPPENED?
Howard S. Katz
March 24, 2008
“Therefore, the dollar can rally.
And that means that we can have a sell-off in gold and other
commodities….Sell all [gold] shares.”“From now on stocks will rise….My favorite group…is the housing group….Buy
at noon on Monday.”
- from The
One-handed Economist, March 7, 2008, p. 8.
This advice served
us well at The One-handed Economist. We were able to avoid $20,802 in diminished
profits on our gold stocks and add on $50,650 in good, solid profits in the
housing stocks. That’s right, I know
about the sub-prime crisis, and I am buying housing stocks. But first let us review the recent top in
gold.
The good chartist
is the careful chartist, the one who looks twice before leaping to a
conclusion. This careful chartist has
read Technical Analysis of Stock Trends by
Edwards and Magee, and he spotted the breakout of a giant triangle (most easily
visible on the monthly basis chart) in September 2007.
Note: This chart is an approximation because it
was drawn on an arithmetic chart.
The correct price objective line is drawn on a semi-log chart. Sometimes the two types of chart are very
close, but sometime there is a significant difference.
Note
also that gold had a 75% advance in late 2005 and early 2006 prior to
entering the triangle. In this
regard, a triangle acts like a pennant.
It divides a larger move in two parts. We can therefore expect a 75% advance from
the beginning of this current move (mid-August, 2007 at $660). This would give a second price objective
at $1150.
Subject to confirmation by other indicators this predicts a resumption of gold’s advance (after the end of this decline) and a subsequent move to $1150.
A second clue to the advance was given by the chart of the U.S. dollar.
As the dollar
broke to new lows toward the end of February, this defined a down channel given
by the downtrend line and a parallel line drawn through the Thanksgiving
low. (Again to be completely accurate
this should be done on a semi-log chart.)
This suggested that the dollar decline would have a short term bottom
around 72. And therefore, this would
define a commodity top.
A third clue came
from the precious metals. From
mid-February to early March, silver outperformed gold. Silver usually lags gold for much of the move
and then comes on like gangbusters in its final stages. Thus, if you can get the order of magnitude
of the move right, a bullish performance by silver has bearish implications for
the precious metals in general. In early
March, the perennial silver bulls were screaming about a short squeeze in
silver. As it turned out, the silver
shorts squeezed right back and came out with some nice profits.
Another clue from
the precious metals was in the fact that volume rose to the March 17 peak, both
in gold and in the gold stocks. There
was bullish news on gold on the morning of the 17th, but it could
not hold the gains, and the day wound up looking like a one-day reversal.
This call has been
vindicated over the past week as gold came down 12%, crude oil 11% and the CRB
index 13%. Since this was a spike top,
it is likely that most of the decline has already occurred, and this is
confirmed by the fact that the dollar will meet serious resistance at 75 (the
Thanksgiving bottom) and is not likely to go above this level.
Another point to
note is that the Bernanke easing is even worse in fact than it seems. The Fed targets
the Fed funds rate to get the public to watch it (like a magician’s slight of
hand), but it is interested in affecting the T-bill rate as this is the key
short term rate which affects all other short rates in our society. The Fed has brought Fed funds down to
2.25%. But on March
20, 2008, the
T-bill rate got down to 0.63. I know it
is astounding; so I will say it again. The key short term rate in our society is now 5/8 of a
percent and this at a time when prices are rising by an official rate of 4.3%.
Let
us do a little math. 0.63% minus 4.30%
equals -3.67%. The real rate of interest
on T-bills today is -3.67%. When real
interest rates go negative, the demand for loans becomes infinite because they
pay you to borrow. Crazy things happen. The last time real interest rates in our
society went negative was in 2003, and we had the housing bubble. The time before that was in late 1998, and we
had the dot com bubble.
What
crazy bubble we will have this time is hard to say at this point, but housing
is a group that always moves well when interest rates are coming down, and over
the past few months it has started to show good strength.
The
stock bear move of October to January was not a real bear market. It was mostly a lot of hype in the media
designed to cover Bernanke’s tracks and justify his easing. At the January 22 and March 10 bottoms, the
sentiment indicators on stocks were very pessimistic. These are the two most important factors
(sentiment and Fed policy) one can have in stocks, and they are both very
bullish. This is why I decided to
recommend the housing stocks, and over the past fortnight my selections are up
24%.
When will
commodities turn back up? How long can
the Fed successfully bull the stock market?
Will Ben Bernanke completely destroy the United States of America?
These are the questions I will be watching in the future. You are invited to visit my web site, www.thegoldbug.net, where I discuss
social issues and economic theory (no charge) and to subscribe to The One-handed Economist, where I help
your portfolio to grow ($300 per year).
Are you making money today?
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