What's Up/Down With Gold?

When I was a boy I was told that anybody could become President. Now I’m beginning to believe it.

— Clarence Darrow

Last night I received so many e-mails that the service provider for the website had problems. Without exception they all wanted to know one of two things:

•    Is the bull market in gold over, or

•    Have we bottomed yet?

I received e-mails from old clients who never write, ex-clients from years gone by, new clients and people just plain scared. Since there was no way to answer them all so I decided that today’s topic would have to deal with gold.

In order to understand what’s going on with gold you first have to know that the world’s economy is deflating. The media will insist that we’re subject to inflation and it could get worse at any moment, but there is no basis for that. If you look at this historical chart of the CRB Index, you’ll see that it topped in 2011 and has since given back more than 25% of its gains: 

 

If you want specifics you can pull up charts of oil and copper (not shown) and you’ll see that they’ve fallen 38.8% and 29.2% respectively from their 2011 highs. Copper and oil are so important because one or the other is found in +/- 85% of all the things that touch our daily life.

With respect to everyone’s concerns, let’s take the easy question of whether or not the bull market is over:
 

  

As I type spot gold is trading at 1,359.00 so that means it has retraced 33% of its bull market rally (255 to 1,923). That doesn’t end a bull market that’s gone on for more than a decade, and this idea championed by the press that a 20% correction means the bull market is over is simply bullshit. In 2008 spot gold fell from 1,028 to 681, a drop of 352 dollars. This represented a 45.2% retracement of the bull market gains (255 to 1,033), and we all know how that turned out don’t we! The bull market is alive and well until and if it retraces more than 50%, down to 1,089.53, of the entire bull market move that began at 255 in 2001.

The next question as to whether or not gold has bottomed is considerably more complicated. There are no bells that go off when you hit bottom, just blood in the streets. Once we broke through support at the 1,506 to 1,522 range the floodgates were opened and there is no technical reason for the selling to stop at 1,400. At the very least gold should see a 33% retracement so that would mean a bottom at 1,367.01 (we’re there now). Since the RSI is close to 20 in a daily chart, and hovering just below 25 in the weekly and monthly charts, i.e. extremely oversold, that is a possibility. That’s why I started to buy physical gold at 1,370 for clients. As they used to say in the old days, it’s close enough for government work.

For those who are trading paper gold and rely on margin you either have to stay short here, or stay on the sidelines. As I mentioned above there is decent support at 1,367.01, but I would prefer the support found at 1,302.35 from a 50% retracement of the last leg up in the bull market (681 to 1,923) and shown here in the following daily chart:  

 

Right now it is important to understand that in general gold is being sold in order to raise cash. During times of deflation cash is always scarce, and when you’re talking about a world flooded with debt, it’s the worst possible combination. Specifically paper gold is being sold in order to push the price of physical gold lower. This is being done in order to limit everyone’s investment possibilities and to foster the idea that all is well. It is worth mentioning that declining prices, combined with falling gold prices is a double-edged sword. Sooner or later they look at 100 dollar down days in gold and 3.00 down days in oil and they’ll connect the dots. Deflation is the worst of all possible worlds and that is precisely the world we’re living in. 

The world is so twisted right now that the Dow is considered a safe haven investment for the simple reason that the Fed supports it.  Finally, you need to pay    

 

a lot of attention to the US dollar from here on out. Note that it seems to be rolling over and is marginally lower today (not shown on the chart above). This is not what you would expect given the Japanese plan to print US $1.3 trillion in Yen and the EU bail out of Cyprus. Furthermore, the Fed needs to print a lot more than it’s currently printing in order to stem the tide of deflation (it will fail no matter how much it prints) and it cannot afford to see the dollar decline at this point in time. The declining dollar is a case of getting what you can least afford, when you can least afford it.

In conclusion, I like gold at 1,367 and I’ll like it a lot more at 1,302 should it fall that low. It’s a bargain and I don’t worry that it might fall even lower. If it does, I’ll simply buy more. Gold is the one asset that will hold its value over time and even in a deflationary environment. If we were to have deflation and the Fed stopped printing, that might be a different story. Unfortunately we live in a world where every major economy it using the printing presses as a cure-all for whatever ails it. That is tailor made for gold. Buy physical gold here and sleep well knowing that one, two or three years down the road you’ll possess real money while the rest of the world loses more and more purchasing power with each passing day.