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Gold At Crossroads And Crosscurrents!

February 27, 2015

Charts created using Omega TradeStation 2000i.  Chart data supplied by Dial Data

After peaking at just over $1,300, back on January 22, 2015 gold has been on a bit of a slide. The prime reason appears to be the fear that the Fed is about to hike interest rates. Is the fear rational? Probably not. Memories are no doubt short. They probably forgot that in the late 1970’s gold was rising as interest rates were also rising. Studies have shown that gold does not have a strong correlation overall with interest rates. If gold does have a strong correlation with anything it is the US$. The US$ has been rising so gold is falling. At least that what conventional wisdom says.  

Since the beginning of the year gold is up 1.4% in US$ terms. But gold is up 8.4% in Cdn$, 1.7% in British Pounds, 8.2% in Euros, and, 0.6% in Japanese Yen. Gold is actually down 3.2% in Swiss Francs thanks to the Swiss unpegging the Franc against the Euro. Despite all the talk about how Russia is sinking into the abyss because of sanctions, gold is only up 1.4% so far in 2015 in Russian Rubles even as gold is up 75% in Russian Rubles since June 2014.

Gold is often treated as an alternative currency and it can act as a hedge against falling currency values. Gold is a hedge against uncertainty and the corruption of governments. Gold has no counter party risk unlike stocks and bonds.

Still gold has fallen roughly $100 from that peak in January. Many find it baffling. Many claim that gold is being manipulated lower but a reminder that manipulation works both ways and not just in down markets. Whether it is or not is beside the point. The trend has been down. For the western economies interest rates are at record lows and some countries have even moved to negative interest rates. Some shorter-term German government bunds recently went negative. In the US, one has to go out beyond three years just to find government bonds or notes with yields over 1%. Can one imagine having to pay the bank to hold your money? In Switzerland and the Scandinavian countries, that is now the norm. In countries like India and China where there is an inherent distrust of banks, one holds their savings in gold. Low to negative interest rates should be a magnet for gold but it has not proven to be the case especially in the Western economies of the EU and North America.

While 2014 did see a drop in physical gold demand, central banks bought the largest amount of gold in 50 years. At one time central banks were sellers of gold. Now they are buyers of gold. And one of the largest buyers was the Russian central bank. Gold imports from Hong Kong into China jumped sharply in January. The ECB’s Mario Draghi declared that gold is a monetary “reserve of safety”. Former Fed Chair Alan Greenspan has suggested that the price of gold “will” be sharply higher in a few years. The Department of Justice of the US and the CFTC have launched an investigation into “rigging of gold prices” against 10 major banks including Barclays PLC, Deutsche Bank, Credit Suisse, UBS, Societe Generale, and J.P. Morgan Chase and Goldman Sachs. Whether it goes anywhere is probably not relevant but a reminder that major banks have already paid huge fines for “rigging” in the LIBOR market, currency markets, some commodities and energy. Previously there was an investigation into the London daily gold setting and banks paid fines there as well.

None of this seems to matter as gold sits barely $70 above its multi-year low. The recent rally took gold up to a downtrend line traced from the highs of August 2013 that joined up with the highs of March 2014. That line also stopped the rally seen in July 2014. On the weekly chart gold tested the 65 week exponential MA (EMA) a level that has been seen on a few occasions over the past two years. At the other end, the low of June 2013 was equalled in December 2013 and a lower low was made in November 2014. All of this is a classic definition of a downtrend in motion.

The rally from the November 2014 low appears to have unfolded in an ABC fashion. This is not what was expected following what may have been a three-year cycle low. The July 2014 top appeared to finish an ABCDE type consolidation pattern that evolved after the huge breakdown from October 2012. Some Elliot Wave analysts including Elliot Wave International labelled the corrective wave that unfolded from June 2013 to July 2014 as wave 4. It was felt that the five-wave decline from July 2014 to the November 2014 low was a culminating wave 5 down from the top of September 2011.

But if the ABC move from November 2014 is correct than that could suggest it was a corrective wave only. The November 2014 low would now be a 1 or A wave down with the run-up to the January 2015 high a 2 or B wave. The current down move would be the start of wave 3 down or the C wave down.

Charts created using Omega TradeStation 2000i.  Chart data supplied by Dial Data

In previous write-ups on gold, I had noted that the November 2014 low might have been a 3-year cycle low or more correctly a 34-month cycle low. As a refresher, according to Ray Merriman  gold’s long-term cycle is 25 years (1976-2001 – cycles are always measured from low to low). Cycles divide into two’s or three’s so the 25-year cycle would sub-divide into 3 cycles of 8.3 years or 2 cycles of 12.5 years. It was felt that the collapse into October 2008 was the trough of the 8.3 cycle low. The next 8.3-year cycle low would be due in February 2017 +/- 17 months or a range from September 2015 to July 2018. The range is interesting as the earliest for the 8.3-year cycle low is later this year.  

The 8.3-year cycle sub-divides into either 2 cycles of 4.25 years or 3 cycles of 34 months. There was an important low in December 2011or 38 months following the October 2008 low. The 34-month cycle has a range of +/- 6 months according to Merriman. There was then the low of November 2014 or 35 months following the December 2011 low. That may have qualified as the current 34-month cycle low.

In many respects, the possible 34-month cycle low in November 2014 has not been confirmed. New highs above the July 2014 high of $1,340 would have gone a long way to confirming the 34-month cycle low. What may be unfolding now is instead the collapse into the next 8.3-year cycle low. And if that is correct the down wave could unfold in 5 waves to the downside. Here is how it could unfold.

Wave 1 down was the low of November 2014; wave 2 up was the recent top in January just above $1,300. Wave 3 down could unfold in five waves to the downside and could bottom anywhere from May 2015 to July 2015. The period starting in March is a weak seasonal period for gold so a down move during that time would fit. Following a low anywhere from May to July 2015 another good rebound could unfold. That would be wave 4. That wave could top in July to September 2015 a period that does demonstrate seasonal strength for gold.  The final wave down would bottom anywhere from September to November 2015. The period would coincide with the earliest possible period for the 8.3-year cycle low.

How low could gold fall? Well worst-case scenarios have gold falling to the 1980 top near $850/$875.  Best case scenarios see gold falling to levels between $1,000 to $1,100. A range for the final low could be $850 to $1,100. All of this could take several months to unfold. And this scenario is not a layup as the decline to the next 8.3 year cycle could actually take longer and not find its final low until sometime in 2016. However, it is a possible road map for the next several months.

As the title notes. Gold is at a crossroad. The decline from the January 2015 top has been deeper than one would expect for a 4th wave correction. Grant you gold could still redeem itself and this scenario would need to be re-written. A reminder that the scenario described above is just one  amongst others. If alternatives arise I will write about them. A move back above $1,280 would suggest that the recent high near $1,303 could be taken out. Resistance levels are seen at $1,225, $1,240/$1,250 then $1,280. A breakdown under $1,170 would suggest that the bearish scenario is most likely unfolding.

Gold is also at crosscurrents as there are numerous bullish reasons as to why gold should rise. The bullish reasons should more than offset the irrational fear of higher interest rates in the US. However much one would like to blame the long decline on manipulators the reality is that gold has been in a downtrend irrespective how one wishes to view it. And the downtrend is not over. But it will end eventually and a new bull market should get underway to follow the long bear market.

It has been a long difficult road for gold following the top of September 2011. The action since then appears to be a huge correction to the long rise from 2001 to 2011. Once the next 8.3-year cycle low is found a powerful rally could get underway as the next 8.3-year cycle gets underway. It is in this cycle that one could see a massive blow off. Now that would warm the hearts of the “gold bugs.”

Copyright 2015 All rights reserved David Chapman

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David Chapman regularly writes articles of interest for the investing public. David has over 40 years of experience as an authority on finance and investments via his range of work experience and in-depth market knowledge.

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