GooooldGoldGoldGold

[HereWeGo]

All right, folks, what the heck is happening in the gold market? Is gold every bit as much a bubble as housing (yet much, much more liquid)? Is the gold market therefore ripe for profit-taking?

[rocketman]

Gold follows oil. Do you see $55.00 oil again in the future? Sorry, I don’t think so.

[qcomer]

Gold follows inflation, soaring oil prices add to inflation and hence help gold indirectly. Gold has risen because interest rates had been going down and liquidity had been increasing throughout the world for the last few years.

For gold play, note that you pay much higher long term tax on gold. If you held gold or gold ETF for more than a year, you still have to pay 28% tax whereas the tax is almost half of that for stocks held more than a year. This is because gold is considered a collectible by IRS.

[Chris Johnston]

Chris Johnston
iamafuturestrader.com

If gold does break 574.50 on a closing basis the game is over for good in that market. Until that time the long term trend is still up. I do not see a short term buy spot at this point, it is basically in a range here. However, as per a blog post I submitted awhile back, this chart pattern is eerily reminscient of many great commodities tops if it breaks that low at 574.50. Huge parabolic run up, then a sharp drop, then a rally up that fails to make new highs. The key to that is that it has the break the low of the first sharp pullback to complete the top pattern.

Interesting times there right now. The bulls need to show up fairly soon. I have been recommending looking for short term buy patterns, but none have developed yet. That recommendation will be cancelled if that low goes.

[HereWeGo]

But hasn’t worldwide inflation been relatively tame during most of the recent gold run-up? It does seem that gold tends to follow oil (for whatever reason,) save for the past few months. Worldwide demand for gold, measured in mass, is about 83-84% of 2005 levels.

Gold has risen because interest rates had been going down and liquidity had been increasing throughout the world for the last few years.

Isn’t that tantamount to saying that gold has bubbled up?

FWIW, the chief investment strategist at Schwab suggests taking profits in more high-risk areas like commodities

[rankandfile]

Rocketman, a quick Google search for “historical oil prices” will help you get some info on oil price history. One of the top results of that search is this site:

http://www.wtrg.com/prices.htm

Here you will find that oil prices were over $60/barrel in 1981 and dropped to less than $20/barrel in 1998. Back during the oil embargo of the 70s, and shortly thereafter, pundits said that oil would never drop again.

[Chris Johnston]

Chris Johnston
iamafuturestrader.com

Gold prices are driven by inflation. I spent several pages in a past newsletter covering this very topic. Inflation has been picking up during this gold rally off the lows of a few years ago, just look at the CPI index over that time.

Now we are hearing the jawboning about reduced inflation pressure, and bingo down goes the price.

[powayseller]

For me personally, gold has more value when the dollar weakens. In my mind, as my concerns mount over a weak dollar, and no good alternative, only gold comes to mind. I think some day the markets will realize also that gold is a safe haven for a declining dollar. Perhaps that’s the reason gold rose with inflation: any time the dollar loses purchasing power, investors want to own gold.

So it shouldn’t matter that the loss of purchasing power is due to inflation or a rising trade deficit and budget deficit, right? A weaker dollar should lead to higher gold prices.

I am waiting for a good entry in gold. I would feel more financially secure if I had more gold and fewer dollars. I really would. Am I going nuts? Or am I being intuitive?

[qcomer]

HereWeGo,
There has been inflation all over the world in the last 3-4 years, not only the US. Housing and real estate has jumped multi fold in US, Australia, Europe & China/India. There has been inflation in stocks and general living standards throughout the world. Do you have any data to prove that inflation has been tame for the last few years? By tame, do you mean the govt inflation numbers that excludes housing, food, energy? and as always, speculative investment has come into gold in the last year or so to add the push to the price. I am not justifying lofty gold prices, just explaining why they are where they are.

Everyone in the US should hold cash in a portfolio of gold/euros/aud/yen along with dollar. Simply put, why should we pay for the stupid fisccal policies of this govt spending billions on war? BTW, dollar weakness adds to inflation, as being the biggest consumer, we import so much of natural resources from around the world. What is the range you are looking to enter in gold?

[Chris Johnston]

Chris Johnston
iamafuturestrader.com

I am a trader, so I look for price patterns in the marketplace. There are no patterns that are in my playbook setting up in Gold right now. Since we are in a trading range, I would require a breakout back to the upside, and then play the first pullback of it. If it stays in a range the only other play to make is to buy against the lows of the range, with a stop just underneath.

That is not a trade I would do based on the big picture bearishness that would be in place if we test that $574 area. From a traders standpoint, this market is in no man’s land right here. If you visit my blog you can see a buy pattern that was set up that was never filled due to this selloff we just had. It is from 8/14/06 and is the fourth or fifth one down on the left.

It shows a pattern that was setup as a buy that the price did not rally enough to fill the order, it was a buy stop above the market. http://iamafuturestrader.blogspot.com/

[powayseller]

Chris, from your view, gold could even go back to $300, couldn’t it? There is a real lack of interest now in gold. Whatever caused it to rally up to the 650s, went away. Why?

[technovelist]

I’d bet a lot of money that gold won’t go back to $300. However, if it does, I’ll back up my truck and fill it up.

As for what “went away”, the answer is: nothing. What has actually happened is that the short-term traders have again been taken to the cleaners by the “big boys”. This is of concern only to those who have weak hands and/or margin accounts. I have neither, so I don’t pay too much attention other than to buy on these pullbacks if I have some spare cash lying around. In my opinion, gold is going much higher, and I don’t really care about the timing.

[Chris Johnston]

Chris Johnston
iamafuturestrader.com

PW – I do not know about $300, but if that 574 level were to break there is no telling how far it could go. It would be a major top pattern that would indicate lower prices by a significant amount. One way of projecting would be to take the distance from the high of over 700 minus the 574 low and take that amount and subtract it from 574. That is one possible target if it broke down. The other potential target is that same number above subtracted from the highest high it has made recently which was 682. That would give the ABC correction symmetry in the Fibonacci world. People also use 1.27 and 1.44 and 1.618 extensions of these numbers to get to magic points in space. The other way they do it is to take the high less 0 then take .382, .5 and .618 retracements of that difference.

I am not a believer in Fibonacci projections but that is how many people make these projections. Trend is still up for now, but no immediate pattern. If I see one set up I will put it on the blog.

It this all sounds confusing, do not worry these projection techniques although touted as the grail, do not have good track records. I was fascinated many years ago with this school of thought and learned through the school of hard knocks that they are not of much value. If you draw enough lines on a chart something will happen at one of them.

[rocketman]

Chris, I appreciate your advice tremendously. It is nice to get the sophisticated opinion you offer. As an average investor, I can only go by the tools presented to me by a few different resources. I see that gold (gray ) has been increasing in value, paralleling prime (blue) and oil (brown). The aberration in the 80’s was due, I believe, to a falling dollar. Now with the problem we foresee with real estate, China and the deficit don’t you foresee that the same psychology will apply in the next year or so. Of course maybe the price will fall a bit, but drop >150 after 574? Would you give me some more feedback on this? – Thanks
[img_assist|nid=1259|
title=gold chart|link=node|align=left|width=400|height=250]

[Chris Johnston]

Chris Johnston
iamafuturestrader.com

Thanks for the nice comments. My research over the years has told me that the real cause effect relationship with Gold has been inflation. There are certainly economic links to the dollar and inflation, but to keep it simple I focus on inflation as the intermarket driver of gold.

Just looking at the CPI and how it has dropped from the mid to late 80’s down into 2000, that in my view is what drove Gold downward. The main point I was making with those projection numbers is that I do not use them. They are widely used in the financial community by “experts.” I just threw them out there as possible destinations. I think I said that I do not use them, I did not reread my post.

I wish I could post charts, every time I try to it just shows as a bunch of wierd looking code. I would love for someone to help me figure that out.

Many big picture tops in commodity prices have been formed by that big run up like is shown in your chart. Then followed by the sharp drop, then another run up like we are in that fails. That is why I am focused on the 574 level. I think if that level breaks the whole run is over for good, so price could drop a long ways if that occurred. It would probably go further than those projections if this happened.

For now the long term trend is still up. The commercials are sneaking back to the long side as of yesterday’s report so this may set up another nice buy spot soon.

The RE/China/Budget deficit angle to this may in fact be correct, it is just not how I as a trader analyze trades. I want to base my decisions on things that are objective, not subjective. I have learned over the years that is the approach that works best for me. I have friends that take the “story” approach that do well, and some that do not. Analyzing the story is a tough undertaking due to the number of different variables that can be considered. It just becomes information overload for me.

In many years past it just seemed that I would often either incorrectly analyze one variable, or leave one out that turned out to be the one that told the tale. There are alot of assumptions out there about big dollar declines, China’s demand equation, and the deficit. However, alot of those are what we all assume is going to happen. There is a saying in the trading world that goes something like this. “What we all assume or are sure will happen, never will.”

In summary, my view is the following on GOLD. The trend for Gold is still up and remains so as long as 574 holds. It appears the “insiders” are starting to buy this dip. If the commercials get over 90% long and a shorter term entry pattern sets up, I will be a buyer of Gold on a breakout of it. If 574 breaks, I will only be looking to short rallies afterward as the game will be over on the long side.

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