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Saturday, December 5, 2009

GOLD Update (Update 3:40pm)

UPDATE: I really didn't mean to start a mega-philosphical question over the long term meaning of Gold. Truth is no one knows what will happen. The main purpose of this post is to chart where gold is going in current fiat dollar terms over the next year or so because I think we can relatively surmise the dollar will last another year. Short term Gold has a chance to make a 5th wave move up but that is not assured.

Long term I think its going below $600. After that we'll see. But for now thats what the charts tell me.

Gold is at a make or break moment I think. A $65 intraday decline was kind of how I expected the beginning of the end to start. There are a lot of people, smart people, who are convinced that Gold will go to the moon. Or at least $2000 for starters.

Side Discussion:
And Gold to $2000-$5000 that is largely based on what? The dollar "collapsing" of course.

I have some general thoughts, allow me to parse some of them:

1. Gold is a commodity like any other commodity. It cannot be used to buy groceries. You cannot go in to a store and buy $1200 of groceries with 1 ounce of Gold. You must of course first convert it to the fiat currency your dealing in.

2. Gold is going to behave like any other commodity. It goes parabolic and then when the steam runs out, it collapses like every other commodity. The charts are littered with moves like this over the past 100 years. Its a well-documented process.

Commodities work a bit different psychologically than other markets. They rise a bit on "fear". Usually this fear is based on a lack of the commodity or other such connections. Almost all turn out to be just as irrational as buying Worldcom at its peak. So parabolic moves in commodities usually occur in exponential moves to peak. Then when it reverses, momentum swings wildly to the other side and the downdraft cannot easily be stopped.

See Oil last year.
See Natural Gas this year.
See Gold in 2010?

3. It is true that Gold is a store of value somewhat, at least in the history of mankind it was used extensively. People are collecting it (physical) in thinking in case our fiat monetary systems collapse, they will be the "rich" ones and able to survive and even thrive. I happen to think that the opposite may actually happen. I have several reasons for saying so:

a.) If our system of fiat currencies truly collapsed, I think the result would be to convert to another fiat currency first and foremost before saying something like "ok anyone with Gold is good to go, the rest can fend for themselves". I think not.

b.) We have a tremendous sense of "fairness" (that usually results in misguided policies nonetheless) in modern society and do you think society would all of a sudden allow a fiat system that supports all to turn into a system that supports a select few that hold physical metal? I rather think that any fiat system change will in particular take into account of Gold holders and penalize them, or at the very least, minimize their holdings. Or convert at an equal rate at the time.

c.) FDR confiscated Gold in the 1930's. It can happen again. And if it doesn't happen quite the same way there will likely be an overwhelming public opposition to reward any who have been perceived to be "hoarding" gold. There may be even criminal laws passed on the exchange of gold for goods and services. Ridiculous? Think hard about it. Does the majority of Americans have or own enough physical gold to survive and thrive in any new system? I don't think so!

4.) And may I remind that the entire world uses fiat systems. The dollar rises and falls relative to every other junk currency out there. I don't think it'll be the one that fails first particularly since its the world's reserve currency. And its due for a big rally indeed....

5.) Gold is to banks in what Kryptonite is to Superman. And banks control the world. Gold threatens fiat systems. The people in power will not easily give it up.

6.) Personally I think the best store of value right now will be in dollars. It is the system. And any systemic collapse will result in a conversion from that very same system. The public will demand it as a sense of fairness.

Simply put, social mood will demand that Gold be marginalized. At the least, I think it will be converted at the going rate no matter what happens.

So with that said, what is happening to gold and where is the "going rate" going? The fact that the dollar spiked a bit and Gold dropped 4% is not good news for gold holders. Bullish sentiment has been at record levels for quite some time now. Weeks. As reported by EWI, bullish daily sentiment was recorded at record 97 percent 2 days running and has been above 90% for weeks. Almost no one can imagine Gold going back under $1000. There is likely none who can see sub $600.

Gold mania is well entrenched as I have talked about before and like EWI points out. Now after 10 years, we have high profile investors starting Gold funds and Barrick's Gold mine just announced the last of their gold hedges have been liquidated (no doubt at a great loss). Its ironic or actually perfectly anticipated by EW analysis. It marks a peak. The public wants gold and, by golly, they will get the opportunity to buy it!

As with any price decline there should be an elevated sense of bullishness during the decline. This actually ensures it continues to decline! Which means that would be the bet to make if your a contrarian which is a key principle of EW analysis.

Gold Bulls will slowly be grind down again until there is extreme bearishness. And it may take quite a while to produce that amount of bearishness. Just like P2 in reverse. And it takes price declines to produce that bearishness. Bulls will be mercilessly squeezed until they capitulate. Isn't it the way any trade works? What makes Gold special? (my answer: nothing)

My short term chart shows that perhaps there is room for a 5th wave up to occur. The wave (3) "acceleration channel" has been clearly broken. Using the "base" channel as an expected wave (4) bounce point, Gold must immediately muster its strength in the here and now to be able to recover back upwards in a final wave move.

But there are several reasons to be doubtful that it can achieve a new high. 1) As a commodity, once the parabolic rise has "snapped" it cannot regain its old highs. 2) The dollar is due for bang-up rally, indeed a predicted wave 3. 3) It has arguably had a "thrust" out of a triangle which means there won't be a 5th wave...

But Gold hold a special place with people and please do your own diligence on things. I don't want to shake people out of whatever is the trade or philosphy they have on Gold. I am merely pointing out what I think and how I interpret the charts and the "historical" charts of parabolic commodity rises. This is all based on EW analysis.

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