Originally published by Chamber of Merchants
Gold broke support, yet rebounded off $1170 USD, closing at a poetic level of $1183. We’ll look at the current situation as well as some likely scenarios. The next few weeks will test traders and the markets more than the last few weeks have. When will the market realise that an indebted USA will need to beg for the funds intended by the Trump spending spree?
Prelude
What is the Weekend Report by the Chamber of Merchants ?
The Weekend Report provides insight on the stock market and the aspects of the global stage that I believe pertain to my own portfolio. I am a trader with over 16 years experience of wading through the madness of markets. While I am qualified in economics, business and environmental policy, having the corresponding degrees cum laude, none of it remotely prepared me for anything that in fact happens in our economies, financial markets and global politics. It disappoints me to know that we live in a world where education and career pathways are established in a manner that keeps us from truly thinking.
We are not required to think. We are required to spend money, in-debt ourselves with loans and mortgages and pass the same habits to the generations that follow to keep this system ever running, ever spiraling towards a greater chaos.
Readers that are in their senior years may recall that while wages a few decades ago were modest, they were able to afford more than what the average wage can today. In fact, the standard of living we find ourselves in today with households required to have two income earners or more just to afford a single home should be concerning and worthy of protest. Yet, we find ourselves, like amphibians, simply adapting to the boiling water around us, to the point where “work” becomes akin to slavery in terms of what is earned and what it can afford. Those of you that still have access to very senior parents, grandparents or great grandparents would do well to ask a few questions about what life was back then in terms of salaries, affordability, housing, debt and the cost of living. When a previous generation passes away, it leaves the generation that follows with no memory of crisis or the pathway that led to those crises. Even though a version of history is recorded in writing, who would bother to read it in a day and age where we transition from sleep to facebook to work to facebook to home to TV to sleep? We don’t think anymore, because we don’t need to. We can get by on autopilot.
Yet, autopilot has a set destination that we will only be aware of when it’s too late to change course. This is on a personal, societal and global scale.
In this light, I offer some thoughts on our world, the economy and the future. I most often comment on trading and the commodities that relate to my own portfolio of investments which is currently real estate, agriculture, gold and silver. I also share insight into thinking processes that have caused me to incur and avoid substantial losses as well as ways of thinking that have allowed me to profit substantially in my latter years of experience.
I am spontaneous and excitable in my writing, which is most likely attributable to my age being 33. My posts are not exactly orthodox financial commentary, yet my style has been described (not by me) as accessible, plain and…yes… even entertaining at times. *gasp*
Money, finance, economics, markets etc are admittedly laborious, convoluted and sometimes just plain boring. But what if I told you that there are dramas unfolding on an hourly basis globally that are completely hidden from plain view. They are laced with struggles for power, money and control of our combined global destiny. It’s all happening right now, hidden behind numbers, statistics, statements and stories.
Ok, having read what I just wrote, I must say, even I’m excited (probably that 33 kicking in again).
So I’ll continue to share and post ideas that I find interesting and relevant. Most of all I hope to point you in the direction of self-education, progress and ultimately, thinking better to make better decisions.
If I were president/prime minister, I would entirely replace and repeal the education system that has not kept pace with the needs of our people, societies or economies. However, the best each of us can do in our personal capacities, is to pass on relevant lessons and knowledge to our offspring who collectively form the next generation of our society. (That is if you can manage to pry their faces off from their mobile and tech screens).
Enough of that violin backed rhetoric. Let’s get on to the Weekend Report.
Gold Support and Entry
Look at the chart above. I mean, really look at it. It shows where we are right now at the bottom of the monthly trading channel. Use objective information and make a decision accordingly. I don’t trade gold directly, but rather Australian gold and silver miners. However, for 2 weeks I have said that an excellent entry point would be around the support area. While gold touched $1170 (!), it managed to close at $1183 during US trading on Friday. The $1183 mark is a close above the bottom limit of the trading channel. For me it represents a great opportunity to enter into the gold sector with low downside risk and large upside reward. However, a concern would be to catch a falling knife.
If you flick back at Friday’s post you would be aware that economically, gold has some slingshot catching up to do in price terms due to the economics behind our currency and economic situations. However, that is the big picture.
What about now?
If this is a great entry point, then waiting for a confirmed reversal would be ideal.
One of the many confirmations (for risk management) that I would wait for is if the 49 Triple Exponential Moving Average on the 4 hour chart moves through the major cloud balance line ( If the pink line turns and cuts through the white line).
This would not provide certainty, but it would would indicate that Gold is starting to gain some traction in the upward direction. I’m already all in, but if I had access to extra funds and I if I needed to wait for some confirmation before throwing myself at the precious metals sector, then this would be one of the indicators that would increase the probability of success.
Note to self: if the 49 TEMA does cross through that cloud line, then price would already be above $1190. And if we get a cloud balance confirmation, which is the red and white lines crossing over, with lagging price line following, then price may already be around $1230+. However, trading into the trend is far safer than trying to call a bottom. (I will address Cloud Balance Charts at some stage).
Keep in mind that $1170 was the most recent turning point for support. If I needed a stop loss then I would set it slightly below $1168.
Breaking below that level would be a sign that the next support could be tested which is around $1144. Many traders sold their gold mining stocks on Friday while the price was $1170-$1177.
However, gold managed to close at $1183 which opens the possibility that some of those miners will open higher Monday. Interesting to note that, once again the US GDX (NYSE:GDX) or gold miner’s index did not break lower than last week.
In fact, the GDX closed slightly positive. I see the divergence as a positive sign. When I say divergence, I mean that gold is down, yet US gold miners don’t appear to be breaking lower(yet). The general impression I get is that normal retail traders and investors are selling their gold mining stocks, yet the stocks are being purchased in large enough volume to not make lower lows. Let’s see how it unfolds. It really all depends on the US dollar currently.
I’ve seen posts saying that gold is not connected to the US dollar…
While the the US dollar and gold can go up concurrently, the current trade is almost 100% inverse. This means if the dollar goes up, gold comes down. And what determines the dollar? Right now it’s the economics in Japan and the stability of the Euro. Anything that is negative for Europe or Japan, will cause the dollar to rise as the euro and yen are sold. This means that if there is an earthquake in Japan, you would witness the yen being sold off whole the US dollar gets stronger. As the dollar gets stronger, gold weakens.
Of course, there are moments of complete global uncertainty where it is not known what the effects on any of the currencies would be: then the rush is temporarily into gold. Take Brexit and Trump as recent examples.
Gold Exit
There are many traders that want to exit their gold positions. They’ve had enough.
This isn’t what they signed up for.
So let’s just briefly look at what recent history tells us about optimum exit levels. Remember, exiting a transaction should not be based on feelings. The market does not care about how you feel. Your exit should be based on where the best price can be achieved. Looking at the chart, it is obvious that pushing through an oversold position would usually lead to a brief overbought level which would provide the best exit price. This is not guaranteed, but history usually does repeat itself. In this light, exiting now would be around an oversold level. This is likely to cause disappointment if gold returns, as it usually does, to an overbought position.
Don’t get me wrong: I am not bailing out on my own positions. My shares will not expire. I am confident in the companies which I am in. They don’t look great right now, but price is probably reflective of current sentiment which is extremely negative. I am merely discussing this thinking process for traders to realise that there is a good time to exit and a bad time to exit.
Oversold conditions, especially on the 4 hour chart are generally not the best time to sell. (There are always exceptions…but this is the reality in general terms and looking at gold since for the past few months, if you had sold at oversold conditions in the RSI, you would have sold before the rally almost every time. In this way I hope I am providing some perspective for readers that are no longer interested in the precious metals, but who also want to exit at optimum levels. NO guarantees, but worth considering.
Gold: A Bear’s Perspective
Above I have charted what short sellers and those that predict the demise of Gold would subscribe to. It’s not a matter of what anyone desires though. It either will or won’t. It’s either a bull market or a bear market. How we feel is irrelevant.
So in the chart above, the trend lines are down, the channels are down, and gold, while having a brief rally appears to have failed to achieve anything of substance. If the price does reach the higher end of the channel, the bearish traders would sell into that , intending to make a profit on the way down from a test of the channel’s resistance.
Gold: A Bull’s Perspective
Below is the chart which the bullish gold traders subscribe to. In the long term, the trend appears to be up. However, there is clearly scope for some lower price action which would still remain within the bullish trend line.
Why do I subscribe to the bullish perspective?
- Gold production has peaked, with demand now outstripping supply.
- The conditions that pushed gold from $300 to $2000 are still in play.
- The economic story is converging into a single focus which is that the Federal Reserve will soon need to expand it’s monetary easing program. The bond market, the Trump infrastructure plan, the social security dilemma and planned tax cuts all lead to one single scenario: the Federal Reserve is moments away from engaging in expanded money printing. After 16 years of loose monetary policy we have finally come to rest around 1% GDP in the US which is dismal. The only thing that the Fed can do is print money. They don’t call it that: they call it asset purchases, quantitative easing etc Of course they say the government should now enact fiscal policy, which means the government needs to start spending money just like 2001 and 2008. The only problem is there is no money to spend. The Fed literally needs to print the “money” so that the government can spend it on bridges and roads etc, known as deficit spending. This will be extremely bearish for the U.S Dollar and bullish for Gold. And it’s all starting in the next 12 months.
As I pointed out earlier this week, the chart below shows that gold was sold off on the premise that the economy was recovering. The Fed was meant to stop buying bonds and the need for quantitative easing was past.
However, given the poor economic numbers and the fact that the U.S is almost $20 trillion dollars in debt, I believe gold is in a bull market which will last for 3-4 years.
Conclusion
This has been a relentless and intense drawdown. Breaking through support after support.
You and I should be aware that many funds and some banks were short on gold at the $1100 price level. Since then they have been in loss territory up to $270 USD per ounce. Over thousands of ounces of paper gold, that wouldn’t look too great. The best option would be to get Gold to a break even level before closing short positions. The next few weeks will tell if this theory holds any water.
The best and only advice I can provide is not to trade on emotion. Rather trade on facts.
I would have liked to discuss more regarding currencies, the India gold rumour etc…But I will keep it for later in the week.