World Of Wallstreet

Elgin Mining (ELG.V) Buyout Of Gold Ore Resouces (GOZ.TO)

Elgin Mining (ELG.V) made an offer to buy out Gold Ore Resources (GOZ.TO) in an all stock transaction nominally at a premium of 66% to GOZ.TO's recent closing price. As of 9:40AM GOZ.TO is trading up 25% relative to yesterday's closing price.

Here's my take on the situation:

• GOZ.TO is a small (44K oz/year), high-cost gold producer with a mine in Sweden that is making a lot of money at current gold prices, but which has no growth prospects. 
• ELG.V is a mine reopener of a high-grade mine in the middle of nowhere (see any towns, roads, cities anywhere near the mine in the map below?) in the Northwest Territories of Canada. The mine closed in 2005 due to low gold prices. They have at least one big-name executive (founder of Kinross Gold is the Chairman).
• I hate mine reopeners as I lost a tonne of money in 2007 on base metal mine reopeners. The mines look like money makers at current metal prices and then they are un-economic and "go to zero" when the price declines.
• But, I remain bullish on the price of gold.

I've decided to sell all my GOZ.TO even though it looks on the surface like the mine reopener will work. Here's why it looks like the mine reopener will work:

• The cash cost of that ELG.V mine has got to be entirely driven by the price of fuel since there are no roads. Transporting fuel and equipment and people, etc. in and out has got to be the primary cost driver for that remote mine.
• So, whether that mine reopener remains profitable depends primarily on the ratio of the price of gold to the price of fuel (see chart below).
• The price of gold relative to oil now is approximately twice what is was in 2005 and is trending higher and has been consistently higher ever since 2009. This seems very promising.
• As long as this remains the case the mine reopener will probably "work",

However, in the light of my reasoned conclusion that Peak Oil is "real" and "significant", I just don't want to touch anything that completely depends on the price of oil staying low relative to any other thing including gold. I don't like high-cash cost gold producers that use diesel either for power generation or for open-pit mining.  I'M OUT.

MontyHigh, www.worldofwallstreet.us

P.S., I kind of suspected GOZ.TO was a value-trap when I bought. There wasn't any kind of catalyst for revaluing the company. They had:

• No growth prospects, no chance of increasing production above that 100K oz/year level that seems to cause gold miners to get a decent valuation.
• No commitment to returning profits to stockholders with either share buy-backs or with dividends.

Next time I buy into a gold-miner value play there has got to be an exit strategy.

Gold Reserves Now A National Security Issue For The World's Governments

I've been feeling that the "India buys Iran's oil with gold" story (e.g. click here) was quite important for understanding the world geopolitical situation and for gold investing, but I wasn't sure exactly how. Just last night the reasoning to support the feeling came to me.

Let's review the major, recent geopolitical gold-related news stories:

• Libya's Ghadafi pays his mercenaries with gold as he attempts to fend off the Bankster Empire attack masquerading as an Air Campaign to protect citizens from slaughter.
• Venezuela's Chaves demands the return of Venezuela's gold from London. He realizes that Venezuela is definitely on the Bankster's list of "regimes that need changing".
• Iran relies on gold to maintain international trade using gold as the Bankster Empire cuts it off from the dollar system and escalates its increasingly violent (bombs, assinations, etc.) campaign for regime change.
• India relies on gold to maintain its supply of Iranian oil.
• China and Russian, still not under the control of the Bankster Empire, eschew dollars for gold, beefing up their gold reserves as fast as they can without driving the price of gold too high, too fast.

Gold is what a nation (regime) relies on should the Bankster Empire turn against that nation.

The first thing the Bankster Empire does when its turning the screws on a regime is to freeze its assets. After that comes the kind of things happening to Iran (funding and supplying internal opponents, preventing them from doing trade by locking them out of the banking system, assinations, bombings, etc.). Throughout, gold reserves held within that nation allow the nation to continue to function and trade with other nations.

So, to any nation that is not fully integrated into the Bankster Empire (a non-aligned nation), gold reserves aren't a nice investment, they are an integral part of National Security (survival). As we know in the USA, national security trumps all other political priorities.

Here's my quick estimate of those nations which constitute the core of the Bankster Empire (dark green) and those nations that are clearly either close allies or vassals of the Empire (light green). Dark yellow constitutes those nations which are clearly outside of the control of the Bankster Empire with light yellow nations constituting those that I deem to be mostly outside of Bankster Empire control. Countries which are white are countries that I just don't know enough about to categorize. Please leave me a comment if you think I have a country misclassified.

As a result of the pattern formed from the Libya, Venezuela, Iran, China, Russia (all non-aligned), I'm expecting that every nation in the world (beginning with the non-aligned nations, but continuing to fully aligned nations like Germany) are going to making the accumulation a significant, no-kidding physical gold bullion reserve located on their own soil as a matter of national security, a top priority.

This major geopolitical shift is an unexpected consequence of the Banker Empire's squeezing of the Iranians that has enormous long-term bullish implications for the price of gold.

It seems Saddam Hussein's decision to sell oil in something other than the US dollar (Euros) was the final straw that drove the Bankster Empire to attack Iraq. I think that the Bankster Empire is not at all amused by the Iranian Gold For Oil deal and that they will be escalating their attack on Iran. Jim Rickards and Ron Paul are right. In my view, sanctions are a prelude to war and war with Iran is already underway and that will become more apparent as time goes by. That seems bullish for oil and gold for the short and medium-term.

MontyHigh, www.worldofwallstreet.us

Gold Interventional Outlook

There's a quite a pile of Interventionals coming up. Here's the outlook for Gold Interventionals for the next week plus:

• Tuesday 1/24 - Turd's "Happy Tuesday" (click here) - where the Evil Empire attempts to cover some gold and silver shorts to make the commitment of traders (COT) report look good. I expect we'll get some positive action thru the close here so that the Evil Empire will have plenty of ammunition for the Interventions that should follow.
• Wednesday 1/25 - FOMC Meeting Announcement w/Chairman Press Conference - gold will be driven down so that it doesn't make the Almighty Fed and its Chairman Bernanke look bad. 
• Thursday 1/26 - Durable Goods Orders and New Home Sales - not a big interventional but we need to keep gold looking bad for the big ones which are Friday and Monday the 30th.
• COMEX Gold And Silver Options Expiration - which influences the next day, Friday.
• Friday 1/27 - Q4 GDP which will, of course, be "better than expected" with gold being taken down to help form the impression that "we're saved!".
• Friday 1/27 - Day after COMEX Gold And Silver Options Expiration - gold is forced down so that anyone who exercised their call options is motivated sell their futures and not take delivery of the physical gold / silver. The close on Friday should be a good entry point. 
• Monday 1/30 - After the retail gold bugs are whipped up by cheerleading over the weekend, they typically bid up the price of gold stocks for the Monday open. Gold stocks typically fall throughout Monday to demoralize those new buyers.

Well, that's my short-term trading outlook based on the Interventionals. I expect I'll hedge some of my Gold call options beginning sometime Tuesday (probably near the 4PM close) and exit on Friday at the close with a little more short-term trading as things go along.

Gold has had a good 10%ish ($150ish) run from the lows around $1525 to nearly $1570 in just a couple of weeks and a few day pullback seems like something to prepare for. Got any dry powder?

MontyHigh, www.worldofwallstreet.us

 

Don't Believe Everything You Hear, Even From Jim Rickards + Revised 2012 Estimated Closing Gold Price

I have great respect for Jim Rickards, Sr. Managing Director for Tangent Capital, and I find that his latest King World News podcasts (click here) has a lot of valuable information. But, you can't believe everything you think you hear even from someone you genuinely admire.

Allow me to be a little bit picky. Here's a quote from the interview beginning at 18:23 sec mark: "By the way, in the last eleven years gold has hit the annual high in the first half of the year, I believe, ten out of eleven times. Check that. I'm highly certain its almost every time."

Well, that sounded interesting and tradeable to me, so I decided to check it out. I dumped the daily historical data for GLD into a spreadsheet (click Download 20120115gldhighofyear) and produced the graph that follows:

The graph provides the price of gold (using GLD as a proxy) and, the high of the that year. As you can see, the high for the year (which I presume is the same as Rickard's "annual high") occurred in the first half of the year only twice out of seven times. So, it seems that Rickards (at least as I understand him), is flat out wrong on this one. I'll be happy to retract this statement in all humility if I got it wrong or misinterpreted his statement.

The lesson I take away from this is "It's worth your time to check out as much of what an expert says as you can prior to using his analysis as the basis for an investment or trade."

Actually the above graph seems very bullish to me and here's why:

Every year for the last six years the Gold's high of the year has exceeded the previous year's high. That means we should see an all time high for Gold in 2012 (1911$+) provided the trend continues. This trend probably continues back at least a decade, but the data set I'm using only goes back to 2005. 

Here's another graph inspired by Rickards' getting me thinking about annual highs:

We see that in each of the previous six years we convenient have data for that Gold ended the year higher than the annual high of the preceding year. This analysis suggests, again assuming the previous trend remains intact, that my previous forecast (click here) for the 2012 price of gold closing price of "a little over $1800" was too conservative. In the graph above, the only year where the closing price of gold was even close to the prior year's high was 2008. So, if we think (as I do) that 2012 will not have a 2008 type financial crisis and the gold bull market remains intact, then the forecast closing price for 2012 should be substantially above $1900.

The graph that follows looks at the percentage gain of the high of one year relative to the high of the prior year and the percentage gain of the close of one year relative to the high of the previous year.

Using the above graph we can estimate the high of 2012 will be between 18% and 35% higher than this year's high price giving a 2012 high price target of between $2255 and $2580. Seems high, doesn't it?

Using the above graph we can estimate the closing price of 2012 will be between 4% and 20% higher than 2011's high price with the higher likelihood of the closing price being 18% or higher (4 out of 6 years). Those prices are $1987, $2293 and $2255/oz respectively.

With this post I increase my estimated closing price of gold for 2012 to $2255/oz. It will be interesting to test this estimate with the results from 2002, 2003 and 2005. I may follow up this post with another completing the analysis.

I hope you find this discussion useful.

MontyHigh, www.worldofwallstreet.us

 

 

Follow Up: $USD And 2012 Gold Outlook Based On The 10-Year Historical Trend

Here's a follow up round on this recent post:2012 Gold Outlook Based On The 10-Year Historical Trend

2b (a remarkable micro-cap stock picker) responds: "My only question would be how gold has correlated to the U.S. dollar and what effect a strong dollar might have on your future price prediction."

Good question. Best gold type podcast I've heard in a while was Sinclair is linked from here: http://www.jsmineset.com/2011/12/26/a-modest-1700-2100-gold-price-in-2012/

 

He claims Pierre Lassonde (King World News) is expecting gold between $1500 and $1800 in 2012 and that is based on strong dollar. Sinclair's call ($1700 to $2100) is based on the dollar not being as strong as expected.

 

 

But here's a chart of the dollar action for the four big corrections. I find for the three previous corrections:

(a) The dollar rises up until the end of the correction.

(b) What the dollar does after the gold bottom varies from one correction to another.

 

So, if the dollar keeps rising at this point, I expect that the bottom is not yet in for this correction. I guess you are expecting further dollar strength as Europe continues to look risky. The "Japan is next" buzz is starting to get thicker also. Japan right now seems to be like Italy was when all eyes were on Greece. The smart guys were talking about Italy. Now the smart guys (Kyle Bass...) seem to be talking about Japan.

 

MontyHigh

Are The Banksters Net Short Gold And Silver? Will The Banksters "Blow Up" Anytime Soon?

I hear many different voices in the gold community discuss the idea that the "Banksters" are manipulating the price of gold. There is an interesting difference of opinion regarding the end-game of this manipulation.

Some voices, Bill Murphy being one of them, claim that the Banksters are leveraged short the price of gold (and silver) and that eventually (e.g. when they've sold all their physical as part of the price suppression scheme) the price of gold will shoot to the moon with the Banksters in ruins.

Other voices, including Jim Sinclair, Catherine Austin Fitts, Stewart Thompson claim that the Banksters, while managing the price of gold, are firmly in control and aren't going to lose control anytime soon. Instead they manage the price to produce extra volatility to take the leveraged trader's money. Sinclair and Thompson claim that nobody is going to make more money from the gold bull market than the Banksters and Thompson in particular mocks the idea that the Banksters a net short gold and silver.

Thompson in particular is trying to buy when the Banksters buy (that would be now) and sell when the Banksters sold (that would be above $1800 this fall).

I've recently come around to the Sinclair, Fitts, Thompson view. We may see various financial institutions go bankrupt and governments lose power and/or default on debt, but I don't expect to see the mainstream powers-that-be behind the scenes (let's call them the banksters) fundamentally lose their grip or their wealth.

How about you? Do you think "THEY" are losing it soon?

MontyHigh, www.worldofwallstreet.us

2012 Gold Outlook Based On The 10-Year Historical Trend

NOTE: This piece was written during the Christmas holiday. As I publish it on Dec 29 after three hard down days, I see that the lows I was calling for January or February are happening right now.

Its that time of year and so I'll take a twirl with my own 2012 outlook focusing on where my money is: Gold. I'm writing this as I do my analysis so you'll be seeing my thinking as it takes shape. The basis for my thinking is three key ideas:

• The 10-year gold bull market is intact. I don't think any of the fundamentals driving the rise in the price of gold are fixed (the unstable and unsustainable exponentially-increasing debt-based financial system). Perhaps more controversially, I don't think the Banksters will, this year, lose their ability to manage the world economy and the price of gold. I think we are in for more of the same, but at an accelerated pace.
• August/September 2011 the price of gold got ahead of itself and is now in a significant correction. My failure to see how overextended Gold had become was my biggest trading failure this year. Gary Biiwii was right on top of this, but I didn't listen to him. Woulda, coulda, shoulda.
• The best way to estimate the current correction is to look at comparable corrections from earlier in the gold bull market.

The above chart summarizes my view of the 20xx Gold Bull Market to date:

• (GREEN LINES) Most of the time Gold has been trending higher. The underlying trend as been accelerating as the bull market has proceded (each green line is slanted a little higher than the previous one).
• (RED LINES) Four times (culminating in 2006, 2008, 2009 and 2011) gold has gotten ahead of itself in an unsustainable above-trend run. The triggers for these above-trend runs were, in my view:
  • 2006 - accelerating inflation of all commodity prices.
  • 2008 - accelerating inflation of all commodity prices.
  • 2009 - an overhang of central bank intervention to end the 2008 collapse.
  • 2011 - an overhang from central bank intervention in the form of QE2 money-printing.
• (BLACK LINES) Each of those unsustainable runs has been followed by an extended, multimonth correction.That's where gold is right now.

The above chart shows how I identified the four above-trend runs. The above-trend runs all culminate with a rise to more than 20% above the 150-day moving average (top red line). Its worth noting that apart from above-trend run corrections the price of gold has fallen no more than 8% below the moving average throughout the bull market (lower green line).

The charts I'm looking at today are all logarithmic scale. That means we can compare percentage price changes by comparing the height of rectangles on the chart. The chart above has for each of the prior corrections a rectangle giving the price change from top to bottom. It also has a rectangle that can be used to estimate the end of 2012 price of gold. This rectangle gives the price change from the high a little more than a year and a quarter out. That's how long it will be from the 2011 high to the end of 2012. I've made a copy of each of these rectangles and moved them to start at the 2011 high. This allows us to see what will happen if the 2011 correction follows one of the earlier corrections. For the 2006 and 2008 corrections this price is less than the previous high. The correction we're having now lasted at least that long prior achieving all-time highs in 2006 and 2008, but not in 2009.

The above chart gives a closer look at the three prior corrections and what they would mean for the current correction. The table that follows gives the numbers. 

The above table suggests that the bottom may not be in for the current correction especially if the current correction is like 2008.

Let's look at the 2008 correction a little more closely. The low price of gold, prior to the Lehman brother's bankrucpy was 21% down from the high, a value very close to the 2006 drop. I would argue that the powers-that-be lost control for a few months during the 2008 crisis starting with the Lehman Brothers bankrupcy. I don't expect them to lose control in 2012, but who really knows.

Here's the previous table with the assumption that the Aug 2008 lows were the lows for 2008 (that is, without the post-Lehman brothers collapse). Now the 2008 correction looks a lot like the 2006 correction.

The 2006 and 2008-without-Lehman scenarios are the pattern for my best guess outlook for the price of gold for 2012:

• I expect a low around $1500 in January or February.
• I expect gold to end up around a little over $1800 at the end of 2012.

Well, that's my outlook with the reasoning behind it. I wouldn't call it bearish, but its certainly not as bullish as many of the predictions I expect you are hearing. I heard one analyst call for $2500 gold in 2012. I'm not the only analyst within the gold-bug community with modest expectations for gold 2012. Even the ever-cheer-leading Eric King could not elicit a bullish-sounding outlook from Pierre Lassonde who is expecting the average price of gold for 2012 end up below the average price for 2011 (click here). I believe Martin Armstrong expects further weakness in early 2011 as well.

The next couple of months are quite strategic. In fact, I think that next Monday, January 2, is very strategic, but the reasoning behind that is for another post. The annual percentage gain from the trend line of the first graph in this post is around 23%/year. If gold can regain and hold the recent uptrend from the first chart in this graph (see above) the target price for the end of 2012 becomes $2020/oz. If it rises above the trend line by some amount (say $75) the target rises accordingly.

It hasn't regained that trend line yet so I'm sticking with my earlier prection. My best guess outlook for the price of gold for 2012:

• I expect a low around $1500 in January or February. If the system really starts coming unglued the target price is significantly lower (e.g. $1324).
• I expect gold to end up around a little over $1800 at the end of 2012.

While I don't need links to predictions without any substantial reasoning / analysis behind it, I'd be obliged if you'd leave a comment with a link to any other analysts who both provide a quantitative outlook and the reasoning behind it.

MontyHigh, www.worldofwallstreet.us

Does Credit Have To Expand Over Time To Prevent Monetary System Collapse?

How often do you watch a youtube multiple times? Especially an educational one? This is one I watched once and it had enough important information that I had to watch it multiple times to see if it really made sense.

Michael Maloney explains in this long tube (click here) how the fiat, fractional-reserve monetary system works. This is the system used by the USA and virtually the whole world. Maloney claims thats that credit has to continuously expand or the system collapses. Can you help me figure out if he's right?

There's four segments that need to be considered. The first two are gimmees and definitely accurate. The key idea of the third and fourth segments are what you can help me figure out.

Starting at 20:55 and continuing to 22:15 he provides an explanation of how a non-fractional-reserve gold-standard money system used to work. This is good background material, but not particularly relevant as its been a hundred years since any country used that system.

From 22:15 to 28:06 he provides an excellent introduction to how a fiat, fractional-reserve money system works. This is something that is hard to understand, hard to believe but true and quite important. Do you get it? I accept that this explanation is accurate and reasonably complete. He doesn't mention that it is the threat of force (police and military) that is the reason why this system must be accepted by the population.

From 29:59 to 32:12 he claims that because interest is required on all of the money borrowed into existence money that the total amount of debt has to increase every month or the system starts to collapse. 

From 45:09 to 46:34 explains why he thinks the total amount of debt has to increase and why this is unsustainable and must end in a debt collapse. This is because there is more money owed (amount borrowed plus interest) than is created by borrowing (the amount borrowed) and as the debt comes due (debt plus interest) and is paid or rolled over the relative amount of debt to currency in existence increases. This animation is the thing I couldn't stop thinking about and brought me back to this youtube and caused me to write this post.

Ok, so that is the background to the claim and here is the claim under consideration (starting at 31:56) verbatim: "This system requires that we go deeper into debt every month than we were the previous month; we have to always borrow more currency into existence than we are extinguishing every single month or the whole things starts to collapse". That is an exact quote. Here it is abbreviated with fixed up syntax: "This system requires that we go deeper into debt every month ... or the whole things starts to collapse".

Help me here. Is that claim true? And does "the whole thing starts to collapse" imply that the whole thing must collapse or merely that ongoing intervention is required to keep it from collapsing and that continued intervention is inherent in the system.

It seems to me that:

1. the total amount of debt in the system can be reduced by default or debt forgiveness. For example, what happens to someone's debt when they die? It will never be paid back. Whoever the debt is owed to must write the debt off and thus the total debt in the system is reduced.
2. the debt, including interest, owed by the US treasury to the Federal Reserve is in a different category from other debt in that nothing bad seems to happen if the US treasury defaults on that debt. So, let's call total effective debt the total amount of debt minus the amount owed by the US treasury to the Federal Reserve.
3. the amount of money relative to the total effective debt can be expanded by having the Federal Reserve print money (buy US treasury debt) and having the US treasury hand the money out as it sees fit (ordinarily directly to its pals especially to the war industry).

So it seems to me that the system is not unsustainable in that it must end. It seems me that the system is economically inefficient in that economic distortions take place when the US treasury spends money (hands out money) to its pals where that money is wasted rather then invested in more productive activities that a free market select. Should we call that handing out of money to pals malinvestment or looting? In either case it sounds like stagflation to me, not a deflationary collapse and not a hyperinflationary collapse.

So, help me. Am I wrong and is the system inherently destined for deflationary or hyperinflationary collapse or is a "slow burn" (to use Catherine Austin Fitts terminology) ongoing fall in the middle-class standard of living another alternative that can be sustained for years or decades? What is it about the system's operation that I don't get that means that a collapse MUST happen?

MontyHigh, www.worldofwallstreet.us

Good Bye $1605 Resistance: Christmas Bounce A-Coming

Gold is now free to move up to the next resistance around $1670.

MontyHigh, www.worldofwallstreet.us

 

Chart Survey

Here's what I'm seeing in the charts. I guess I'll publish it.

The 30-Year treasury bond yield, which has turned down again, seems to be signaling a bigger, scarier market event than 2008. 2008 was a single spike down with an immediate sustained recovery back into the moving average channel. The current situation has a similar spike down that is not returning and is instead signaling more danger. Here's some observations:

• In 2008, gold's low occurred immediately prior to the spike down. This time gold is only now falling hard suggesting perhaps another fear-induced spike down in 30-year interest rates.
• Sometime soon a "short the long-term US treasury trade entry should appear" when the crisis fear peaks.
• A US stock market collapse has yet to accompany the spike down. It has been foreign stock markets collapsing this time. In 2008, the depths of the US stock market panic arrived after 30-year treasury rates had recovered. The US stock market is not out of the woods yet.

The US dollar looks really strong although it seems short term likely to go thru a week or two long consolidation (see other RSI 70 touches/excursions).

The VIX isn't sensing the same fear that the 30-year treasury is signaling. Its pattern seems similar to 2010 and where a return to the 40-week moving average indicated a bottom in the stock market and anticipated the Bernanke Jackson-hole speech that hinted at QE2. It also looks like Apr/May 2009 where is signaled the end of the 2008 panic.

I'm surprised, but real-estate looks short-term bullish. Is it benefiting from those low interest rates? Still it has stopped trending up from the 2009 bottom and is basically range trading.

Commodities look weak to lousy across the board. The above chart shows industrial metals threatening to break down. Going short big miners with a stop if they don't break down in two weeks might be worth looking into as a hedge that the crisis has not peaked. 

If you have read this far, the following three gold charts should reward you.

Gold took a little excursion outside the 55-day bollinger bands this week. This is ordinarily a good entry point. The RSI also took a little excursion under 30 this week (also a good entry) point. Gold found stupport at the May 2011 (previous to the most recent) all time high. Also a good place for support. If this is not 2008 all over again, then Thursday was probably a good entry point.

This chart shows that 55-day bollinger band excursions are good entry points, generally (blue arrows) and that RSI 30 touches or excursions are also often good entry points. Holding until an upper bollinger-band touch or near-touch looks good on this chart after such an entry except for some of the 2008 entries.

Here's a close up of the 2008 crisis. As you can see, even in that extreme situation, returns from 55-day bollinger band excursions and returns from sub-30 RSI excursions all had short term pops with all but one having a return to (or close to the upper bollinger band. A trading system of:

• Enter on a return from such an excursion.
• Exit on an upper bollinger touch or near touch.
• With a generous downside stop of at least stops of 12% percent below the entry price.

Would produce very nice positive results on all of the entries in that chart. That's what I'm holding out for currently. By the way, the current situation looks most like the Nov 2008 situation as far as the MACD goes . I wonder if we'll see a few weeks of choppy consolidation like we saw then.

In retrospect, the first chart and the last three seem most significant. They seem to be saying that we are in a serious situation like 2008, but that most of the damage to gold is done. Furthermore, the VIX chart and the real-estate chart suggest that the worst is over for the rest of the markets including the US stock market.

MontyHigh, www.worldofwallstreet.us

End Of Year Gold Trading

Well, we are now at that point I was planning for in an earlier post (click here). We are at the point discussed in the post, two weeks before the end of the year. Here's the current gold chart:

Its been a painful week and a half with my account being leveraged long in gold options. My Feb 2012 $1700 options are pretty close to "going to zero". I bought a few more options this Thursday close to the bottom. I still have enough gold bullion to retire on a mercenary general's pay plus a bunch more other assets. Still, I'm pretty sure that if I weren't keeping my "basically a hobby" day-job that my trading would be a lot more lucrative. 

So, what's the outlook from here. Let's do a little pattern matching. We are looking for years with:

1. a hard drop
2. thru significant support (and moving averages)
3. down into RSI over sold conditions

around mid-December. There aren't any years in the last decode record with an oversold RSI in Dec.

Here's a quick eval of several years in terms of the above criteria (1, 2, 3);

• 2004 - (1), (3 only to 42 RSI): +.7% from low close to end of year close.
• 2005 - (1), (3 only 45 RSI): +4.8% from low close to end of year close.
• 2006 - (1), (2), (3 only to 40): +3.2% from low close to end of year close.
• 2007 - none.
• 2008 - (1 early in month), (3 only to 45): +16% from low close to end of year close.
• 2009 - (1 bottom later in month), (3 only to 38): +.9% from low close to end of year close.
• 2010 - (1): +3.6% from low close to end of year close.

So, the year that is closest is 2006. It went on to have a nice run into the end of the year, a really scary start of the year followed by a great run into late spring.

Finally, if the low is in for December (big if) there is some winnings to be made to the end of year all those years.

I expect I will stay leveraged until the end of the year. I expect that I will try to get unleveraged on the last day of the year, wait for what happens of the first day of the year to decide what comes next.

In general I find the work from the earlier post (click here) to be useful for trading gold thru the New Year. You might want to take another peek. Longer term (say between now and the end of 2012) I'm quite bullish on gold as I think that nothing has changed, interest rates are still negative and the desire for gold as an inflation hedge and a safe haven against systemic risk is likely to accelerate as the financial system's problems are increasingly understood.

MontyHigh, www.worldofwallstreet.us

 

 

Gold-Bug Mythbusters: Need To Back-Test Those "Observations"...

One idea I've heard repeatedly in the gold community is that having the gold mining stocks go down while the general stock market and gold itself are not down is an imminent warning of a "gold take down". This is alot like the idea that "THEY" always do a gold takedown when the unemployment report goes out. Another one (click here) is "They always take the price of gold down for options expiration). All three of them anecdotally seem to be true, but none seem to hold up when I actually analyse the data.

Here's how I did my analysis of the "stocks down signals gold take down" idea:

• Throw the historical daily price data for GDX (gold stocks), SPY (S&P 500) and GLD (price of gold itself) into a spreadsheet with the dates lined up.
• Look for a day when, relative to the previous close, GDX is down more than 1% while SPY and GLD are either up or down by less than .2%. 
• Look at what happens to the price of gold and the price of GDX one thru five days thereafter (close to close).

Here's the results:

The result is that for every duration and for both gold and gold stocks the price goes up (on average) for all those durations. This is particularly surprising given that the average includes that "outlier" bad results from the crash of 2008.

By the way, I don't despise those making this kind of observation. I appreciate their experience and these kinds of observations have to led me to significantl profitable short-term trade setups based directly and indirectly on those "THEY ARE MANIPULATING THE PRICE OF GOLD" thoughts. So, keep em coming and I'll just follow St Paul's advice from 1 Thess 5:21: "Examine everything carefully. Hold fast to that which is good".

Best wishes and let me know if I've got my analysis wrong or overlooked something. It won't be the first time.

MontyHigh, www.worldofwallstreet.us

 

 

 

Retire On A Mercenary General's Pay

Xenophon (Ancient Greek Ξενοφῶν, Xenophōn; c. 430 – 354 BC)

Here's an interesting bit from "The Exploits Of Xenophon" written by Xenophon himself (loosely translated for children by Geoffrey Household) regarding what happened to him around 400 BC. A Thracian Prince named Seuthes II offered Xenophon's mercenary army: "one gold piece a month to the men, two to the officers and four to the generals".

Two observations:

• Compared to an ancient Greek mercenary army, the USA does have gross income inequality with CEO's making way more than 4 times the average worker (see http://www.stateofworkingamerica.org/charts/view/17) for the background on the picture that follows: Ratio of average CEO total direct compensation to average production worker compensation, 1965-2009
• To retire on a mercenary general's pay (say with a life expectancy of thirty years) save up 1440 (30 * 12 * 4) gold pieces and spend four a month. Assuming a gold piece is an ounce in weight and at the current price of gold ($1725 when this was written), you need roughly 2.5 million dollars worth of gold and you'll be living on four oz of gold per month, that is, initially $6900 a month or $82,800 per year. You'll be living on the same wage as a Mercenary General for those thirty years.

This second point illustrates the idea that gold is a long-term store of wealth even across a span of 2,400 years.

UPDATE: 1/4/2011, The best estimate of Xenophon's pay is four Persian Daric's per month (click here). A Persian Daric gold coin weighed 125.5 grains (click here) or 8.1 grams (click here) or .26 troy oz (click here). So my best estimate of a Greek Mercenary General's pay is 1 oz/month (not the 4 oz/month given above). This a lot less than what it would take to live a middle-class retirement on.

MontyHigh, www.worldofwallstreet.us

Nicely Said Stockaphobe

Nice short post by Stockaphobe from the Investor Village precious metals board:

"Re: Central Bank Event

Cute!

 

Gold up and steady over night, then wham, banged down to 1700 ish from around 1 am in Asia. Look like someone knew something was coming so they cleaned out all the stops first, then bang at 6 am off we went. 

 

Glad to see the markets are not subject to inside info or manipulation."

MontyHigh, www.worldofwallstreet.us

For Peter:

Download America is an Insecure Empire with Catherine Austin Fitts 1_

Download America is an Insecure Empire with Catherine Austin Fitts 2_

Download America is an Insecure Empire with Catherine Austin Fitts 3_

Thinking Ahead... End Of Year Gold Trading

I'm starting to think ahead to how I'm going to trade the end of the year and then the new year. My seat of the pants recollection (prior to an in-depth analysis) is that the end of the year tends to be good, but the new year can be quite treacherous.

Following this post are the charts this analysis is based on. Here's the tabular results:

The trades I find attractive are as follows:

• Column B: Go long the second to last Friday before the end of the year. Exit at the end of the year. REASONING: The relatively high percentage of winners and the relative small size of the losers makes this attractive.
• Column G: Watch what happens on the first trading day of the year. If its not at least up .5% from the end of the year close there is no momentum supporting gold... Go short. Otherwise, gold has good momentum... Go long. Exit at the close of the second Friday following the entrance. REASONING: This smells like curve fitting, but I like it because I think that Cartel manipulation of the price of gold is significant. If they can keep gold soft the first day, they attempt to set the tone for the whole year by pushing the price down right at the beginning of the year. If they can't push it down at the beginning of the year, then gold is too strong and can keep going.
• Column H: Skip the new year's opening uncertainty. Go long at the close of the first Friday following the first trading day of the year. Exist at the close of the following Friday. REASONING: Avoids the manipulation and drama of the beginning of the year.

MontyHigh, www.worldofwallstreet.us

My Best Gold Chart

I've been leveraged long and wrong for about a week and a half now. The leverage is around 3 to 1 via Gold Futures options which at least have limited downside. Its been quite painful.

I've been feeling quite bamboozled not knowing what to do about it for a few days because I don't want to sell out right at the low. After pondering things here's my best gold chart:

The obvious feature on the graph is the consistenly rising price within the three year channel. The price of gold is now nearing the bottom of the channel which means longer term its probably getting very close to probably a good time to buy (and its probably not the time to close out losing positions). The price has also been supported by the 30-week simple moving average with only one isolated weekly close below that average.

The green area is the 30-year US treasury-bond yield. The yield has been down there near the 2008 crisis lows for more than a month. Unlike 2008, which was a single V shaped crisis, the yield is going down back down again indicating another surge of great fear. The price of gold bottomed early in the 2008 crisis and climbed thruout the 30-year treasury yield's V-bottom. The big rise in gold in the summer of 2009 was a fear episode like 2008's. The next leg down in the 30-year treasury yield that started in mid-oct 2011 was accompanied by a gold price rise just like 2008. I consider the last two weeks of price weakness that accompanied the falling treasury yield to be the result of Gold Cartel manipulating the December options expiration. If so, the price of gold may soon jump backup as the options expiration period has passed.

The blue arrows identify situations where the price of gold fell from the top of the channel to the bottom of the channel, bounced to the middle of the channel and then started falling again. In both of the previous two cases the price fell all the way to the bottom of the channel. In 2009 it took 6 weeks (four more beyond where we are now in 2011) to get to the bottom of the channel. In 2010 it took 4 weeks (two more beyond where we are now in 2011) to get to the bottom on the channel. Those bottoms, in both cases where multi-month bottoms

Putting this all together, my favored scenario is for gold to fall back to the bottom of the channel and put in a multi-month bottom. That target, if it hit immediately is around $1640 or another 2.5% down.

Of course, it could also immediately bounce (the Euro rumors of a "plan" are back) and either never hit the bottom of the channel or take a few weeks to get there which would relieve my current discomfort.

Falling out of the bottom would mean that the current phase of the gold bull market (as bounded by the rising channel) is over. If that kind of penetration occurs it will probably be quite dramatic as speculators watching the same trendline either dump long positions or jump into short positions.

So, I'm expecting 2.5% more leveraged pain with but with a downside of another 5% or so if the support is lost. I may turn some of my call options into synthetic put options to limit the downside risk. A call is turned into a synthetic put holding the options and then shorting a futures contract.

How low do you think the current gold correction will go?

MontyHigh, www.worldofwallstreet.us

Gold: Managing An Underwater Trade

WARNING: This may not be my greatest post and may not be worth your time.

As explained in a prior post (click here), I'm now long gold with a fairly large position because I was expecting a pre-Thanksgiving bounce (WRONG). Here's the table that was the basis for that expectation:

Instead, gold has dipped pretty hard. So, how does one manage such a trade? I'm going to reexamine mine entry criteria and then compare what has happened with previous such calendar-based trades.

Here's the charts for gold for the last 8 years where green arrows represent the calendar-based entry equivalent to this trade (at the close of the Wed one week before the Wed before Thanksgiving).

The first thing I see is that the 2007 trade looks most like this year's trade and, contrary to what was in the table, was actually a loser. Going back and looking at the numbers I see that I made a mistake constructing the table, ARGHH!.

The next thing I see is that several years had decent gold price dips like this current one: 2007, 2010, 2008, 2006. It looks to me, based on the 2007, 2010, 2008 and 2006 charts, that a four or five day pop is about due. I expect I'll manage this trade by waiting for a four or five day pop to exit.

MontyHigh, www.worldofwallstreet.us

 

Good Odds: Go Long Gold At Close Today (Wed), Exit At Close Before Thanksgiving

I like to look for historical patterns around days where the manipulation may be rampant and last night I looked at Thanksgiving. I was expecting to see a pattern of using the lightly traded Friday session to turn the price down. I didn't see much of a pattern there. I did see a nice pattern on the week leading up to Thanksgiving.

So, to be methodical, here's a dead-simple trading system:

• Buy gold at the stock market close during the week before Thanksgiving.
• Exit at the stock market close of the Wed before Thanksgiving.

Here's the results (one row for each of the different entry days):

Its pretty rare to see something like rows 33, 34, 35 and 36 where for each of six years in a row you get a tradeable bump up where all the trades are decent winners.

I also see that something extraordinary happened on Friday before Thanksgiving 2008 with gold rising 8% in one day. Looking back at the charts I see that was the short-term pop off a bottom during the 2008 panic. The S&P500 jumped something like 15% during those days. I've excluded 2008 from the average results because its such an out-lier.

This kind of trade looks pretty attractive to me. I have already opened a position for just this short-term trade.

By the way, the results for the S&P 500 are also attractive (but not as attractive as for Gold) either in average returns or percentage winners. Silver's results are attractive but without the consistency of gold and without a higher average return. So, gold is the place for me for this short-term trade. I have taken all my protective shorts off (copper and S&P500). I expect I'll revert to a smaller long-gold/short copper trade next week, but until them this long gold is the only short-term trade for me.

Of course, past results are no sure predictor of what will happen so everyone thinking about this has to do their own due diligence and manage their risk appropriately.

MontyHigh, www.worldofwallstreet.us

Let The Charts Talk: End Of A Relief Rally Or Party On Til New Years?

Last weekend around this time I felt completely bamboozled after looking at the charts. This week I feel like I'm seeing some things. This posts puts a few of the things I see up with comments. Click thru to see the charts in their full resolution.

First oil:

Oil is rising hard and fast. We know that when it gets too high it crashes the world economy.

The more representative $BRENT crude oil has put in a higher low and broken out of that downtrending channel.

Brent is also now rising faster than commodities in general. The world economy cannot grow in the face of a strong, sustained real rise in the price of oil, IMHO.

Gold and the US dollar are rising at the same time. That indicates real fear.

Commodities in general look bearish to me having failed to close the gap at the 2008 highs and remaining under the moving averages.

Copper looks bearish to me also.

China has bounced off a bottom but is at resistance.

The US stock market has bounced up off a double-bottom and is fighting with significant resistance at the head and shoulders neckline which is also the 61.8 fibonacci line.

My overall conclusion is that we are in a relief rally that has about run out of gas, but that this week will put it to the test. If China, the S&P500 and copper move up this week then the rally probably continuesthru the end of the year following the usual seasonals. I guess its possible for the S&P500 to continue higher for a while despite everything else falling as money seeks out a US safe haven from Europe (and Asia).

Gold seems strong against the S&P500, copper and commodities (not shown) and seems to be accelerating out of the above 3 year channel. I'm bullish because I think its different from earlier in the bull market. If it were business as usual it would take a lot longer for gold to recover from the August overbought condition.

I've been dubious about silver, but this chart shows that when silver bounces off the bottom bollinger band that it typically goes up to the top bollinger band and runs for a while (with the 20-day moving average as an exit signal). I guess I have to get me some silver, especially if the S&P 500 goes up this week.

At this point I'm long gold futures options, long gold stocks, have one silver stock, am long gold/short copper futures and short the S&P500 (as deflation insurance). Based on this look at the charts I expect I'll jettison the S&P 500 if it breaks thru the resistance and holds it and will find some way to buy a good chunk of silver if it doesn't.

Of course, everyone has to take responsibility for their own investing and this is not a recommendation.

MontyHigh, www.worldofwallstreet.us

 

Chart Of The Day: Want Some 2008 Crash Insurance?

My savings took a giant hit (~70%) from my top in 2007 to the bottom 2008. That was before I started using technical analysis. That can happen when you depend just on fundamental analysis and your analysis is WRONG. I don't ever want to have that happen again.

The above chart shows that there was something I could have done to profit from the big crash in 2008. Go long gold and short copper. Gold as a store of value in times of fear and uncertainty. Copper as a commodity whose price is sure to get hit hard in a major economic slow down. The chart shows that ratio making a continuous move that could more than double what you have at risk, supported the whole way by a very tight 20-day moving average.

The fundamental buzz around copper concerns the almost certainty of a significant recession in Europe (China's biggest export market) along with scary anecdotal stories out of China itself regarding a potential housing bust.

I've already long and strong (but not heavily leveraged) gold with various kinds paper and physical gold. I expect I'm going to play that 20 day moving average on the long gold short copper trade with a decent sized percentage of my networth at risk via the futures market as both a big economic/market hit insurance trade with an expectation of profit. A decent size position, but not anything that could blow me up.

Of course, I'm not recommending any such thing for anyone else, this post is merely pointing out an interesting looking chart that shows you want to look for if another major downleg in this Great Recession resumes.

MontyHigh, www.worldofwallstreet.us

Peak Oil/ Shale Oil: What The Experts Think

I put my "ASPO-USA Takeways" post up on the top energy investing board. Here's the thread (click here). What follows is the response from the board leader (emphasis added). I believe its significant if you are looking for a big peak oil impact in the USA soon.

"<<Expect the USA to have to get along with between 20% and 50% less oil by 2020.>

IMO growth in production from the tight oil plays in both the US and Canada will come as a very big surprise to the peak oil folks.

They will be producing several million barrels a day more supply.

By 2020 the higher millage vehicles will also be eating into demand by perhaps 2 million barrels a day.

By 2020 we may have nat gas in the truck fleet offsetting maybe 1 to 2 million barrels a day.

Yes oil prices are going higher, but it is not all gloom and doom.

The higher oil prices go the faster the development tight oil will be and also the faster the move to nat gas in transportation."

For perspective, here's a snippet from another place in the thread:

"Here are two statistics from the EIA: 

US liquids fuel use is about 19.5 MMBO http://www.eia.gov/steo/gifs/Fig15.png

US liquids fuel production is about 9 MMBO: http://www.eia.gov/steo/gifs/Fig13.png

 

By 2020, US liquids fuel production should increase probably in the range of 10 to 11 MMBO."

Having read these guys and listened to the Peak Oil experts, I believe the BRY board guys are genuine experts with the ears closer to what is actually happening, at least in the USA and Canada, than the ASPO experts, so its worth giving them a listen. There is more good material in the linked thread.

Given that the US has falling liquid fuels demand, my revised estimate is that things will be tight but not catastrophic like having to get by with 50% less oil.

Once again, I'm probably done with posting on Peak Oil for a while.

MontyHigh, www.worldofwallstreet.us

 

Yahoo Finance's Top Story: MF Global Customer's Money Missing... Got Gold?

Will these customers get their money back if they are under the FDIC insurance limits? Yes, almost certainly, but the FDIC insurance fund is just about out of money. If there is a cascade of bank failures the customers won't get their money back, at least in terms of the buying power of what is returned.

The fear this kind of headline produces should help support (or drive up) the price of gold as more people want to store some wealth in a vehicle (a currency) that won't go-to-zero should the banking system collapse. That should make gold a "good investment" at least compared to other vehicles (bonds and stocks). 

But if you hold gold, what form do you hold it in? Can you can trust where you have it stored to not have your gold "go missing" like MF customer money?

MontyHigh, www.worldofwallstreet.us

Interventionals Coming Up

For me the big interventional this week is: "Bernanke Speaks" following the FOMC meeting on Wednesday. I expect I'll close my short term long-gold options trade a little earlier than planned (Wed close). They can't allow the price of gold to make Bernanke or the Federal Reserve look like money printers.

This web site regularly posts a nice roundup of the next week's economic announcements: Calculated Risk

MontyHigh, www.worldofwallstreet.us

They Are Begging For The Printing Press. Got Gold?

I'm guessing we'll get both:

1. An undeniable second-dip recession that is plenty painful and, like the previous one, doesn't seem to go away.
2. Plenty of money-printing out of Bernanke.

MontyHigh, www.worldofwallstreet.us

P.S., A joke:

"Multiple choice. Which is these does not belong with the others?:

(a) Herpes

(b) Aids

(c) Syphillus

(d) High USA unemployment.

ANSWER: (c) Syphillus. You can't get rid of the others."

Fully Bamboozled At This Point...

I had the morning off from church this week taking care of the 10 year old with a cold. That explains all of the posts. For the first time in a week I've had a chance to consider the markets with some intensity.

Here's my findings:

• Overall Impression - I'm feeling quite bamboozled at this point. My general modus-operandi is to do nothing when confused with potentially really bad results. This time I'm going to lighten substantially on some of everything if things don't get clearer to me soon.
• Macro Buzz - This buzz is from reading the news. It says either:

• the Europeans come up with a plausible plan and the risk on inflationary trade is on (Dollar down, US Stocks Up, Commodities Up, Gold Up [but not as much as stocks), Silver up. OR
• they don't (Dollar up, US Stocks Down, Commodities Down, Gold probably down, Silver down).

I guess we'll hear something tonight. I expect an overnight pop thru the morning as they'll definitely have some kind of semi-positive sounding news, but that the deflation trade will show up by the New York close if they aren't close to a plausible plan. I think all this Euro Crisis Macro buzz stuff is obvious to anyone paying attention to the markets. I also think it takes a continuous stream of bad news to keep the fear trade going. No news is good news which pretty much accounts for the recent "risk on" trading action.

There's also very quietly some bearish noise coming out of China which I think is responsible for Copper and other commodity weakness beyond what is expected from the Euro Crisis stuff. This is not fully taken into account by financial press or average money manager. If we get a relief rally, I don't expect commodities to lead.

• Now based on the charts, here's what I see:
  • US stocks broke above their recent trading range but there's stiff resistance within a couple of percentage points. What happens short term depends on the European situation. A move thru the remaining resistance at S&P $1260 is bullish and it will be time to abandon any bearish stock positions.
  • Emerging markets are flat out trending down and ugly. I think this is related to the China macro buzz. They are dragging commodities with them.
  • Everything seems to trade around the US dollar which seems to be weakening.
  • The recent collapse in 30-year US treasury yields (and now their rapid recovery) is signaling that the Euro situation will blow over (I think). 
  • Gold looks ok as long as the 150 day moving average holds. The commitment of trade report is bullish.
  • Silver's chart looks like a bear flag to me. A breakdown under $30 that holds signals another big silver price collapse. I don't buy the Eric Sprott story, yet.

By the end of this week the European situation should be clearer and I expect either to have eliminated my S&P 500 put options hedges or will have lightened up on the gold futures options and cut my core gold stock positions.

Perhaps I'll supplement this post tonight with with some charts, time permitting.

MontyHigh, www.worldofwallstreet.us

Mr Eric Sprott: Is There Any Data Suggesting Gold Is Cheap Compared To Silver?

Let's put in just about the longest average of the $GOLD:$SILVER ratio that www.stockcharts.com will print: 360 months == 30 years. As you can see, the ratio is lower than the average. So, gold is cheap relative to silver from a 30 year perspective (although not as cheap as in April 2011). You get the same results if you put in a 20 or 10 year average.

Seems like I heard something quite different from Eric Sprott recently. Tell me again what his data was to backup the idea that silver is undervalued relative to gold? It sounded great at the time.

MontyHigh, www.worldofwallstreet.us

Interventional Trading, Updated: Bernanke Testifies, S&P500 About To Break Down

It turns out there's a big interventional coming up tomorrow: Bernanke Testifies before a hostile US congress.

Add in that the S&P 500 chart is breaking down.

Add in that my own internal emotional meter is on real fear for the general stock market and US economy even though I don't own US stocks and my day-job (which I don't really need) is secure.

Together I conclude the risk/reward is good for a small, short-term trade betting THEY can push the US stock market up. I just went long ES Dec futures with a nominal value of about 10% of total portfoio value at $1087.75. Will unload around when Bernanke ends his testimony tomorrow. If the move is up strong then I'll hold until near tomorrow's close. Look for an update (for better or worse) after I exit.

This kind of trade would make a lot more sense if it were back-tested. I guess its time to start gathering data for "Bernanke Testifies" days.

MontyHigh, www.worldofwallstreet.us

Update 11:51, Oct 4 - out for a small profit (.2% ish) at $1190.25. I knew that gold was a typical "Bernanke Speaks" interventional but didn't trade it. Gold is down 2.2%. Woulda, coulda, shoulda.

Is The Bottom In For Gold And... How To Play It

Many respected gold pundits are saying the bottom for gold appears to be in. For example:

Harvey Organ: "I strongly believe that you are safe to buy your silver and gold as you will not see lower prices".

Pierre Lassonde: "If you look top to bottom, the gold price is down about 17%, so my view at this point is the correction in gold has about run its course, it’s about over."

John Hathaway - listen to .mp3.

Even my expensive news letter (name intentionally withheld), which has been coyishly bearish on gold for a while, sent out an update suggesting the bottom was in or nearly in.

As an aside, I believe my take on the interventionals for this week were pretty accurate (click here). The main interventional coming up for this week is Friday's unemployment report. My analysis of unemployment reports is that the interventions are typically just intra-day.

So, I come to the questions:

• Is the gold bottom really in? If not how much further has it to go?
• Whether the bottom is in or not, what can we expect looking out a little more than a year to Thanksgiving 2012.

Most of this piece is based on the idea that this correction was special in that the vertical dive was a liquidity event where all markets were falling at the same time and gold was sold to take profits and to protect against margin calls in underwater positions. Specifically, the gold vertical dive took place at the same time that the S&P 500 was falling hard. My piece from last week (click here) introduced the concept, identified the four previous occasions in the last decade where this happened and analyzed those occasions.

But first, a little classical technical analysis. Here's the gold daily chart:

From this chart we see:

1. Gold had an accelerated rise (see green box).
2. Gold formed something that looks like a head and shoulders pattern (light blue) and achieved (briefly) that the target low.
3. Gold fell hard (while the S&P 500 was falling hard, see blue box).
4. There is lateral support (gray lines) associated with price levels preceding the accelerated rise. 
5. Gold has fallen back and gotten support at the first level of lateral support with a brief almost touch to the next level of lateral support. Further support lies around $1575, $1560 and $1475. 

If you look at every case over the last decade of a correction from a bull-market high thru the 50-day SMA (click here), you'll see that gold always falls back to the lateral support associated with the take-off point to the rise to the all time high. I should have been expecting this, but was too optimistic. Gold has fallen back to the first lateral support, but looks (based on prior bull-market high corrections) like it could easily fall to the $1550 level. That's another 5%.

The weekly chart that follows looks at previous cases of simultaneous S&P 500 hits and gold hits.

The table that follows compares the current correction with those corrections where weekly closing prices are used. Rows 2..4 look at the previous such corrections. Rows 5..8 look at different scenarios associated with the current correction. The correction in 2008 is bigger than the others and has the notable feature that there were two consecutive liquidity events (one in Sep 08, the 2nd in Oct 08). The table that follows treats those two events as a single event.

The current correction has a weekly decline from the near-term top to the bottom (so far) of 13.7%. The Feb 07 correction was shorter (D2) and smaller (F2). The 08 double event was both deeper (F3) and longer (D3). The 09 event was quite comparable in depth (F4) but longer in duration (D4). Still it is the most like the current event (so far). The data examined so far leaves me less than really confident that current correction's bottom is in.

Rows 5..8 give various scenarios regarding how the current correction might work out.

• Row 5 assumes, as the above pundits have predicted, that the bottom is in and that the resulting rise to mid-November 2012 is similar to the rise from the Feb 07 correction to Nov 07. The bottom is thus $1626 and the price mid-Nov 12 is estimated at $2,084 for a 28% rise.
• Row 6 assumes the bottom is in (like Row 5), but that the rise to mid-Nov 12 is between the rises out of 07 and 08 and proportional to the decline relative to the 07 and 08 declines. That provides an estimate for mid-Nov 12 of $2594 or 40.4%.
• Row 7 assumes the bottom is in (like Row 5), but that the rise to mid-Nov 12 is the same as the rise out of the 09 event (30%) producing a target price of $2114.
• Row 8 assumes that the bottom is not in and that the decline will be as deep as the 08 decline (25.3%) targeting a bottom of $1408. With the same rise out of the bottom as 08 (59.5%) the estimated mid-Nov 12 target prices is $2246. I don't expect the current fall to go as far as the 08 fall, but I find this scenario useful as a weekly close below that $1408 price can be used as an indicator that something is different and perhaps the gold bull run is over. I expect that row 8 would only occur if another liqudity type vertical fall began. A simultaneous hard fall in the S&P 500 and gold might indicate a trigger, going forward, to liquidate leveraged positions.

In conclusion, I find:

• There is some reason to think the liquidity-related correction is gold may not be over. Specifically, in 08 the drop was larger (with dual liquidity events) and gold has not really corrected all the way down to previous highs.
• The support of $1560, $1510 and $1475 seem like good targets for the correction low if it is not yet in.
• There is some reason to think the liquidity-related correction is over (the decline exceeds 07's and matches 09's, the decline has reached pre-accelerated rise support and the experts says its over).
• Most importantly there is good reason to think that the price a little more than a year out will be significantly higher than the current price ($2114 seems like a good target).

As a result of this kind of analysis, I closed all my Dec 2011 gold options (for huge losses) because they were so far out of the money that they threatened to "go to zero". I then put the money (and some cash raised from a sale of PHYS) into $1500 Dec 2012 options. My overall portfolio leverage is now a little less than 2 to 1.

As far as risk management goes, there's that $1400 stop (see above) and the exit on a renewed liquidity drops. As far as black-swan risk management goes, I still have enough bullion (GoldMoney and PHYS plus some coins in a safe-deposit box) to retire comfortably (but without much margin) even if another big gold correction comes wiping out those Dec 2012 options and decimating my gold mining stocks. I think my risk tolerance remains higher than most but that risk is being managed.

The lessons I've learned from this correction so far are:

• If a correction starts and I'm ill I should admit I don't have the mental horse power to really trade the situation and get out of leveraged positions.
• Expect a correction from a bull market high that breaksdown thru the 50-day SMA to continue to fall to the luanch point of the rise to the bull market high. Dump all leverage as soon as the correction starts.
• Be better prepared through the life of a trade as far as what to expect should a trade go against me so that I don't have to analyze the situation from scratch as the correction takes place.
• The bottoms of liquidity event gold corrections provide good entry points for longer term (1 yearish) gold trades.

I hope that you find enough value in this analysis to compensate for the time invested reading it.

MontyHigh, www.worldofwallstreet.us

  Download 20111001gcspxdeclines

Gold Interventionals Coming Up For This Week

To complete my analysis of the current gold tradiing situation this post examines this weeks interventionals which are as follows:

• Monday - COMEX margin rates increase. Could provide the impetus for another down day for gold. 
• Monday - S&P 500 is threatening to breakdown thru support (see chart below). THEY want to keep this from happening. I expect a little risk-on trade action, positive for gold, thruout this week as THEY support the S&P 500. 
• Tuesday - Gold Options expiration. Given the way they've crashed gold I don't think they need to hurt gold further to force call options to expire out of the money. See the study of this below. 
• Wednesday - Durable Goods, should show continued slide further into recession, but not enough to cause intervention. P.S., Ordinarily I love to go long gold at the end of the day after options expiration. My look at the last almost three years of options expirations action gives no reason for this Wed close not to be a good entry point for gold. 
• Wednesday - 5 Year Treasury Auction - could be a hit for gold as they don't want any treasury bond competition looking good.
• Thursday - 7 Year Treasury Auction - could be a hit for gold as they don't want any treasury bond competition looking good.
• No interventionals next week until the unemployment report on Friday.  

Ok, so the margin increase (Monday) and options expiration (Tuesday) are the big interventionals for this week. I expect by the close of Wed gold should be released to start a significant recovery (see previous post). Maybe Thursday's Treasury auction will postpone that one day. We'll see. Am I missing something?

MontyHigh, www.worldofwallstreet.us

 

A Study Of Gold Bull Market Corrections Through The 50 Day Moving Average

This post is the first in a series capturing my analysis of the gold market situation as I complete chunks of analysis. The planned posts at this point are:

1. This current post.
2. A post studying situations where gold fell hard at the same time as the stock market falling hard (as happened this week).
3. A look at this week's interventionals.

Having been out sick this week and not trading very well I find I'm still leveraged long gold and need to figure out what the probability is of upward price action.

The next three graphs show, for the present gold bull market, those cases where a bull market high is followed by a correction that pierces the 50 day moving average. I've put these corrections under the microscope and to see if they can help me decide what to do about my now deeply out of the money $1800 Dec 2011 call options.

If you are holding or considering buying gold this article may provide some insight one what to expect thru the end of the year.

Minor point: I'm using daily closing prices for all this analysis.

Since the start of the bull run there has been 14 cases (including the current one) of a 50 day moving average breakdown after a bull market high. This current case is already one of the larger ones. I expect I'll be adding columns to this table as my analysis proceeds.

The current correction is already a big one from a percentage standpoint (column C). Still the following data from the table indicates the correction probably still has further to go:

• 7 of 13 of the previous corrections lasted longer than this one has already (column C)
• All four of the corrections most like the current one (rows 3, 9, 10 and 11) went longer than the current prior to finding a bottom.
• 11 of 13 penetrated the 100 day moving average and 6 of 13 penetrated the 200 day moving average while this correction has yet to penetrate the 100 day moving average (with a daily close).
• All four of the corrections most like the current one penetrated the 100 day moving average and 3 or 4 the 200 day.
• The RSI appears to have a bit further to fall prior to the bottom being reached.

The current correction has the situation where it hit a top, bounced around for a month and then had a seemingly vertical drop of around. The table that follows adds columns regarding the first major vertical drop (consecutive down days) for the earlier corrections.

The first thing I notice is that this correction's first big vertical drop (with a jump in the gold/silver ratio) started it started a full 20 days after previous bull run high. I'm not sure what to make of this. It means this correction may be different from earlier corrections.

I also notice that a 3-day duration for a vertical drop is close to average, although one more day would make it average. The size of the vertical drop is close to the largest earlier vertical drops (which I call the most similar to the current correction, rows 3, 9, 10 and 11). This means that this vertical drop is probably ended (or will end Monday). Those most similar corrections last a day longer than the current correction which implies that this correction's vertical drop has a bit further to go.

But the most important thing to notice is that only 3 of 13 corrections hit their lows with the end of the first vertical drop. 4 of 4 vertical drops greater than 7% ended up putting in a lower lower. This means I probably want to trade around this expected further decline if possible. An average further drop of 4.8% moves the price of gold down to 1582 (coincidentally, or not, matching up pretty closely to Jim Sinclair's lowest support number).

Another thing to note is that of the four corrections with vertical drops > 7%, all had bounces at the end of the vertial drop and two of them were substantial (1.4%, 3.4%, 4.0%, .7%). So if the vertical drop has completed, waiting for a bounce to exit makes some sense.

The main hopeful thing I see from this vertical drop data is the RSI reading at the end of the vertical drop. The current correction's RSI has achieved a lower level at the end of the current vertical drop than previous such corrections (rows 3, 9, 10, 11) and is closing in on what could be the ultimate low for this correction.

Now, my options are going to expire around Thankgiving which 9 weeks away. Most of them are now way out of the money. I don't want to hold options in the final week. So, I need a big price recovery in the next 8 weeks to avoid having them "go to zero". So, let's see how the price changed from the end of the vertical drop to 8 weeks afterwards in these prior corrections (column Q).

Yikes that looks bad. Even though there's lots of scary things out there (Europe, Falling Commodities And Stock Prices Signaling Recession, China Slowdown, etc.) the outlook from this table is neutral for the next 8 weeks. Looking at the most similar corrections (rows 3, 9, 10, 11) indicates that we shouldn't really expect an up move over the next 8 weeks. 

My options need a big price bounce back if they are not going to expire worthless. Column Q says not to expect that. The overall conclusion of the study so far is that gold seems to be just about due for a bounce, but after that it can be expected to decline further without much improvement from now until Thanksgiving. I don't like that message, but that's what this data indicates.

Lessons to be learned: If I'd been watching and analyzing more closely, I think I would have (probably) dumped my options as soon as $1800 was breached (and definitely after the 50 day crossing). This is a case where my own internal psychology has caused me to hold onto positions after they should have been dumped thereby ramping up my losses. One excuse is that I had a cold all this week. Perhaps one should tighten their stops (or just dump all leveraged positions) when their health isn't 100%. Live and learn.

MontyHigh, www.worldofwallstreet.us Download 20110924gc50downcrosses

 

Be Afraid, Be Very Afraid: Seen This Movie Before?

Seen this chart before?

 30-year treasury yield says its the 2008 crash, all over again [or something worse]. Beats me if it really is, but this is an indicator that something crazy is going on. Hold on tight, because some crazy stuff is happening.

Right now I'm quite heavily leveraged long gold with call options. If support breaks I'll be taking a big loss and running for cover. I'm expecting that at least part of that European flight to safety goes into gold.

On the other hand, my recent post on this chart (click here), says that once that 30 year yield has truly bottomed that an opportunity to go long the general stock market is at hand. I'm waiting for that signal.

MontyHigh, www.worldofwallstreet.us

 

Change In The Gold Price 24 Hour Cycle

Its pretty painful being leveraged and wrong (having the underlying go against you). That's been my condition. 

I've been watching this 24-hour chart for a few years and I find that:

• The same moves tend to repeat, day after day.
• But each day the move tends to start a little earlier.
• The fact that today we didn't get another repeat means the consistent downward action of the last two days may be concluding. 

Gold corrections have been less deep than the charts suggest and the 50 day moving average is close to where we got last night. I expect I'll stay leveraged long a while longer. The seasonals are quite good for this time of year and I'm playing with the casino's money. 

MontyHigh, www.worldofwallstreet.us

 

Current Gold Price Action: Anybody Seen This Before?

Here's the current gold daily chart:

I was wondering if the markets have resembled this during the current gold bull market? A chart pattern that has the following:

• Gold steeply rises and then stops.
• And enters a triangle kind of consolidation.
• While the general stock market has topped and then tanks. 
• Where the Gold RSI was overbought for a couple of months but gets down near 50 during the consolidation.

So far, the closest thing I've found is the end of 2007 (which was when all the crazy financial stuff was first really getting going). Fundamentally and sentiment wise the current situation seems similar only this time the fear is over Europe sovereign debt while last time is was the housing / subprime debt dragging the big banks down. 

 
Here's what happened in 2007/early 2008 after gold topped mid-november:

• Eight weeks prior to gold hitting a higher high after the end of the steep rise - that would be around 10/20/2011 if the pattern repeats.
• With higher lows and lower highs until then.
• Followed by a steep price rise for about 10 weeks that moves gold up 32% from the low of the correction. That would be around the end of the year and with a gold price of around $2360.
• With the general stock market popping up hard prior to falling to lower lows.

I think this parallel has some merit and its my best guess for what is going to happen next. I expect I'll be holding my options until the pattern changes from the 2007 pattern (current gold low is taken out, consolidation stretches out too long, etc.).

Its a little funny that everyone thinks the current situation is a repeat of the fall of 2008 when it looks to me like its really more like a repeat of the end of 2007!

Are there any other close parallels I'm missing?

MontyHigh, www.worldofwallstreet.us

Gold Trading: Just Bought Back In, Sort Of

I just bought back in, only this time I bought at the money Dec calls ($1800) and didn't buy any gold mining calls while yesterday I sold an equal amount of $1600 calls. So, I have:

• a lot less at risk (less than 1/3), [The amount at risk is less than recent profits]
• but am controlling the same number of oz of gold
• but the price of gold has to run to more than $1900 (5.5%) before option expiration in order for me to break even. These options may go to zero, but that is the limit to this trade's risk and one I can accept.

The options are rather expensive, in my view, which means that smart money (seller of options) does not really believe this current take-down is going to last. I agree with them.

The reason I bought now, rather than waiting is as follows:

• Last time gold bounced sooner than I expected.
• Gold is in day 2 of the correction and corrections have lasted little more than a 2 days (see chart below). 
• Gold is at round number support which provided support last time.

I expect I'll buy some more on Friday as I originally intended to do thereby raising my overall leverage to the price of gold from where it was a week ago.

MontyHigh, www.worldofwallstreet.us

 

Trading Fear

Yesterday's exit was a lucky move, but it was based on my experience watching the markets (especially the precious metals markets) very closely for the last few years. Holding thru the actual news event that was generating the fear rarely seems to work out for gold.

There has been growing fear in Europe for days and it became centered on the question: What happens if the German supreme court rules against ECB bailouts? This is a classic setup: Growing fear centered on a future, fixed-point in time event, especially an event where the question is: Can they kick the can down the road again? The debt ceiling was another such event. The answer, so far, has always been:  Yes, they can.

The way to trade fear seems to be:

• Get in just as the fear is on the horizon.
• Exit at the point of maximum fear just before the make or break it event.
• If there is no "make or break it event" then the absence of new fear-generating news is enough to end a strong, fear-based run. Even if all of the long-term affects are still looming, the absence of new fear-generating news is enough to stop fear-based trading and end a move.

In this case we have to add in the major: "President Speaks On The Economy" interventional. I expect I'll get back in (buy gold and gold mining call options) around 8:30AM on Friday when the interventional suppressing of gold intended to keep the president from looking bad peaks.

MontyHigh, www.worldofwallstreet.us

Trading Around The Point Of Maximum Fear

Just took profits on my call option trading positions in gold and GDX, the gold miners ETF. Still holding all the core positions. It seems to me that we have reached a point of maximum fear:

• It looks like Germany is going to back off more bailouts (see recent election results). Tomorrow is when the German supreme court decides whether EU bailouts are permitted. 
• All the panicked out of the US stock market belated flight-to-safety retail investors have come back from vacation and spent their wads.

Furthermore, the powers-that-be can paint a gold "double-top" by guiding gold down from here.

So, I expect:

• Neutral to downwards action from here today and tonight (without a big breakout above $1920).
• A "we're saved" headline out of Europe overnight.
• A multi-day gold correction.

Of course, this scenario may not work out and gold may jump hard tomorrow on a "the Euro is doomed" panic trade.

We'll see, but I'm betting the powers that be are not ready to crash and burn quite yet.

MontyHigh, www.worldofwallstreet.us

 

Best Of The Message Boards And Best Of The Web: China "Gets Its" About Gold

Hat tip to InvestorVillage's coolreit for dredging this juicy item from the prolific ZeroHedge web site (click here). Here's the money quote:

"The China Radio International sponsored newspaper World News Journal (Shijie Xinwenbao)(04/28): 'According to China's National Foreign Exchanges Administration China 's gold reserves have recently increased. Currently, the majority of its gold reserves have been located in the U.S. and European countries. The U.S. and Europe have always suppressed the rising price of gold. They intend to weaken gold's function as an international reserve currency. They don't want to see other countries turning to gold reserves instead of the U.S. dollar or Euro. Therefore, suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar's role as the international reserve currency. China's increased gold reserves will thus act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB.'"

Well, this has been the GATA story (Bill Murphy and Chris Powell, etc.) for years. If this report is to be believed, the Chinese are with me among those who accept this "conspiracy theory". Furthermore, they are big enough to easily pull down the whole gold-suppression scheme themselves but instead are working behind the scenes to build a coalition of nations working to the same end. I would count, at a minimum, the Russians, the Venezuelans, the Khazaks and probably the Iranians among their committed partners. 

This story, by itself, has enough behind it (at a fundamental level) to keep pushing up the price of gold indefinitely. 

MontyHigh, www.worldofwallstreet.us

UPDATE 15:37 EDT: This report appears to be legit. I was able to search it and find it among the wikileaks cables at this site, url is the search results url: http://cablesearch.org/cable/view.php?id=09BEIJING1134&hl=09BEIJING1134

 

One interesting thing about this is the date of the cable: 

"DATE

2009-04-28 08:23:00"

 

This means the Chinese have understood well what's happening with gold since at least April of 2009.

Large-Cap Gold Stock Momentum Trade

In the previous post I concluded that gold stocks now look attractive and that large-cap stocks will probably move first. The comment from Swedish goldbug nicely summarizes why the herd is likely to head into large-cap stocks first:

"I agree that large cap gold stocks are about to run. But my main argument is a bit different from yours.

It's all about the relative strength of large gold stocks vs "everything else". My point is that right about now, the large gold funds (for example Blackrock World Gold Fund) are outperforming even emerging market funds and are at the top of fund top lists over the last couple of months. This will have the effect that the part of the herd that invest their savings by trend following will pile into gold stocks. I do not use that strategy myself, but many people do. They just look at the best performers last three months and buy them and re-balance their funds every other month.

Look for example at this swedish internet broker:
https://www.avanza.se/aza/fonder/fonder.jsp

The first table are the top 8 performing funds the last three months
The second table is the most bought funds the last three months

BlackRock World Gold is the best performing fund and has just reached place no 8 on most bought funds. And is probably rising on the most bought list.

The herd money are coming!"

This post covers my decision making process regarding how to play this given that I don't have a real edge when it comes to gold stock picking right now and given that I want whatever I choose to be liquid (something I can easily exit in one day if the trade goes against me).

From my current universe of precious metal miners, I'm looking for a short-term, very liquid trade, probably using December call options. I take those stocks which are primarily gold miners with more than 10M$ traded per day (thus discarding SLW and MFN, but keeping GORO just because I really like it fundamentally) I get the stocks given in the following three-month perf chart:

 
In order of performance, the stock symbols are: NGD (New Gold), AUY (Yamana), RGLD (Royal Gold), FNV.TO (Franco Nevada), GG (GoldCorp) with EGU.TO (European Goldfields) and GORO (Gold Resource Corp) bringing up the rear.

I wish I had an edge on the fundamentals of these stocks, but I don't.

Here's my impression of the charts (in the order given above):

NGD, AUY, RGLD,  - Looks overbought, but has tracked the price of gold.

FNV.TO - A little less overbought. 

GG - Not overbought, but not breaking out to all time highs, either.

GORO, EGU.TO - some pretty sad looking charts given the price moves in gold. The GORO chart is threatening to break down. Not bad for a bottom-feeder, though.

Well, I don't like any of those charts. GDX has the daily and weekly charts I like the best with nice breakouts (but leaving a gap behind) and nice, but not overbought MACD and RSI.

At this point, I just bought a fairly big $55 Dec call options position in GDX in my trading account and putting my IRA's cash into GDX. The sum of the GDX stock and options owned is around 12% of my total porfolio value. The total amount of GDX controlled is around 10% of what my accounts now control in gold and stocks and I now have nearly no cash and am leveraged up around 2.5 to 1 (leverage provided by call options, not by anything with unlimited risk). That's pretty as aggressive as I get, overall.

Let me know what you think,

MontyHigh, www.worldofwallstreet.us

 

Trading Gold Thru The Summer Part 22: Back In The Pool

Just bought enough Dec 1600 gold call options to leverage myself roughly 2.5 to 1. Gold was around $1810 at the time and I paid around $230 per option. I like the $1600 gold call options because:

(a) They were for sale at a price where gold only needed to rise 1.1% for the options to break even. That is, they had a low premium.

(b) $1810 / roughly $230 = nearly 8 times as much gold is controlled compared to using the same money to buy physical.

So, I'm both leveraged to the price of gold and I have enough fiat dollars to get by if something catastrophic happens which sends gold to a price of zero. I also have enough physical gold with PHYS and goldmoney.com to get by if the fiat dollar goes to zero. So, I believe I have just about as good risk management as is feasible when one is aggressively trying to increase wealth.

I basically stuck to my plan (wait until near the close after "Bernanke Speaks" and near the close of the day after options expiration). It is now obvious that the time to reenter was yesterday morning. Woulda, coulda, shoulda. I expect that I will stay leveraged until at least next Thursday and then reevaluate.

Trading is like golf: you always feel like you could have hit a better shot. Still I got out around $1870 and got back in around $1810 so I saved my self with this weeks trading something like: almost 5% of portfolio value = (eliminated leverage * gold price drop/ gold price) = (1.5 * 60$ / $1810). That's something like 2.5 years of profit compared to holding 10 year treasury bonds. You could call that fast money. 

MontyHigh, www.worldofwallstreet.us

P.S., I expecting the "Trading Gold Thru The Summer" searies is going to and and I'm going to stop posting my every trade after labor day.

Quick Relook At GOLD RESOURCE CORP (GORO) Fundamentals

Well, there's been another hit piece put out by shorts about my largest stock holding. IKN's fiesty Otto Rock (whom I would like to consider a friend) has entered the fray because, apparently, the shorts quoted him without permission (click here and here).

I haven't been fretting over this stock because I'm in for the long haul and I think they are going to execute on their guidance (or pretty close to it) despite the fact that up until now they have over-promised and under-delivered on schedules. I further think their dividend policy puts them in a class of their own in terms of stockholder friendliness.

I decided to revisit the fundamentals, because Otto Rock, a much better fundamental analyst than myself, keeps claiming its overvalued. From a fundamental standpoint, the stock seems quite easy to analyze at a gross level. Its a single-mine miner with a very low cash cost and they have given guidance about production and taxes. 

Here's the spreadsheet I threw together in about 15 minutes. The case seems pretty clear and I'm content holding. If it goes down more, I may put some more of my relatives' money in it. I've got so much myself that buying more doesn't make sense from a "single mine" risk standpoint.

 

Click Download 20110824goro for the spreadsheet. Let me know if you'd like to quibble about my assumptions or have some good reasons for thinking they won't execute on their guidance.

When I look highlighted rows 9, 11 and 16 I see a stock that seems clearly undervalued. I can only speculate that Otto thinks its overvalued because he doesn't think they'll achieve their guidance. We'll see.

MontyHigh, www.worldofwallstreet.us

 

Trading Gold Thru The Summer Part 21: Not Inside The Bollinger Band Yet, Updated 10:19

Here's the conclusion from this weekend's gold trading strategizing (click here): "Conclusion: I expect I'll exit leveraged positions on a bollinger band reentry that involves a 3.3% or larger close to close down move. For reentries on smaller down moves use a trailing stop of around 4% top close to end of day close."

Here's the surprising, funny thing: Yesterday gold took a 3.6% hit (GLD close to close) and yet, gold was so over-extended that it did not reenter the bollinger band!

According to my trading system I decided upon this weekend, I should still be leveraged up! I'm not, I got rid of the leverage yesterday (click here) while gold was around $1875.

So, now what?

I intend to watch what happens between now and Friday's close. I'm expecting two days of decelerating downward action to a low Friday (say another 3% to 1777). There should be some mighty quiet gold investing message boards by then. There will also be one of those "gentle" bollinger band reentries where the trading system intended to hold: "For reentries on smaller down moves use a trailing stop of around 4% top close to end of day close."

I expect I'll reenter leveraged long around 3:30PM with Dec gold call options for a few days trade and then I'll re-evaluate. The interventionals should be over by then. Gold bug sentiment should have cooled some by then as all of the recent implusive buyers will consider their gold investments to be "losers".

Do you have a favored scenario? Are you holding thru this downward price action or are you avoiding risk with "fiat" cash?

MontyHigh, www.worldofwallstreet.us

Updated 10:19EDT, Well, getting to $1777 didn't take long. I'd say we are inside the bollinger band now and what is important is how much buying support we get from India overnight tonight.

Trading Gold Thru The Summer Part 20: Just Lightened Up, Updated: 15:56 EDT

Thought it was time to lighten up when I saw the lows of the day, so far, break down. Dumped almost half my gold options. Thursday is options expiration and Friday Bernanke speaks. Will probably get back in on Friday at the 4 PM. No change to the stocks or PHYS or goldmoney bullion. I'm leveraged about 1.5 to 1 at this point (1.65 if you include the now underwater copper short). 

 
Just keeping a record of what I'm doing this summer.  

MontyHigh, www.worldofwallstreet.us

Update 9:11, just sold a bunch more gold options. Now the only leverage I have is the copper short. I'm done selling for now, I expect.

Update 15:56, looks like a pretty good call. I caught nearly that entire run leveraged up. Even a loser gets lucky sometimes.

Trading Gold Thru The Summer Part 19: Gold Accelerated Rises Under The Microscope

Well, if you are reading this after reading the previous two posts (click here and here) you either have too much time on your hands or have a lot invested in Gold. In this post I put the previous three accelerated rises in the price of gold under the microscope and to determine where we are and to determine what kind of exit condition to use on the modestly leveraged gold futures options I'm holding. 

The first chart that follows is gold's current situation. The remaining charts look at the three previous accelerated runs where the start of the run is identified by a blue arrow. Light blue boxes identify significant runs where the closing price remains outside of the 55-day 2 sigma bollinger bands for several days.

First let's look at the general market conditions relative to the current situation. Observation 1:

• For the current run, the general stock market has topped and is falling hard while gold is rising.
• The Dec 08 run is the only run that matches this situation. The other two runs occur with a rising stock market.

Conclusion 1: The Dec 08 run is most like the current run from a macro-economic and general mass-psychology standpoint. People are running for safety. I expect that this time will be different than 2008 because it is now clear there is no safety in US treasuries and because there are fewer gold speculators leveraged all the way to be forced to capitulate via rising margin requirements and manipulated price drops.

Now let's look at those light-blue boxes that highlight out-side of the bollinger band runups. Observation 2: Gold's current run outside of the bollinger bands is already 26 days long. The only comparable such run, at 30 days, was the leadup to the May 06 major, sharp correction. Conclusion 2: Be careful out there. The risk of a major gold correction is high.

Now let's look at the end of each of the light-blue boxes. That is, what happens when the closing price goes back inside the bollinger band. The table that follows examines each of these.

 

Observation 3: Two of the five outside of bollinger band reentries (row 2 and 6) had the kind correction I would not want to endure (see columns D and F). Those two corrections did not recover within 20 days. The other three had quite manageable corrections (see columns D and F) which went on to achive higher highs within 20 days (see column G). Conclusion 3: Try to stay away from corrections like rows 2 and 6. Try to stay invested through corrections like rows 3, 4 and 5.

Observation 4: The kind of corrections I want to stay away had one-day bollinger band reentries featuring big down moves (3.8% and more) while the corrections I want to ride thru had reentries with modest down moves (.4% to 2.4%) and did not involve a greater than 3.1% close over the subsequent 10 days. Conclusion: I expect I'll exit leveraged positions on a bollinger band reentry that involves a 3.3% or larger close to close down move. For reentries on smaller down moves use a trailing stop of around 4% top close to end of day close.

That's what my microscope shows me and that's how I expect I'll trade this current accelerated, outside of the bollinger band rise. Consider this post and the other two "Trading Gold Thru The Summer" posts this weekend, I think that the current risk/reward for holding (giving that I'm quite profitable so far) is quite attractive. Of course, this is not investment advice and please read this web site's banner warning again prior to acting on anything in this post.

By the way, add Quint Tatro (interviewed by Jim Puplava here) to the list of folks who wouldn't touch gold with a 10 foot pole right now.

MontyHigh, www.worldofwallstreet.us

Download 20110820sigccomp

 

Trading Gold Thru The Summer Part 18: Parallel Gold Overbought Situations

I'm back from vacation having held thru the vacation and lucked out being leveraged up on Gold 2.5 to 1 thruout the impressive run up in the price of gold during the vacation. This post continues my analysis of the present situation begun in the previous post (click here). The previous post really should be read first.

One of things that caught my eye while working the previous post was that gold is currently around 51% higher than it was a year. That seems like a really big move compared to the previous steady price rise over the last 10 years. In this piece I identify other situations where the price of gold percentage gain year over year is as high as it is currently and, keeping my eye on the big picture, make observations that might help identify what comes next.

I expect I'll follow this with a post that puts each such previous situation under the microscope to help identify what the beginning of the subsequent correction looks like.

The chart that follows covers every situation in the last ten years where the price of gold year over year is anywhere near as high as it currently is.

There are three such prior accelerated runs higher with year over year rates of change as high or higher than the current situation (see the green horizontal line). The runs ended in:

• May 06 - can anyone leave a comment giving what the mass psychology was around precious metals for this run. It was before I was paying attention. In general I remember that the commodity trades (especially Canadian Oil sands) were really running at that point.
• Mar 08 - this was the end of the "stronger-for-longer" commodity run which gold was tagging along for.
• Dec 09 (maybe Nov 09) - this was the "we're saved" QE1 run. Its worth noting that QE2 did not really push gold hard enough to have an accelerated run in gold occur in the last two quarters of 2010 and earlier 2011.

Observation 1: Seasonally/tempermentally this run is different from earlier runs. This run is based on "they're printing money like crazy and have to continue because the system is failing". That's different from all those earlier runs. Conclusion 1: This accelerated run need not top out at the same ROC levels that earlier runs topped out at.

Observation 2: Looking at the beginning of the runs (when the year-over-year rate of change began rising) [see gray arrows] I observe that the current run is starting from a significantly higher year-over-year rate of change (ROC) level [already plus 20%] when earlier runs started from a 0 to 5% ROC. Again, this run is different from earlier runs. Conclusion 2: Perhaps Jim Sinclair (Mr. Gold) is right that the gold bull market has entered a new phase with an acceleration in its price rise. Speculation 2: If the size of the increase in ROC is similar to other runs (around 50%) this run could go another 30% higher (to 80%) in year-over-year rate of change. Given that this will be occurring at the same time gold started last year's run this could be another 50% higher giving a possible target price of almost $2800 dollars before the end of this year!!! I'm not expecting this, but it seems possible. There would have to be quite a bit of "The System Is Failing" action in the rest of the financial markets for this to occur and I hope it doesn't [although it looks like it might be happening].

Observation 3: The start of each accelerated run, including the current one, began from an RSI near or just above 50. Conclusion 3: If the start of the run is similar, the duration of the run and the size of the percentage moves may also be similar.

The table that follows summarizes the duration of the accelerated runs a couple of different ways and the size of the percentage moves. This table depends on the idea that the start of an accelerated run begins with the previous ROC bottom and ends at the top coincident with or following the ROC top.

Observation 4: The earlier accelerated runs were 2.5 to 3.5 times longer in duration (row 2) than the current run so far. Conclusion 4: This accelerated run could go on for another 3 to 5.5 months (late November 11 to early Feb 12).

Observation 5: The earlier accerated run continued for quite a while after going weekly RSI overbought (row 3). Conclusion 5: If the current run is similar to May 06 or Mar 08 the current run could continue for another 4 to 5 months (late Dec 11 to late Jan 12). Even if like the lesser Dec 09 run it could continue for another 3 weeks or so.

Observation 6: Two of the three earlier accelerated runs had roughly 48% price increases while the current run has only a 26% price increase. Even the weaker Dec 09 run had a nearly 30%. Conclusion 6: The current run could definitely have further to run, running another 18% to $2190 if its price increase equals that of the May 06 and Mar 08 runs.

Observation 7: The earlier accelerated runs don't last long after the ROC hit 51%. Conclusion 7: Unless "its different this time" the correction could start any day. Be careful out there.

Observation 8: The top price of gold occurred at nearly the same point in time where the top in the ROC occurred. In two of the three cases (May 06 and Dec 08) it took more than a year for the price of gold to reach a higher high. After the smaller Dec 09 run it took almost six months for gold to achieve a higher high. Conclusion 8: There is very likely a top price for gold coming and then there will probably be a painfully long correction and consolidation. Be careful out there.

Given all of this, the conclusion of the previous post is reinforced: Since I am playing with the casino's money (profits) and I have high risk tolerance there seems to be some real potential for considerable continued upside and I don't need to get out now just because gold seems "overbought".

The next post I expect will look at the weekly and daily charts to see what the end of these earlier runs actually looked like to help me identify the end of this run.

Again, am I way overconfident and missing anything important? Do these historical parallels have any predictive power or am I just reinforcing my own sub-conscious desires? Also, leave me a comment if you remember what things were like in May 2006.

MontyHigh, www.worldofwallstreet.us

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Trading Gold Thru The Summer Part 17: Time To Take Profits?

Gold has been on quite a tear lately and I've been leveraged up with Dec Gold Future options around 2.5 to 1 the whole way. I'm also holding a bunch of Sprott PHYS gold bullion closed-end fund and some gold in off-shore storage. I'm up over 40% year-to-date so I have some profits to protect.

Gold's RSI has been overbought (> 70) for a while now and some serious gold bugs are saying its time to take profits. For example, roughly a week ago David Morgan (click here), made such a call and missed this week's run up:

Yukon Cornelius, a quite skilled Jr mining stock picker, just yesterday put out a more impassioned plea (click here) to lighten up.

In opposition to these "overbought" warnings is the basic trading addage of "cut your losses, but let your winnings run". Add to these James Dine's Dinesism 1: "A trend in motion will continue until it actually ends [DITREND]" and 3: "A trend in motion overrules all 'facts', 'arguments' and reasons' [DITREMO]".

And, perhaps most importantly, probably the main advantage a little guy has is that he can "get out" in a single day or hour (if he's careful about what he's holding) while the big boys (Fidelity Mutual Funds, Pension Funds, even big (> 1 B$) hedge funds) need days, weeks or months to get out of a sizable position. Holding until the end (and taking a hit when the end comes) is something only the little guys can do.

The most recent parallel to what is currently happening with gold was silver's run last spring (which ended abruptly Sunday night May 1, 2011). Let's compare that run with the current gold run (see big chart that follows):

As you can see, I've got the 1 year gold chart lined up with the silver chart for the year right up until silver's top (30-Apr-2011).  The table that follows provides some observations:

The bold rows (2, 3, 4 and 5) show that Silver's last parabolic run was bigger (in percentage terms) and longer (in time) than gold's current position. This makes me think that gold's run can contine for more than another month prior to a big correction. I think the long-term gold run itself can continue as long as the current financial crisis continues (seemingly for years). The question for me, at this time, is not when to get out of gold, but when to eliminate leverage.

Row 2 is a scary one as that 51% year-over-year rise in the price of gold seems unprecedented (I'll probably study this later this weekend). Either "its different this time" as Jim Sinclair has prognosticated or a longish-hard correction is coming. Sinclair has stated that now that gold is about $1764 that the parabolic final rise has now commenced. We'll see.

The italicized rows(6 and 7) show that in some ways gold's run is as overbought as Silver was prior to its big correction. Risk is high, just as it was for the final month of Silver's run. The big gold correction could start this Sunday night just as it started on a Sunday for silver. I'll be watching the action closely Sunday night.

Row 8 indicates that gold may be due for a correction, although the recent 3% correction may allow this to wait.

Rows 9 and 10 provide some help in determining what kind of stop to use to detect the end of the current sharp gold price rise.

Let's run down the standard set of gold investing criteria and then make a plan:

• Fundamentals - Gold's fundamentals remain strong as the whole world has negative real interest rates, a European financial melt-down looms, a global recession (well at least USA and Europe) seems to already be underway. These point to both a run-to-gold safety and a run-to-gold away from monetary debasement flow of funds pushing up the gold price.
• Technicals - That's what this piece is all about. Gold is running hard, the only question is when will it stop.
• Interventionals - The big interventional for this week is "Bernanke Speaks" at the annual Jackson Hole meeting this Friday. The interventionals have not been working lately as the Gold Cartel has seemingly been losing its grip (e.g. there have been days where gold rose more than 2%). That also seemed to be the case with Silver last April. They were actually marshalling their forces for the big counter attack. The same is probably happening now with Gold. UPDATE: I see (and should have known) that gold options expiration is also set for this Thursday (the day before Bernanke speaks). THEY often try to drive the price of gold down the day after options expiration to manipulate those who exercised options into liquidating the futures and not taking delivery. I like to trade options expiration. I expect that I will at least partially trade around Thursday night thru Friday afternoon and then get longer at Friday's 4PM close and keep the extra long position for about a week. 
• Seasonals - the seasonals have not worked out this year (with gold running hard thru the usually lackluster summer). Still, the seasonals are now turning positive with the usual Labor day to Thanksgiving run-up season nearly at hand.
• Personal Psychology - At this point I'm feeling over-confident having made good money recently, but I am not feeling greedy. I'm ready to pull the trigger and get out if the jig seems to be up.
• Mass Psychology - The mass psychology is turning towards owning gold as the main alternatives (stocks, bonds, real-estate) have been quite disappointing lately. The mass psychology of the silver run was, in my opinion, drive by greed (supply/demand stories and "trapped shorts" stories). The mass psychology behind the current gold run is entirely fear-based, in my opinion. People are afraid that gold is in a bubble, but they are more afraid that "the system is failing" and ordinary investments are about to crash again. I'm thinking that the Cartel objective is to pull in more suckers and then to spank them with a big manipulated correction. That should be enough to drive up the fear of gold for a while and allow the Gold Cartel's managed retreat to continue.

In summary, at this point risk is high, but it seems like gold can keep running hard for more than another month. As you know, my risk tolerance is much higher than most people's. My intention is to:

• Remain lightly leveraged (2.5 to 1) while the run is clearly continuing.
• Develop a plan for to minimize risk despite the relative illiquidity of the gold call options I'm holding.
• Keep moving profits into multiple "outside of the banking system and safe" gold bullion vehicles I can find. I still have no gold in or near my home. I don't want the guys with guns to make a visit.
• Be mentally prepared for a substantial hit when this current hard run-up in gold comes to an end (up to say 20% of portfolio value).
• Watch carefully for a Cartel attack, be willing to give back some recent gains and eliminate leverage when it has clearly hit. 

Am I missing anything?

MontyHigh, www.worldofwallstreet.us

 

Technical Analysis Quiz: Which Chart Is Scary?

I was away from the markets all day today. Woulda, coulda, shoulda. Can you spot the chart that isn't scary?

Just about every stock chart I look out is downright scary. Commodity charts look ugly, but don't really look scary. Silver looks like a commodity chart to me. The gold chart looks just fine. If it goes up tomorrow then the Cartel may actually be on the ropes this time. THEY don't want GOLD to be the only thing that looks good to the SHEEPLE as they ponder what to do with the IRAs all weekend long. I'm expecting a schwack of gold early tomorrow and some propping up of the major stock markets if Europe doesn't continue to melt down hard tomorrow. .

I expect I'll be unloading everything that is not gold bullion and is not a core gold mining holding. I may keep the silver if it doesn't drop like a rock. I'll keep the "money for nothing" silver arbitrage trade as well.

MontyHigh, www.worldofwallstreet.us

 

Today Is Jim Sinclair Day... $1650/oz By 1/11/2011

When I first started following gold (around Thanksgiving 2007 when gold was around $800/oz), Jim Sinclair had been saying that it would hit $1650/oz by January 11, 2011 from some number of years. Leave me a comment if you know when he first made the call. He was certain of this to (and beyond) the point of arrogance. 

But, he advised people to buy physical gold and to stay away from all leverage. This turned out to be good advice for the inexperienced. That's what I was. He never made any significant attempts to extract money out of his listeners with subscriptions, etc. 

I think overall he has done a significant service to those who visited his site. 

Thankyou, Mr. Sinclair. 

MontyHigh, www.worldofwallstreet.us

Download Solari-2011-08-04

 

Trading Gold And Silver Thru The Summer Part 16: Back Long Again

Just switched my synthetic puts back into call options by buying back the future shorts (Dec Gold and Silver). So, I'm leveraged long again, mainly gold. I think this message board post captures the spirit of the moment:

"If $39.50 is the best these bitches can do

on propaganda to celebrate US Debt increase 

then its obvious 

they are totally butt naked LOL "

MontyHigh,

 www.worldofwallstreet.us

P.S., It looks like I screwed up again on that "Cartel Cheats To Win Again" post. Even those the screen captured message is dated 7/31/2011, I think its a left-over from the early May silver take-down. 

Trading Gold And Silver Thru The Summer Part 15: Silver [Gold] Cartel Cheats To Win Again

This could be a big correction. Hat tip to Gary Biiwii for calling it. I've turned a bunch of my call options into synthetic puts for a short-term trade. 

MontyHigh, www.worldofwallstreet.us

 

Gold At The Top Of A Channel Buzz...

There's been some buzz among gold technicians lately about gold being at the top of a trading channel (click here for the estimable Trader Dan Norcini on the subject). The implication I hear from most of that buzz (not Trader Dan) is that we are due for a correction or consolidation imminently. Here's Trader Dan's chart:

I think that given the size of the move (more than a double) that looking at gold with a log chart makes more sense. When you draw a channel with log scale the top and the bottom of the channel represent a basically fixed percentage distance from the center of the channel. Here's my channel chart:

Looking at this chart we see that gold is not yet to the top of the channel. Its about $50 (~3%) below the top. Compared to earlier highs this run it looks like gold has further to go with both MACD and the RSI. So, I think we're still a couple of weeks (or so) from the top of the channel and a consolidation. Off Topic: Is that how long it will take to work a debt ceiling deal?

Now let's have some fun. Let's draw a center line (GREEN) and see where this puts us around the end of December (where I'm expecting to take profits by closing positions until I'm unleveraged).

We see that if gold stays in the channel by the end of November it will be between roughly $1640/oz and $1800/oz with the middle being $1700/oz. I'd be quite pleased if it hits that $1700/oz target which about matches what I've been expecting based on this post (click here) from May 2011. The May target was around $1750/oz which was based an 11% gain above trading system's entry point. The entry point which was around $1590.

One more thing. When I look at the above chart I'm looking for situations that seem about the same to where we are right now. I think I see one.

Where we are at now looks a lot like where we were at the end of Aug 2010. I've noticed that things usually don't exactly repeat in the markets, but... when they do, the repeat usually occurs a little bit earlier than you would expect based on simple cyclicality. The herd is expecting it and gets in earlier. So, if we are going to have some kind of a repeat of last year, it makes sense that its already underway.

I guess I'm more bullish than most of the commentators talking about a Gold trading channel. At this point I'm thinking I'll remove a little leverage (take some profits) each day this "debt ceiling crisis" continues and the top of the channel gets closer, but stay leveraged with Dec 2012 call options around 3 to 1. See the P.S. for the stop I'm considering.

Of course, this is not an investment recommendation (read the disclaimer at the top of the page).

MontyHigh, www.worldofwallstreet.us

P.S., I guess I see one other thing is this chart. A fall from significantly above the green line thru the green line nearly always results in a drop to the bottom of the channel. Guess I'll be tightening my stops and be thinking about bailing on my leverage if that green line is punctured.