The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Thursday, July 29th, 2010.
Evidenced by Tuesday's drubbing of gold and silver into COMEX (paper market) options expiry for the metals, which is an all too common occurrence that goes unchecked by regulators, it's apparent the banking cartel's resolve regarding suppressing metal's prices is particularly strong at present, with the tell sign here being generous numbers of put owners got paid - paid big time. If cartel members were the writers of these put contracts, such an outcome would be expensive, so it must be concluded the writers were likely hair-brained hedge fund managers, possibly goaded into these positions by cartel members. Then, it was easy for cartel members to sell gold down Tuesday as lower volumes associated with summer doldrums left few obstacles to overcome.
And the really good part of it from their perspective is the demoralization of gold bugs gaming a trade back up to options related equilibrium pricing, somewhere north of $1200. Undoubtedly Tuesday's price action did not compute to these types at all, meaning they will be slow to return to the market. This is where the title of this piece comes from, paper (COMEX) covers rock (physical gold); as the continued irony associated with precious metals prices, given physical supply constraints, gets more profound with each passing day. What's more, irony also lies in the observation not only does the cartel routinely drive gold lower at options expiry when paper pricing (COMEX) put / call ratios are low, but now, apparently this will also happen when they are high as well; leaving the question, exactly when does a technicals / internals trader buy / own the stuff. (i.e. clearly Tuesday's attack on gold and silver was designed to discourage.)
By the third week of August volumes should be picking up again however, as vacationers will be returning to prepare for September at that time, with this putting a different slant on things afterwards. That is to say, the bureaucracy's price managers will not be able to push the markets around quite so easily anymore, so what happened in gold on Tuesday should not happen again. This of course does not mean gold and silver would escape liquidity issues if they develop going into the fall, which is what we expect considering stocks continue to follow the seasonal pattern closely. That being said, with seasonals for both gold and silver strong from now until year end, although prices might need to go lower, don't expect an all out collapse. Remember, we are only correcting 1 of C and then it's off to the races again.
That being said, let's take this opportunity to check gold's count and technicals for clues as to what we can expect, and attempt to match them with our expectations for the general equity complex, currencies, etc. First, I should make it clear my expectation for stocks is the seasonal pattern will continued to be followed closely, with this characterization provided by John Taylor (attached above) likely not far off the mark, as follows:
"Although it is more likely that the equity and credit markets will not begin their major decline until the last week of August, the odds favor an unimpressive month ahead which means that we are at the end of the exciting part of the rally of the past two months. By the end of next month, equities will be headed lower, credit spreads will widen sharply, and government bonds will begin a rally to new all time highs. Our completely technical cyclical work implies that there will be a return to dark times in September and October, with a sharp decline driven by liquidity and solvency issues likely to set the world back on a recessionary course."
In returning to the near-term, and in checking the seasonal chart for the S&P 500 (SPX) attached above, stocks should cycle down next week (in fear of a bad Employment Report), but then recover into options expiry in the third week of August, which is consistent with John Taylor's views, and my own. What does this mean for gold? If stocks do in fact trace out the aforementioned pattern, then the dollar ($) should get a lift next week, pause for weeks two and three in August, and then rally hard into October as equities are hit. And it just so happens this thinking is confirmed in the gold chart(s), where an interim low is close at hand, but where an ultimate low, the one fully correcting 1 of C, is not put in until the fall. (i.e. in October ahead of stocks.) (See Figure 1)
Figure 1
I see gold is climbing overnight, as expected, from the oversold condition pictured above. As per the count however, don't be surprised if gold has one more minor degree wave lower next week if the $ bounces (and liquidity dries up temporarily), in order to complete the count. Then, gold should enjoy a stronger rally to trace out the Minor Degree b wave also indicted above, this being the move anticipated during August, consistent with the larger equity complex, currencies, etc. It will be informative to see what kind of volume we get out of this rally in August. If it does not break above the trend-line indicated on the chart below measuring the ratio between the DB Gold Double Long and DB Gold Double Short ETN's, then the anticipated declines in precious metals prices into the fall could be worse than we are envisioning at this point. (See Figure 2)
Figure 2
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Good investing all.
