The following article was published for the benefit of subscribers on October 4th, 2012. This article is provides technical analysis for gold from many different perspectives. Other analysis posted over the past 12-15 months on the Internet can be viewed in site archives to follow trends of other markets we follow. The FED and other countries around the world are participating in an effort to rescue the global economy by creating money out of thin air, which really is credit. With the pattern that the Contracting Fibonacci Spiral is indicating, these balloons of liquidity the FED is blowing may turn out to be lead balloons...the US Dollar is set to decline, which in turn will inflate prices seen in the stock market, commodities and their related stocks. This price inflation is thought to be the issue that will cause markets to top out and cause a deflationary episode starting sometime beyond July 2013 and extending into late 2014...this is the thesis of our work, based upon discovery of the Contracting Fibonacci Spiral that broad market indices are currently in. I am working on a piece for Stocks and Commodities magazine that will hopefully discuss this theory at a level I have not yet presented. For gold bugs, expect a pause until no later than mid-November, followed by a very sharp price move in gold...
Ratios
The daily chart of the gold/silver ratio is shown below, with upper Bollinger bands starting to decline towards the current price. Full stochastics 1, 2 and 3 are shown below in order of descent, with the %K above the %D in 1 and 2 and beneath the %D in 3. Generally, this ratio rises during periods of market weakness and falls during periods of market strength...it seems that the ratio is starting to decouple from this trend and start to have a greater weighting based upon the merits of owning physical gold and silver. With a rising %K in stochastic 1, the ratio is remaining rather flat....the %K in stochastic 3 is displaying no evidence whatsoever of moving higher. These items coupled together suggest further sideways action in the ratio over the course of the next 3-4 weeks before breaking lower. The present sideways action may be viewed similar to the bounce up in early 2011 before heading lower. The general trend for this ratio appears to be lower over the course of the next 6-8 months.
Figure 1
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The daily chart of the gold/oil ratio is shown below, with lower 34 and 55 MA Bollinger bands curling down, suggestive that further upside is likely i.e. Gold is likely to continue to outperform oil. Full stochastics 1, 2 and 3 are shown below in order of descent, with the %K above the %D in all three instances. A top in this ratio is likely to be put in place sometime within the next 3-4 weeks. Oil has been killed the past week, but remember that longer-term trading patterns from late 2011 suggested prices somewhere between $180-200/barrel. We are looking for oil prices to top out somewhere between $160-180/barrel before June 2013...this will be the game stopper for global economies as exports from China simply stop due to zero profit margins. The US Dollar is denoted in black along with the ratio, which has a volatile relationship between positive and negative correlations. The only purpose of seeing these two variables on the same chart is to see what fleeting correlation exists during a given weak.
Figure 2
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The weekly chart of the HUI/gold ratio is shown below, with gold denoted in black. Lower Bollinger bands are well beneath the current value, suggestive that a bottom was put in place. Full stochastics 1, 2 and 3 are shown below in order of descent, with the %K above the %D in all three instances. A double bottom was put in place earlier this summer and at present, the %K in stochastic 2 has at least 6-8 months of upside before topping out...we are looking for the ratio to climb up to 0.44 for a top. The process of precious metal stocks falling into favour with investors again is going to be 3-5 year process...gains for the coming top will be excellent, with a HUI top expected near 800-850....but if gold is at $2250-2500/ounce, then the ratio should even break 0.45. But again, sentiment is what dictates prices. When we do get a top 6-8 months from now in the HUI, it will be an important top, so it will be imperative to lighten up trading positions and bank profits. For now, we sit as the bread and circuses over the US election continues. Once it is over and Obama remains in power, people will wake up and realize that nothing has changed. With a focus on the US, global news will then see how bad things are in the US and then the witch hunt crosses the pond. Do not be fooled by low oil prices at the moment, because a strong surge of cost-push inflation is nearing our doorsteps.
Figure 3
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Gold
The daily chart of gold is shown below, with the lower 55 MA Bollinger band recently curling up, suggestive that a top was recently put in place (or is looming). Full stochastics 1, 2 and 3 are shown below in order of descent, with the %K beneath the %D in 1 and 2 and above the %D in 3. Extrapolation of the %K trends in stochastics 1 and 2 suggest at least 4-6 weeks of sideways price action is likely in order to see a visible contraction in volatility before gold can break higher. As mentioned before, we have a triple top forming at present beneath a former high, which is structurally in line with the base of the volcano top. When these sorts of patterns develop, the former high is generally taken out with ease, with minimal resistance, followed by a back test and then off to new highs. The average price of mining an ounce of gold for all included expenses is around $1300/ounce. So, at present, gold is trading at $480 profit per ounce. If gold goes up another $480/ounce here, then the profit margins of many companies goes through the roof. The lower 55 MA Bollinger band is rather far from the current price, so we may see more of a 6-8 week period of sideways price action before prices really take off. Gold is a coiled spring at the moment, but technical analysis suggests anywhere from 4-6 weeks at a minimum before any sort of surge in the price of gold commences.
Figure 4
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The weekly chart of gold is shown below, with upper Bollinger bands all in close proximity to the current price, suggestive that further upside is looming. All three lower Bollinger bands are in close proximity to each other well beneath the current price, indicating that there is no chance of a sharp correction occurring until they fan out...this is at least 6-8 months out, AT A MINIMUM. Full stochastics 1, 2 and 3 are shown below in order of descent, with the %K above the %D in 1 and 2 and beneath the %D in 3. The %K in stochastic 3 curling up alongside a rising %K in stochastic 2 suggests at least 6-8 months of continued upside.
Figure 5
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The monthly chart of gold is shown below, with upper 21 and 34 MA Bollinger bands in close proximity to the current price, suggestive that further upside is looming. Full stochastics 1, 2 and 3 are shown below in order of descent, with the %K beneath the %D in all three instances. The monthly stochastics do not really give any sort of indicator of strength at present, so continue focusing the the weekly chart for indications of when the present correction is over.
Figure 6
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The short-term Elliott Wave count of gold is shown below, with the thought pattern forming denoted in green. There was a parabolic arc put in place for gold between May and early September, which did not collapse...instead it corrected higher...this is an extremely bullish observation for higher gold prices going forward. Generally, parabolic arcs see complete retraces...when there is no retracement, the upward price extension is usually equivalent to the parabolic rise...this would put gold at $2500/ounce at a minimum before July 2013. As other charts have shown, expect further sideways price action over the course of the next 4-6 weeks before breaking higher. DO NOT TRY SHORTING PRECIOUS METALS OR THE STOCK MARKET. Some articles have appeared over the past few weeks attempting to short the broad stock market or precious metals...until tops have been put in based upon the Contracting Fibonacci Spiral (CFS) cycle the markets are in (Google for more information), shorting could be an expensive proposition. The environment we are in is operating under a CFS, which to my knowledge is the only working cycle to accurately describe what is happening at present...until the mentioned topping dates of the broads, HUI, XOI, commodities etc. are reached, do not attempt shorting...volatility is going to be significant.
Figure 7
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The long-term Elliott Wave count of gold is shown below, with the thought pattern forming denoted in green. Based upon the present pattern, expect upside to last for anywhere from 6-8 months at a minimum before topping out somewhere between $2500-3000/ounce.
Figure 8
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That is all for today...back tomorrow with an update of oil, natural gas and the AMEX Oil Index. Have a great day.
