Charts created using Omega TradeStation 2000i. Chart data supplied by Dial Data
In the previous week's Chart of the Week, (Is there a Bear Case for Gold? - June 5, 2014) I mused as to whether there was the potential for another drop for gold in the works. The thought that gold could once again put in another scary plunge was based on the premise that there was the eerie similarity between the pattern that is currently forming and the pattern that formed from September 2011 until April 2013. On April 12, 2013, some 400-500 tonnes of gold were offered at the open in thin market conditions on the COMEX the futures exchange that trades gold. The result was a $200 meltdown for gold. The gold sale had a value of roughly $23 billion.
In Q1 2013, the notional amount of gold derivatives outstanding for US banks jumped about $20 billion to $148 billion from Q4 2012 as reported by the Office of the Comptroller of the Currency (OCC). During Q2 the notional amount of gold derivatives outstanding fell by almost $27 billion. The short sale was made in the early part of Q2 so it is possible that these positions were all covered by the time Q2 ended on June 30, 2014.
Since then the notional amount of gold derivatives outstanding has fallen another $26 billion to Q4 2013. Some 90% of all derivatives are held by only four banks in the US - JP Morgan Chase, Bank of America, Goldman Sachs and Citibank. Other large bank holding companies in the US include Morgan Stanley and HSBC.
One of the constant themes I hear is that the gold market is manipulated and that technicals are largely useless in a manipulated market. Given the recent investigation into the London Gold Fix there is no longer any doubt about manipulation in the gold market. Previous investigations have led to some large financial institutions paying large fines for manipulation related to LIBOR, currency price fixing and energy price fixing. The five banks involved in the London Gold Fix are facing lawsuits and Barclays PLC paid some £26 million (US$44 million) in fines by the British regulator. Traders have been let go on the banks dealing desks and Deutsche Bank has pulled out of the London Gold Fix and is selling its seat on the LME. Other banks involved in the London Gold Fix besides Barclays are Canada's Bank of Nova Scotia, HSBC Holdings PLC and Societe Generale SA.
Chancellor George Osborne of Britain has vowed to make manipulation of markets a criminal offence. Osborne was referring primarily to the currency markets and the LIBOR markets but it was also made clear that it would extend to commodity markets and even to the fixed income market. Regulators are also investigating markets in the US, although to date there has been no investigation of the gold market. The US COMEX, (a division of the NYMEX), is where gold is traded. The Commodity Futures Trading Commission (CFTC) regulates the COMEX. Participants must be registered whether as to a large or small speculator or a commercial. Commercials make up the largest group. Each week the CFTC reports the long and short positions for each group. That is known as the Commitment of Traders report (COT).
Technical analysis remains relevant even in a manipulated market. A pure technical analyst would probably only look at the chart with no idea as to what he may actually be looking at. Patterns form - triangles, wedges etc., support/resistance levels become evident, indicators can be applied. There were technical signs of a potential breakdown back in gold back in early 2013. However, at the time, gold's fundamentals remained positive and that threw numerous analysts off track. Technicals and fundamentals can diverge.
Elliot wave analysis is a form of technical analysis that centres on investor psychology, price action and wave patterns. Elliot wave analysis is rule based and as a result, it can be complex. There are few who are considered experts at Elliot wave analysis. I find it useful to see if there are any emerging big picture patterns. I do not consider myself an expert. There are numerous criticisms of Elliot wave analysis. It can be subjective, vague, and, inconsistent in that wave analysis can have numerous revisions.
The chart of gold shows what appears to be three waves down from the September 2011 high. Wave 1 or a possible A wave bottomed in late December 2011; wave 2 or a possible B wave topped out in October 2012; and, wave three or a possible C wave bottomed in June 2013. The three or C wave appears to have unfolded in five waves. I have labeled them a possible large ABC pattern because waves A and B appear to have unfolded in three waves, which is typical of corrective waves. If the A and B wave unfold in three waves then the C wave typically unfolds in five waves.
Labelling it a large ABC corrective pattern could suggest that the current symmetrical triangle forming is wave 1 of a new bull market. If this is a wave 1 of a new bull market then gold should break up over $1,360 and could have objectives up to $1,600. The current symmetrical triangle pattern would most likely need to be relabelled. Key resistance levels would be seen at $1,400, $1,430, $1,480 and $1,525.
On the other hand, the forming wave could still be wave 4 in a still unfolding five-wave pattern to the downside. Robert Prechter's Elliot wave analysis www.elliotwave.com believes that the current wave is a wave 4 and not a wave that could be the start of a bull move. A symmetrical triangle typically unfolds in an ABCDE type pattern and so far, the ABCD might be complete. If that is the case wave E wave could rise to about $1,360 before failing. The breakdown point would be around $1,250 and project down to potential objectives near $1,000. This scenario is similar to what I showed in the previous COTW.
Charts created using Omega TradeStation 2000i. Chart data supplied by Dial Data
The chart of silver shows a possible unfolding five waves to the downside. In many respects the silver chart is hopeful for the bulls if the five wave pattern to the downside is correct. This chart could break out over $20 and potentially have objectives up to at least $26 for the first wave to the upside. Even if silver were to break out over $20 it would not necessarily signal an immediate sharp rise. However, a move to $26 would be significant before a correction could set in.
Charts created using Omega TradeStation 2000i. Chart data supplied by Dial Data
The chart of Pan American Silver (PAA-TSX, PAAS-NASDAQ) could be even more encouraging for the bulls. PAA may have completed five waves to the downside with the last bottom seen at $10.18 in October 2013. There have been three fan lines drawn off the wave 2 high in April 2011. PAA is currently testing the third fan line. PAA may be breaking above the third fan line on June 12, 2014. If that proves correct this could be bullish for PAA and for the precious metals markets.
It is interesting that on June 12, 2014 that riots are breaking out in Sao Paolo over the spending of $1 billion on the World Cup against the backdrop of millions of Brazilians living in poverty; Islamist insurgents in Iraq have seized some key cities and are working their way towards Baghdad prompting a response from the US that there might need to be a military response; and, finally there was a story that pro-Russian separatists have picked up some Russian tanks that are now in Ukraine. The Ukrainian government is accusing Russia of invading.
The result of these events has seen oil prices leap over $2, gold prices rise around $13 and the Dow Jones Industrials (DJI) fall over 100 points. Of the three charts shown, only the gold chart is somewhat ambiguous as to what the next move might be. Both the chart of silver and PAA appear to be bullish. After almost three years to the downside, the gold bulls need some hope.
