Gold Ripe For Pullback?

Discussion in 'Commodity Futures' started by rodden, Dec 4, 2003.

  1. rodden


    Over the past 7 1/2 months gold has been forming a neat rising wedge.

    Monday (Dec 1) Gold Spot hit 406.4, hitting the upper boundary of the wedge (actually penetrated it briefly) thereby fulfilling its technical obligation to complete the wedge formation.

    Recently the $CRB broke down from a similar formation, falling rapidly from 258.0 to 244.5 in 9 days. Monday the $CRB did a spectacular one-day recovery, climbing 11 full points in one day. Whether the $CRB the is just bouncing within a major reversal or morphing into a broadening formation remains to be seen.

    If Gold behaves similarly, it could drop within a few days to sub-380.0. There are many technical and fundamental reasons that this is possible.

    Comex Gold activity has been markedly higher since Gold broke 400.0, without much price movement; this is usually a sign of an impending reversal. Also, net longs has actually diminished on high volume - another bearish indicator.

    The long/short ratio for Gold contracts is about 3/1 - an unusually high ratio making any short squeeze in the near future unlikely.

    The absolute long position is 200K+ - also unusually high; the potential for a sell-off cascade is obvious, especially if Gold falls below 400.0 and starts bouncing off 400.0 .

    Physical demand is badly lagging supply; Gold is trading up here in a speculative balloon.

    Any hint of a US$ reversal may trigger a sell-off.

    Just my 2 cents worth. Gold will probably skyrocket now that I've made a fool of myself.
  2. I don't follow it quite as much as you but here is my "stating the obvious" take on gold.
    Short term: Gold would probably have some support at $400, the magnitude and speed that it breaches that level would probably panic either camp and turn that $400 into mid term support or resistance.

    The curious thing is making a bearish case for gold longer term- if the $ keeps going down it would be bullish for gold. To halt its slide, the deficits would have to be financed by printing more $ which is inflationary which is ALSO good for gold. AM I oversimplifying it? Seems to me that being short gold longer term might not be worth the risk reward.
  3. rodden


    Hey, GAT - I've given up on long-term considerations; as far as I'm concerned there are too many black box factors operative in the global economy for anybody to make a meaningful analysis.

    My concern is strictly with the short-to-intermediate term.

    I'm not saying that Gold positively will pull back - just that the stage is set for a major shake-out. Usually when things can go wrong - they do. Maybe some big operators are waiting to scoop up those 200,000 contracts a few dollars under the panic price..maybe not. There's no way for us little guys to know.

    There are many possible Gold-Dollar-Equities scenarios. Gold and the Dollar are not necessarily in a teeter-totter relationship. Both Gold and U.S$ can drop if Gold is falling faster on the world market than the Dollar. This can happen in our shake-out situation, or simply because there's a change in sentiment re. Gold's value as a currency and/or commodity.

    The current lack of demand for physical Gold means there's not much fundamental reason for Gold to be @400.0+ . Gold is being supported by traders speculating that serious inflation is just around the corner and/or that the U.S. Gov't will continue to allow the Dollar to sink to correct the trade deficit and to reduce Gov't debt. While these speculations are based on pretty obvious logic, the question is one of timing. If the Fed decides that currency chaos is looming and moves to halt the Dollar descent for even a short time, holders of 400.0+ Gold contracts will begin to weaken in their resolve, and will almost certainly begin to crumble.

    Many of the U.S.'s trading partners are unhappy with the Dollar's decline and may succeed in pressuring the U.S. to compromise in its apparent weak-dollar policy.

    My thoughts, as presented herein, are only speculations that consider only the tip of the tip of the iceberg; the forces that drive the Gold and currencies markets are extremely complicated and are quite beyond my scope (or anybody else's as far as I'm concerned).

    Personally, I don't have the nerve to short Gold per se, but shorting Gold Majors equities doesn't look very dangerous to me here, as long as I keep a close eye on my positions - and that's what I'm doing.

    If you're strictly a commodities trader you might find it difficult to sell once the sell-off begins - or to cover a short if some bizarre geopolitical event cause Gold to leap $30.00.

    In any case, I'm just suggesting that a Gold sell-off is distinctly possible - but not a certainty by any means.
  4. If the trend of making gold easier to own continues, I wouldn't be surprised if one day we eventually see metals as the fourth asset class to own on the street (along with cash, stocks, and bonds). Who knows where the price would be if the mutual fund complex begins invest directly. Just a thought.
  5. Any thoughts on whether the imminent launch of the new Gold ETF might reduce demand for the mining company stocks given that some non-futures traders have used them as a gold proxy in the past? If so, the ETF's debut and the competing draw of money flows could conceivably exacerbate any sector weakness resulting from any meaningful pull-back in Gold. Just a working hypothesis (backed up with short NEM calls).
  6. Good post rodden.

    I for one would'nt be long gold. Would wait to pierce 400 and short it and use 400 as a tight stop. I guess I am a perennial mild gold bear since in the past 10 years we've had the MOther of all geopolitcal events and gold barely moved up. Iraq invasion of Kuwait with oil fields burning, Pakistan/India nuclear standoff, 2 gulf wars. Sept 11. How much bigger a geo event does gold need to go up!

    Remeber the old saying in commodities - nothing cures low prices better than low prices and vice versa.
  7. rodden


    Sounds pretty plausible to me. "Experts" anticipate ETF's to be equal to 1.5 - 2.0% of global gold equities by 2004's end but these are nothing more than guesses based on pretty suspect models. ETF interest is strong in the investing world and might well spark a surge of interest in Gold ownership. The simple fact that they're easy to sell will make them tempting to buy.

    ETF's might eventually become the only "real" money - and a truly global currency at that. Maybe..some day.

    At this stage nobody knows how this thing will play out. I understand that ETF's are being backed by major promo in the U.S.; if they make it there, they'll make it everywhere (or so I should think).

    Your hypothesis re. ETF's stealing some of Gold equities' thunder sounds good to me. I think the main interest in ETF's will come from funds; funds have to put their money somewhere and they must be getting nervous about the equities markets in general - especially given equities' muted response to all the terrific U.S. economic stats coming out lately. Funds might start out taking little tastes, then big chunks when ETF interest snowballs in a self-fulfilling fashion. Also, Gold equities are selling at high PE ratios; the one-to-one relationship of the ETF (ETF= 0.1 oz gold) should prove an attractively liquid easy-to-justify-to-your-fund-boss alternative.

    ETF's have been moderately successful in Australia in spite of a steady local currency; in the U.S., with its falling dollar, they should be more appealing. Projections of ETF sales in the U.S. are based on their reception in Australia and almost certainly underestimate demand.

    Bullion has been supported by numerous factors, including the winding down of producers' hedge books. This process is slowing; the big question now is - can ETF demand fill in for dehedging? We have to wait and see.

    We may well have a situation in which ETF success causes Gold to rise and Gold equities to fall simultaneously. But again - that's a maybe.

    As you suggest too, any correction in Gold will cause a correction in Gold stocks which could be exacerbated by ETF competition - a likely scenario.

    How about this, though: Before ETF's are launched (Jan? Feb?) could we have a sharp sell-off in Gold that shakes out the overextended longs - especially if there are further delays in the ETF launch? Such a correction might have come and gone before ETF's are activated. Gold equities could be hammered between now and the U.S. ETF launch, then have their recovery thwarted by the ETF competition (or anticipation thereof). But...that's pretty speculative.

    Given the intense feedback relationship between U.S. investors and the market, it's hard to even guess what effect ETF's will have. It could go over like lead balloon, spin out of control, or just be quietly integrated into the system.

    For sure - ETF's will affect Gold equities but will the effect be big..or small; will it be sudden..or slowly evolving?

    At this point I guess we're guessing. But it bears very close monitoring - if it plays out big it could present us with some major moves. If it doesn't - well, that tells us something too.

    And of course, ETF's will just be one of many factors determining that point of dynamic equilibrium we know and love as POG.

    Thanks for your post. Now I'm more undecided than ever - and I think that may be good. Or maybe it isn't. I don't know.
  8. rodden


    And a pretty good thought at that. Maybe the distinction between metals and cash will blur with ETF's coming on the scene. We'll see.
  9. rodden


    Look what we have this morning: Gold down; Dollar down; Equities down. Anything is possible.
  10. Cutten


    Generally in a bull market the odds favour buying, rather than selling short. You may catch a correction, but without a major reversal signal, the odds play is to look for dips to buy, not rallies to short.
    #10     Dec 5, 2003