Last words (and epitaph?) on gold

I've charted the 40-day exponential moving average (40-day EMA) for gold over the past 5 years, with 7.5% and 10% envelopes (red, green, respectively). Throughout the entire decade-long bull market, gold has never moved significantly below these envelopes.

If we call a "major" correction one in which gold hits the lower 10% envelope, clearly the last one occurred in 2008. Since then, I think we can agree that the last 3 memorable (i.e. non-trivial) corrections occurred in December 2009, June 2010, and January 2011. Note that in all three cases, gold sunk below its 40-day EMA (see black circles). Although silver corrected big-time last May, gold has just moved below its 40-day exponential moving average this week.

Combined with the expected seasonal consolidation, the "end" of QE2, and the apparent momentum of the chart towards its 144-day moving average, it would seem that we're in for a few months where you're better off short (or probably sitting out) than long.

But not so fast. In other currencies, gold is at a critical juncture, which, if broken, would (in my opinion) signify fairly serious "chart damage." In other words, while there's a lot of slack in dollars, the same doesn't appear to be true in other major currencies. In my previous post, I depicted gold in euros. Gold in Australian dollars appears to be at a similar critical juncture.

I'll be long gold (in Euros, not dollars) until the support in Euros and Aussie dollars is emphatically broken (admittedly, we're nearly there), because there seems very little downside and significant upside potential. I'm feeling pessimistic though.


Warren James said...

The sell-off in Gold looks scary in AUD, but part of that is a strange surge in the AUD just in the last few days - the overall trend appears still intact like you show. I'm a buyer at the new sale price but my strategy has morphed into governing the flow into physical rather than price picking. Like yourself and many, the volatility has me puking a little.

GM Jenkins said...

If there's not going to be a 2008 kind of chaos and collapse this summer -- and I'm betting against that -- then I think you've gotta be bullish right about now. The last few days have looked bad, but I'm calling a bluff here and protecting my hand in gold. In dollars, gold is ~$30 away from the major upward trend line that everybody and his mother is eyeing right now. In other currencies, it appears seriously oversold.

Though, from a long term perspective, the best thing that could happen to gold might very well be a repeat of the 2008 deflation scare. We know with near-certainty that they'll eventually print whatever it takes to paper it over (pun intended) and this time they're probably much better prepared to act quickly (though it might take a hundred trillion this time around to put more time on the clock- who knows).

Warren James said...

GM, that sounds right to me - it is one of the premises of FOFOA's hyperinflation arguments, simply the fact that deflation won't be allowed to happen. The mechanic will be digital money printing, and the colour and the shape will be whatever it needs to be.

It will be interesting in 10 years time to look back on the current correction and see it in the context of all that followed. I'm bullish :)

Anonymous said...


Anonymous said...

I am new to this blog, but can see that some of the same intellectual firepower is available here as is at FOFOA. I am glad i found this blog. I am hopeful that perhaps a few of you here will indulge me with an opinion on an idea I have. I am considering using an exchange such as Bullion vault as vehicle for my business sweep account. Historically I have used a MM for this purpose. HOwever the mm community as a whole has taken on alot of EU risk exposure, which isn't justified by the .007% interest I am recieving. To leave the money lay in my business checking account would allow no inflation protection and recieve no interest. I see my risk with Bullion Vault as primarily short term volitility. I am mid and long term bullish on gold. I would appreciate the boards thoughts. jv

Warren James said...

mtbbuck, by 'intellectual firepower' you're obviously referring to Mr GM Jenkins :), but I will take a stab at your query.

By using BullionVault or GoldMoney, you do indeed get exposure to the price movements and liquidity is not bad either. Here, we are of the opine that the vaults ARE full of claimed metal (at present anyway) so counter-party risk is low. Regardless of your time frame though, making such a move makes you a trader, and as such your cash becomes an investment, subject to all the things that make trading work or fail.

You could get a better yield by holding AUD - rates are on hold and our economy is on the ropes like everyone else's but we do have a swagful of commodities (and gold in the ground) which will see us through the worst of it. Our central bank inflates our living standards to give around 5% p.a. yeild to international speculators who hold the currency for that purpose alone. Depending on how you view taxes and inflation, that puts you way ahead of your 0.007% interest rate. Doing that kind of investment will look better in the board meeting rather than explaining to your shareholders that you are speculating on the gold price with the funds.

Hopefully in the future (a freegold future), moving capital to physical gold specifically because it is holding it's value best as fiat devalues, i.e. the benefit will become more pronounced. Currently I don't think the price of gold is allowed to keep pace with inflation because if it did then people would be buying more of the shiny stuff.

Well, those are my thoughts - actually we run the household like our own central bank, with strategic metal reserves and a yearly 'mark to market' valuation (just time it at the same time as the BIS does theirs and you should be looking good). I would happily run a business in the same fashion (in fact I plan to do this), but at the end of the day it comes down to your liquidity needs. You could also take a punt that FOFOA's freegold valuation may get triggered sometime in the next x years and be ready holding physical gold for when that occurs - your business will have a great capital base.

Another option is to try and get a loan offset account, and use your sweep account for that purpose. Then you're not earning income (so no tax) on that, as well as reducing your overall debt and liabilities - and in theory the gain is proportionate to the interest rate you're paying on the loan. Depending on the account structures available to you, that is a really clever strategy. Just my three cents worth. Regards, Warren

GM Jenkins said...

Warren, intellectual firepower would describe me well if it meant "likes beer." :P
mtbbuck, all i can tell you is that if I were in your position, I'd probably do what you propose, because I'm a believer in gold to the moon, and that any volatility is short term etc. But it might be worth considering respectable deflationists' perspectives, such as mish shedlock, who thinks that global trade could shut down. In a deflationary situation gold should also do well, but could pose problems if you're too heavily exposed.

Anonymous said...

I want to sincerely thank both of you gentleman for your thoughts. I will research everything that you have put my way. The one thing I am certain of is that with the actual 9% inflation currently using these bank holding instruments is a big loser. We have about $50000 in short term CDs for the purpose of boosting the collaterizable basis of the business for the purpose of getting letters of credit(bonding) in order secure jobs. This money is all coming free over the next 2 months. It will be an interesting test with my bank to see if they are going to accept physical gold as collateral for this purpose.

Just so you gentleman know I'm a simple guy grinding along up here in MT. I own all the stock in the corporation, so no problems with decision making. We have a position in physical gold already, which I consider as insurance against the meltdown. We still have some work to do in other areas so that we can function if this thing gets tough. I am just fortunate that I got back into studying financial matters. Virtually everyone that I deal with is clueless to what is likely coming. jv.

GM Jenkins said...

Thanks mtbbuck, please let us know what you decide to do and how it works out.