On Keeping my Little Lemur Purse Firmly Closed

It's been a while since I actually checked the gold price (I haven't owned any since around $1800, as regular readers are wont to remind me, usually in the same sentence as words such as 'naive' and 'deranged'). But a few emails plooping into my inbox over the last 24 hours prompted me to have a wander over to Kitco.

Oh, the humanity.

It's certainly pretty nasty. I mentioned in a comment a while ago that I was open to buying some gold at some point, and that I felt arrogant enough to declare that I would 'know' when that would be.

This ain't it, I don't think. Not by a long chalk. My little lemur purse is staying firmly closed.


To trade commodities at the moment, a class of investments of which gold is most assuredly a member [I suspect that JdA only says things like that to give Victor the Cleaner palpitations - Ed.], one needs not many more tools than a standard fib chart and a sense of momentum. The latter can be mathematically expressed as RSI, stochastics or MACDs, etc., or one can simply develop a 'sense' of when momentum is about to be born or die. The former is based on a few numbers that have no particular special significance in the markets beyond sufficient traders and algorithms being primed to follow them. This is my pre-emptive response to chart-mistrusting commenters such as Duggo: I agree fully that charts are based on no firmer principles than reading cattle entrails. But if the big bad trading computer is programmed to buy or sell based on cattle entrails, one would do well to take an interest in them.


Broken fib:

So, I present my standard fib chart since gold's all-time high in September 2011, which you've seen at Screwtape several times before. The 38.2% retracement line has just been broken to the downside:



You will note that each time previously the 38.2% retracement line has been broken to the downside a full retracement to the 0% line has only been a few months away. Perhaps my line is not quite in the right place (I think it is, actually): all that would mean is that we are now on the cusp of either the smartest buy in gold in ages, or the last chance to sell before something really horrible. You will also note that this fib line coincidentally (?) comes in at the same point as GM's longer term trend line in his post of today.


Bulls lacking in confidence; bears creaming themselves:

So why is my purse remaining as tight-lipped as GM's valet after one of his celebrated avant garde 'all-night fluids' parties? Here comes the momentum question: trading is now thin, and likely to get thinner before Christmas. Traditionally, in gold, it is the bears that take advantage of this rather than the bulls. More empirically, the flow of money is currently against gold. Stocks are the flavour of the month, regardless of your views on whether that is right or wrong, and the momentum is going all their way. It is therefore hard for me to make a case that the bulls are about to come out in force when any right-headed bull is counting on prices getting cheaper over the next few days. But that means that GM's (and my) key support lines could easily be properly broken. $1650 certainly, but $1600 or even low $1500's cannot be ruled out.

This is a kind of game theory problem. A concerted bull attack here would allow the chart lines to be preserved and would allow all the bulls to profit from their purchases. However, as each bull pulls their bid further and further back out of a sense of personal caution, the chances of such a concerted action diminish. Each bull looks for confirmation (i.e. a rebound off the support lines) - provoked by someone else's purchasing, of course - with the net effect of killing their momentum at birth and allowing the thin market that makes the bears' job so much easier.


A landmark year in the gold bull:

There's one final factor, and it's something that as a bear I am watching closely:

2012 could be the first time during the bull that gold finishes the year lower than it started it (i.e. $1603.60).

One of the great rallying cries one reads everywhere on the silverogosphere is that gold has netted an average of 20% a year for the last ten years. How true is this?


Well, actually from Jan 2002 (being generous) to Jan 2012 it worked out at an average of 21.8% per year, so that's a pretty good meme as memes go. However, there's a sting in the tail: when it stops being true, does that mean that the gold run is over?

Let us pause to consider that there was even a rise (albeit small; 1.6%) in the worst financial year in human history, 2008, when human beings were getting ready to have their final amorous encounter, eat each other, and barter in acorns. The 'great correction' of 2004 worked itself out and still returned 6.0% - equivalent to the return from a few bank accounts at that time.

So, philosophically, what would it mean if 2012 actually delivered almost no return - or, hush when you say it, a loss? Bearing in mind that this was the year of "QE to infinity! (c)", of the impending fiscal cliff, and of a concerted world-wide money printing effort we have never seen the likes of (at least in terms of coordination). The stubborn refusal of gold to perform under such conditions - for a whole year - for more than a year, in fact - must, on some intellectual level, be addressed.

OK - we're not there yet, and none of this might come to pass. Gold could finish the year at $1700, for a crappy 6% return. But even that demands an explanation. Why not 20% this year, given my previous paragraph?

Could it be that (as I believe) gold is already dramatically over-priced? So no amount of fear or printing will stop the correction that is needed to finish the mania-piercing job that began in September 2012? Could it be (as I also believe) that gold has no particular fundamental problem, but is unattractive compared to productive assets at the beginning of a climb out of recession in western economies (buy low, sell high...)? Could it be for other reasons? - I personally discount 'manipulation', because it is obvious to me that gold has, if anything, been manipulated higher for a decade.

Regardless of what you believe, you cannot ignore this. Gold in 2012 has given us a stupendous hint of topping out. The worm is turning. The bears have got wind in their sales. Call it what you like. Scream at the injustice of it all, if you want. Rejoice! (c) and stack some more. Go ahead. But unless one can produce a coherent argument as to why 2012 was so utterly different to the preceding years, and why this was but a perverse anomaly, one's investment thesis for going long gold is busted. And that's not a smart way to invest. That is, in fact, a strategy for extirpation by the bears.

One final thought:

Every single person who told their readers to buy gold (and hold it) this year was wrong.

Even if you're evens, or slightly up (buying at the year's lows), the opportunity cost of this year's gold misinvestment is considerable. And for the vast majority, they'd have been better off keeping their fiat under the mattress. Now that is a sobering thought.

Bonne année!

JdA





ADDENDUM (21/02/2012): Following the traditional quarrel in the comments about the merits or otherwise of TA, S Roche has kindly sent me the following chart and comment, which I think deserves insertion here:

I come across a lot of people who don't trade who laugh when I show them a potential inflection point on a chart, and tell them from that point it will either go up or down. They just want to know which way it will go, and they want to know it now. 
Some of these people still don't get it when I say, wait for that moment and, depending on whether it goes up or down at that point, place your trade accordingly. 
Here is a reasonable example, per my suggestion above:


There are a lot of good books on the subject and some people make a reasonable living at it.
S Roche

25 comments:

poopyjim said...

Nice piece JdA! I too am extremely bearish on paper gold.

/SleepingVillage/ said...

JdA, ya little shit disturber:)

I'm with Jim on paper gold. The "price" doesn't mean too much to me...

I do think your large, bold statement is a little, um... wrong:)

Depends on your perspective and if you're a flippy paper trader. Even if you bought gold, real physical gold at $1800+, it's only a loss if and when you sell it below that number.

Let's talk about this a year from now, see where we're at;)

Jeanne d'Arc said...

@SleepingVillage:

Let's talk about this a year from now, see where we're at ;)

That's what they were saying in October 2011... ;-)

/SleepingVillage/ said...

JdA,

Haha, yeah you're right:) I guess the point is that I personally don't care about the day-to-day or year-to-year "price". I doesn't mean much in the time scale I operate in. We have different philosophies on gold, and I think we went to different schools:)

I do want to have a portion of my savings stored in physical gold, and what better time than today, or last August... or the 17th of January?

If the paper price goes down a lot and I'm in a position to buy more physical gold, then I will. Until then I have no problem just chillin' (and watching my gold) and also all the papertards(no offense to anyone) get bent outta shape when the "price" goes up and down...

Popcorn?

Bullion Baron said...

"Every single person who told their readers to buy gold (and hold it) this year was wrong."

Well I reckon I did a pretty bang up job of calling the bottom within a day or so of the low point for the year ;)

http://www.bullionbaron.com/2012/05/good-chance-gold-and-silver-have.html

"First I would like to clarify what I meant by a "bottom" in Gold and Silver. There is of course the potential for Gold and Silver to trade lower than the recent lows at $1526/$27, however I think there is a good chance that these prices formed a low point which won't be breached again before the end of the bull market (if ever)."

http://www.bullionbaron.com/2012/05/good-chance-gold-and-silver-have_20.html

Granted Silver did dip a little lower, but that was the bottom for Gold.

But sure I agree there have been better performing assets this year, but Gold has been pretty easy and hassle free ride the last few years and suspect will continue to be the case if you can ride out the volatility...

S Roche said...

Run an Andrew's Pitchfork over your Fibs (Say, 4hr chart, Oct 4 high to Nov 5 low and your top line will pick up Nov 23)...buying opp? Maybe for traders only but there is a LOT of negative sentiment for gold at the moment.

There is also lots of complacency.

Brian said...

Jeanne, real gold versus physical gold?
There is currently not a price for gold. You are just watching gamblers betting on the movement of electronic prices that's all. Good fun I suppose, but those that buy gold actually buy real gold, and the vast majority know more about what is coming down the road than you appear to with your comment that gold 'is unattractive compared to productive assets at the beginning of a climb out of recession in western economies' That was funny but perhaps you refer to another planet maybe, rather than this blue one?

But this is an interesting article, if you are curious on the identity of mystery bloggers. This is possibly a remarkably large coincidence, or not. Who knows ;)

http://news.bbc.co.uk/1/hi/england/leicestershire/4504526.stm

duggo said...

"we are now on the cusp of either the smartest buy in gold in ages, or the last chance to sell before something really horrible"

Translation:- If it goes up I'm right and if it goes down I'm right.

Spoken like a true Technical Analyst. Not a clue. The illumination of this statement is a wonder to behold. The person making it doesn't actually realise how comical it is. That friends is all you need to know about TA in a nutshell. Hang-it high above your computer.

I'm going for a lie down.

Tony said...

+1 duggo

duggo said...

And another thing.
Why is it when pundits talk about the rise and fall percentage gain or loss of a market they always base it on the 01 January?

I have never met anyone that cashes all of their investments in on 31 December and then starts again on the 01 January. Real people (unlike TA experts) buy and sell throughout the year so everyone has a different perspective on losses or gains.

Jeanne d'Arc said...

@duggo @Tony

Erm, I think it was pretty obvious from almost every other sentence of this article which way I thought it would go... Good grief.

@Brian

You've totally lost me with that, I'm afraid. Was that the right link?

duggo said...

"Erm, I think it was pretty obvious from almost every other sentence of this article which way I thought it would go."

Yes.... but you just couldn't help putting in the little "get out clause" at the beginning.

Double Good grief!

duggo said...

Please don't think this is personal. As a previous dabbler in the dark arts of TA I'm only too aware that people who rely on this form of entrails divining suffer from indecisiveness. I have never yet seen a TA person say "next week this is definitely going to happen...the charts say so".
BrotherJohn is the classic case. I sometimes wonder if he can clean his teeth without consulting a chart.
Still as my late mother use to say "it helps pass the time".

Brian said...

It is the correct link Jeanne.

It may only be of interest to those who follow the trail.

Smiddywesson said...

Paper gold and real losses:

All loses and gains are instantaneous, regardless of whether you let it ride. So if you are holding physical or paper, and the price goes down, you lost money whether you close the trade or keep it open.

Calling it paper gold and laughing off losses is intellectually dishonest. Paper gold is still readily transferable into real gold, so paper gold loses are as real as physical gold losses. We live in the present, not the future.

The distinction between paper and physical only matters when the whole shebang collapses. If I could make those kinds of calls, I could MAKE my future.

Brian said...

@smiddywesson

Wrong.

I still have my physical gold. The 'whole shebang' as you eloquently call it, will collapse.

Make your future. We do live in the present, but we plan (and save) for the future.

mr pinnion said...

The present is always the past when we think about it.So does that mean we always live in the future as far as we're concerned?

Regards
Ozzy

mr pinnion said...

@JDA

Are you not concerned that there will be a FOFOAesk disconnect between the physical and paper price which leaves you with no gold?

Regards
Ozzy

Edwardo said...

It's not who you think it is Brian.

Jeanne d'Arc said...

Article updated to include a chart by S Roche on the merits of TA.

Jeanne d'Arc said...

@duggo - Of course I realise it's not personal :-) You're right to say that I put in a 'get out' clause. My view is that is the responsible thing to do. The whole philosophy of Screwtape is to recognise that other points of view, and possibilities, exist.

Essentially, TA is an opinion given based on a balance of (often fine) judgements. If it were possible to be 100% sure, then I can guarantee you I wouldn't be writing for a blog at the moment. I would be on the larger of GM's three yachts, snorting sherbet off Daniel Craig's stomach.

To make money, however, one only needs to be right 51% of the time. That is where TA gives me the edge: it consistently helps me to be right more than 50% of the time.

Jeanne d'Arc said...

@mr pinnion

No, I have not the slightest concern about that whatsoever.

I do believe in hard assets, however. It's just that gold is not striking me as anywhere near the best at the moment. My fiat will be converted into housing and land (or even stocks) before gold, until all of this nonsense has worn off.

And as I always say - if the balloon really does go up, then gold won't be helping you anyway.

Brian said...

Jeanne, I wish you well.

Your comments above re gold lead me to believe you have never hiked the trail.

If you take the time to do so, your views would be likely to change on both gold's bestness, and it helping you if the balloon does go up (or indeed down).

@Edwardo.

Is who you think it is really who he says he is, or is he an elaborate deflection. Like when FOA said Another was English when he clearly wasnt.

AdvocatusDiaboli said...

thanks for the analysis, usefull to determine to maybe wait much more if one is considering to increase their holding.
On the other side, I like FOFOAs expression "unambiguous ownership" and there are not that many alternatives out there (specially if living in a greedy socialist country), so not holding any longterm savings in gold and/or silver at all, is IMHO also kind of risky speculation.
Greets, AD

Jeanne d'Arc said...

@Sleeping Village

Let's have this conversation a year from now [Dec 2012] and see where we're at...

Time's up. Shall we have that conversation now..? ;-)

JdA