June 2013 metals preview

Hello friends,


I'm posting sporadically here because I'm not trading the metals currently. No strong reason to be bullish, but then the short side is damn crowded and also fundamentally stupid (even if it has worked for lots of people of late). Betting against gold is not unlike selling life insurance to one of these poor ants:

As far as taking a long position is concerned, I'm not that stupid either. Not yet anyway, as I'd like to see some pretty emphatic evidence that the downtrend has changed.

So, as regular readers know, I've been looking at three-line break charts, which have a damn good track record at telling us when to start paying attention to gold again.



On the virtually "noise-free" monthly gold chart, there finally was a correction large enough to register as a red bar. Interestingly, three-line breaks (as just occurred in May) are generally very good signs of intermediate trend changes (at very least), where at least a few more bars of the same color generally follow. But the gold bull market so far has been so strong that starting after way back in 1999, all we see are singleton red bars. Will that change? I.e. will we complete a month below $1388 before completing a month over $1825? It would seem likely, but then note that there's less to climb presently than there was in 2008 for an upside reversal (see green vertical bars) :

The weekly three-line break chart for gold does a good job capturing how "natural" a strong upside reversal would have appeared back in April (when, as we know, precisely the opposite happened). Look at how weekly downside momentum had stalled at that point, culminating with two red bars of almost zero height. At any rate, the chart is now quite bearish, as a $1580 weekly close is necessary for an upside three-line break. As with the monthly, you'd have to guess there will be a few more red bars before the next upside reversal. But that would entail a weekly close below $1359, which would signify a serious chart violation on the conventional charts and probably lead to a much larger collapse.

But the next few charts are more bullish. I've been closely watching GDXJ, and not only its price. As I mentioned way back, its ratio with the Dow Jones Industrial Average has been a very good indicator of when to buy gold with confidence after a correction. The blue dotted line shows where the ratio now is; quite close to what would be an important reversal:

Red bar = good time to buy

And another good indicator, the GDXJ ratio with gold, just had the biggest upside three-line break in its history (see blue vertical bar) on the daily chart. A bullish sign, but of course the mining stocks have been yo-yos.

 Finally, regular readers know I watch nothing more closely than the "Real" interest rate, i.e. the 10-year yield in ounces of gold. Can the ratio really go higher from here? I'd have to see it to believe it. If long bond yields keep going up, gold will have to recover its former trajectory eventually -- I'm feeling pretty confident about that. The US Government can't afford to pay out that much gold to its dupes and enablers.