Friday, February 26, 2010

Weekend Post - Can We Figure Out Where Gold Is Headed?

I'd like to reference figuring out gold to figuring out a woman, but I might get crucified if I take that reference any farther (hey, us guys are just as bad I know). Bottom line is I don't think you can live without either of them these days. Up, down, sideways what the heck? Impending doom and gloom and where gold is going is about all anyone can talk about. Paper gold, physical gold and even the tungsten version, which one is right for me? Russia, China, they are all buying all they can get. The IMF is selling it? Whaaaat?

I'm gonna produce several charts that I feel are relevant, but in true blog form I can't do a full dissertation. I'll also avoid the conversation surrounding manipulation (although I fully believe in price manipulation) and conspiracy theories (tungsten). So lets get on with it. I have made the charts small for length purposes, but I have included direct links to the charts they are in for better viewing.

First I think you have to take the global economic forecast into the picture. It sucks and is going to get a lot worse. Plain and simple. We are being robbed by the banks and your government is allowing this to happen (no one can refute that). Massive deflation is coming and most likely some form of global default. Sounds great right?

So how does gold (red) correlate to the dollar (blue)? A 20 year chart should do the trick (I threw in SPX (Orange) for good measure). I believe the two larger wedges identify the long term trends that are still in tact and will be for many years to come.

Given those trends and the global economic disaster we are experiencing, most are forecasting that many  countries will try to deflate their currency as fast as humanly possible. What happens with the dollar may tell us where gold is eventually headed.This monthly chart says to me we are in a massive bear flag that is playing out before the big fall. It also says one of two things. 1) Either the dollar has completed an ABC here to resistance and a near 50% retracement of the last fall, or 2) it will continue to run to the upper blue TL or to the top of the pennant near 89 and then collapse. At this time I could go with either scenario.

So if the dollar continues to run, gold will....? Look at the first chart. The dollar has run recently and gold has not corrected. You could argue with gold having climbed from 258 to well over $1,000 it is slightly overbought. Yes, but this is gold and someone (????) who may have known a massive financial crisis was coming (????) just kept on buying the stuff up, up, up. So what is gold going to do? There are many scenarios from crashes to super booms above $5,000. My question becomes - Does the gold/USD correlation possibly end and a gold/SPX correlation begin? Again refer to thee first chart (and your imagination - sometimes that is necessary). Inverse to the dollar and direct to the SPX? Not that far fetched. That would be a worst case scenario for the gold bugs.

Looking at the $GOLD/$USD chart you can see the massive rising wedge that should be completed. Overbought is an understatement and room to fall is bountiful. Divergences exist. The need for a correction is overdue. Given the theme for massive global deflation to assist multiple nations from going bankrupt (here I apply my imagination again), I think the dollar is going to continue to rise as some sort of (tongue in cheek laughing) safe haven and then collapse with the rest of the world as most of the global economies default on the debt that they will never be able to afford.

Damn, Shanky? Well, that is what I think and common sense tells me this is how it will most likely play out. Big Sugar Daddy will come to the rescue initially and allow everyone to devalue to their dollars vs. the USD (you see, since we (and GS) really caused this mess we're gonna have to step up to the plate more than we already have). So USD initially go up to $89ish and then get crushed.

Here is a great link to a vid from Market Club that I liked - no, I really liked it - not kidding or it would not be here (If you liked that vid they have other market related vids - and another gold vid at this link here). Pretty subtle hugh? LOL. Hey, the charting stuff is pretty cool and easy to use - you should consider giving it a spin. And for the newbies that want to learn more about trading and market trends, try this link out. It is free. They don't think gold is going up from here either. They do some good time analysis that I do not normally cover that is well presented and worth a look. (OK - sales pitch is over, but let me know if you liked the vid in the comments)

So I am seeing a near term correction in gold, but not much. It is possible that the dollar and gold will lose their inverse relationship but not for long. With the IMF flooding the market, Russia and India have bought massive quantities near the $1015 level support should be bountiful. Gold possibly remains in a sideways to down corrective for a while. First as the market tanks for P3 the reaction will be to haul ass from everything, then the real panic buying begins. So how low does gold go before the meteoric rise? This Monthly chart of gold shows a nasty multi-year rising wedge (blue) with an even nastier wedge (red) causing a throw over of the top trendline (no - I do not think that is a breakout - it is a fakeout). The fibs and target for the red wedge are in the $961 to $909 are and the 20ma is at $953. That may sound like a lot, but the divergences (see pink boxes) in the indicators and the meteoric rise in price say it is due for a turn or at least a breather. The gold bugs need to be worried if a larger correction to the 38% fib of the whole move occurs or it corrects to the lower blue trendline near $820 (I don't think that is possible).

What do I think? It stays in the current ballpark with a $950 max floor at this time. The manipulators will not let it crash (unless they want to buy it cheaper).I think it struggles with the overall market (but not nearly as bad as the market) and when the dollar finally lets go and real panic sets in it will all be about GOLD BIATCH!

I hope you enjoyed this. Remember to check out the links to those vids and give me some feedback.

Have a great weekend.