Do Gold Bears Have The Upper Hand?

Patrick MontesDeOca

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GLD, GDX, SLV, AGQ, AG, PSLV, PHYS over the next 72 hours.

A lot of assumptions have been made lately regarding the gold and silver markets’ trend direction. The propaganda machine has been on the horn announcing the end of the long-term secular bull market in gold, and all kinds of ridiculous forecasts have been made.

After a $50 drop over the past three days, do gold bears have the upper hand?

With a 3% drop in just the last three days, gold on Thursday touched the lowest settlement for the spot month since late June. On Friday, it put in a daily bullish reversal in the face of a very disappointing unemployment report published by the Labor Department.

The idea that the Fed is going to start to implement the exit strategy for the $85 billion monthly bond buying program in the summer of 2013 just went up in smoke with the latest unemployment data point.

U.S. jobs gains for March came in at the lowest level in 9 months – a gain of 88,000 new jobs versus expectations for a rise of 190,000. That forecast had already been cut down from an earlier target of 195,000 new jobs after a batch of downbeat data this week.

According to Karl Schott, a metals bullion specialist with EMA:

“The jobs report has now shown us that we are not recovering as fast as the FED expected with its previous economic stimulus and monetary policies. I feel that they will not be in any hurry to stop the monthly bond buyback program. The jobs rate at the lowest since 1998?… is not actually a fact. We are just now seeing that there are less people looking for work that have been discouraged and have left the system. It seems this sector is increasing at an alarming rate and it is becoming the invisible generation that no one talks about. Small business owners and independent agents that do not qualify for government assistance are becoming the lost generation. This continues to support the idea that more immediate stimulus is needed, and that, in my opinion, will continue to support metal prices for gold and silver moving higher from these extremely oversold levels.”

This is a contrarian opinion against the Credit Suisse report on Wednesday to cut its outlook on gold prices for the next couple of years. Credit Suisse on Wednesday cut its outlook on gold prices for this year and next. The bank cut its average price forecast for gold this year 9.2% to $1,580 a troy ounce and its 2014 average price forecast 12.8% to $1,500/oz. Societe Generale recently called an end to the gold era and forecast a drop in prices to $1,375 an ounce by the year’s end.

When you take into account the sentiment to be at the most bearish since the financial crisis of 2008 and the propaganda machine in full force, it might be wise to note that the current condition has all the elements of a major bottom in the making and the potential for a serious short covering rally to take place.

In a recent phone interview to be published exclusively for Seeking Alpha, I asked Eric Sprott (Sprott Asset Management) if he can explain the complacency of depositors across the eurozone in what seems to be a clear signal “Template” for central leaders’ intentions to “Levy” deposits in order to save the banks. And could Cyprus be the Black Swan in the eurozone banking system and will it disappear from the headlines?

This is what he said:

“Sure, well Patrick to the first part of the question that people are being benign about it, I am not so sure that is the case. We judge that by what is happening in the gold market and the stock market. Well, the stock market is going up and the price of precious metals is going down therefore everyone is complacent about it. I don’t think that is the case whatsoever in the real world. As you know the stock market is almost a function of central bank printing of money. That is essentially what’s happening ok. And I have written many times that I think western central banks continue to supply physical gold to the gold market to suppress the price, and I fully believe it and I have fully documented it.”

What is interesting to note is the increase in demand in the physical market after the Cyprus development.

“There is no doubt that is happening whether you want to look at the US Mint Statistics or if we take a look at the company we have called Sprott Money, we see more physical buying of gold and silver there.”

He said, “This is a Black Swan.”

In a recently published report on Seeking Alpha I wrote:

“Our 2013 proprietary cyclical wave analysis indicates a bottom occurring in the February 15 time frame with a strong rally into the time period around April 15, 2013. This would be the ideal synergy when prices should test the upper end of their projections. What will determine how fast and how high silver moves nobody knows, but current conditions are a perfect storm for this pattern to turn into a buying frenzy.

When you are looking at building wealth long-term by trading silver, opportunities like the one silver created this past week by testing the low $28 levels usually are short lived as smart investors come to terms with the fact that silver is really offering historic value at current prices.”

Let’s examine what I said in this forecast and see what the market has done since the projection was made. Conventional interpretation of cycles defines the expectation of a cycle top to be accompanied ideally with new seasonal or historic highs in price. This is the highest probability factor for the signal to materialize as originally anticipated. In the current analysis, this is not the case. Instead, what we see as we move into the latter part of the forecast is that prices are doing the opposite or have created an “Inversion”.

Sometimes a cycle high occurs when there should be a cycle low and vice versa. This can happen when a cycle high or low is skipped or is minimal. A cycle low may be short or almost non-existent in a strong uptrend. Similarly, markets can fall fast and skip a cycle high during sharp declines. Inversions are more prominent with shorter cycles and less common with longer cycles. For instance, one could expect more inversions with a 10-week cycle than a 40-week cycle.

This is actually an alternate count to interpret the signal. Based on the fact that the prices are making weekly lows into this cycle time frame, it is actually telling us that instead of a cycle high it is making a cycle low. It indicates that this inversion confirms the probability that we’re looking not only at a short-term bottom, but a major generational bottom or the yearly lows are coming in sooner than expected for 2013.

Let’s take a closer look at the gold ETF (GLD) derivative technically, and see if we can identify some live trading opportunities for next week.

Gold holdings in the SPDR Gold Trust (GLD +1.68%), the largest of the gold-backed ETFs, have fallen to 38.8 million ounces Wednesday, from the 43.4 million-ounces level seen at the start of the year. Shares in the ETF have also lost over 7% year to date.

Daily Outlook

The GLD SPDR Gold Trust Shares closed at 152.81. The market closing below the 9 day MA (153.41) is confirmation that the trend momentum is bearish. A close above the 9-day MA (153.41) would negate the daily bearish trend to neutral. With the market closing above the VC Weekly Price Momentum Indicator of 152.39, it confirms that the price momentum is bullish.

Look to take some profits, if long, as we reach the 155.34 and 158 levels during the week. Buy corrections at the 150 to 147 levels to cover shorts and go long on a weekly reversal stop. If long, use the 147 level as a Stop Close Only weekly.

Weekly Outlook

If this week’s lows of 149.44 are not violated by closing below this level on a weekly basis, we can build a strong argument that the lows are in and the foundation is in place to support a bigger and stronger move to the upside.

If the lows of this week hold, it will support a rally into the following Fibonacci targets short-term:

1. 163.39

2. 168

3. 172

A weekly close above 172 puts into perspective the upper end of the target zone, the highs (186) made in September 2011.


Additional disclosure: The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts.


About abwehra group

The Art&Science of Trading Gold
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