Gold correction nearing end?

There are a number of questions re gold that we need to answer now. Perhaps, the most important one is: 1. is the correction over? I have used the graph of GLD as well as gold itself to try to answer this question.

GLD, when plotted on a weekly basis shows a very nice straight line vs its 30 week moving average. The value of GLD is pretty close to the moving avg, though the moving avg shows an upward displacement. The MACD tells us a slightly different story. Following a drop, the MACD takes 2-3 weeks to turn positive again. Next week may be the low point of the MACD.

Interestingly, the 30 day moving average of gold shows almost the exact pattern.

We may then conclude that the gold price is near the bottom in this correction, though a slight drop may yet occur.

There is another question that we might ask, though we as yet can not answer. Is gold price entering a steeper rise? Or put it another way, will we follow up the last peak with another peak that will occur at the same elevated rate as the last peak? If so, the next peak in gold may take it to 2,200 to 2,500. If that happens then the gold mania will occur in 2012.

So who was right?

So far, I must say that it was Larry that carried the day. He forecast a big drop in gold and silver and predicted that the DOW would fall to 9,000. In fact, gold took a steep dive to 1550 or so before recovering some and closing above 1,600. Today gold is up again, but eroding some.

The DOW is also moving up and it had a good day yesterday. Will we disregard the clear head and shoulders? No. Volatility is still the name of the game.

And from elsewhere: a different story.

"When some weathermen predict rain and others predict sunshine, it behooves the prudent man to keep an eye on the sky and on the radar, if available." Geezer Bela in Exile

Larry is a superb technician and he does rely on formulas that DO work, so his predictions should not be dismissed out of hand. Still, there are those other experts on KWN and they are not chopped liver, either. Louise Yamada likes the bull market for gold and silver, though she does not like the miners. Rob Arnott warns of tremendous inflation coming. And Robin Griffith says: "only a fool would short gold here." Larry recommends using a double short fund to protect current holdings.

IMHO, the divergence of opinion reflects the volatility in the Markets, which is another way of saying that there is a lot of uncertainty. As I write this, the price of silver is at 40 and gold is at 1,800. Both were a bit lower earlier. Gold has a support at 1,780 and silver at 39. So much for the radar.

Now for the look at the charts.

Silver is still increasing so its 50 DMA increases faster than the 200 DMA. Gold, on the other hand, is still increasing so that its 50 DMA parallels its 200 DMA and both are rising consistently.

Could Larry be correct that if/when the Stock Market retreats, people will dump their gold and silver for cash, as they did in 2008? Not likely, say experts on KWN. We face a different situation now. In 2008, the money circulation was virtually stopped when the FED imposed "mark to market" and people needed cash. Now, people are liquid.

Larry's formulas predicted that when the Stock Market will tank, gold and silver (and the miners) will not. He now conveniently ignores this earlier prediction. Something else that Larry ignores. The Greek "crises" is ON/OFF as their cash allotment is held up. There is no reason for Greece to default. Neither is there certainty that the US will have a double dip recession. Central banks can postpone these events by printing more money. True, that will not solve the long-term problem (governments spend too much and capital formation is inhibited by high taxes), but government can BELIEVE that more printing of money will do the trick. And that means that precious metals will keep rising in terms of currency. So, the argument is what happens if there is a sell off on Wall Street.

Larry: the sky is falling!

Larry's formulas are at it again. They predict:
1. the failure of the Euro;
2. the breakup of the EU;
3. double dip recession;
4. a drop of the DOW to 9,000;
5. a slaughter of the commodities including silver and gold.

Curiously, Larry tells us that the FED can do moreless anything it wants: 1. reduce bank reserve requirements; 2. force the banks to lend; 3. buy stocks and bonds and, of course, print more Dollars. What the FED can not do is print more money and reduce the amount in circulation at the same time. Not unless it sequesters the new money in the banks by paying the banks interest (as it is doing now).

Larry's thesis is that we are heading into the same type of environment as 2008, when everyone was liquidating assets to get cash. In such an environment even gold is sold off. However, in 2008 the FED was working on creating an economic stoppage to elect Obama. Recreating 2008 will not get him re-elected.

Do you hear the foot steps?

Can you hear the foot steps? It is the chickens coming home to roost in Europe. Secretary of the Treasury Geithner flew to a meeting in Wroclaw, Poland and told the European finance ministers to do what the US does: have the Central Bank hand a check to member banks and tell them to tack on a zero - Geithner calls that "leverage." It is counterfeiting on a grand scale.

But, Europe is not the US! The EU has several countries (17) and they all need to be consulted. And they all have different level of interests, different ways of looking at things.

This is the week when the chickens may find their coop. It is a busy weak: 1. the IMF meets; 2. the FED meets and is expected to agree on a new twist to things (essentially manipulate long term interest rates to reduce them); and 3. the European finance ministers meet to decide on whether to release Greece's next allotment of cash.

Can you hear the clucking?

The Financial Times of London described the different scenarios of a Greek default(first three graphs). The written text following (and you may need a magnifier glass to read this) shows the actual events that took place in Argentina after it defaulted. The events were very traumatic for the middle class.

It would be very comforting to know that the Europeans worry about the people of Greece and try to stave off default for that reason. The truth is that Europeans worry about "contagion." Contagion, like quantitative easing, is a code word used to cover up what really goes on. In the case of "contagion," it refers to the check kiting that went on between European banks to allow governments to engage in deficit spending without admitting it. The next to last chart shows the tangled cross borrowing by European countries and their Central Banks. If Greece defaults, the European banks would have to write off a lot of their assets and they are close to bankrupt as is. Of course, the Europeans can do what banks do when dealing with fiat currency: print more.

At present, Europeans are trying to dump the Euro and buying US Dollars. That is why the Dollar is rising in value. The last graph shows us the resistance of the Dollar to buying pressure. Bernanke does not want the Dollar to rise; in fact he wants the opposite.

One might ask what brought Europe to this state. The application of Social Democracy is certainly a major factor, but the Greens is another significant factor. "Greens" means higher energy costs and higher costs in manufacturing. Governments borrowed money to maintain "benefits." And Europe is running out of other people's money to redistribute.

Gold breaks out on upside.

The last post uncovered a wedge formation both, in the plot of gold and also HUI (the miners index). This time I am reporting that both Gold and HUI have broken out of the wedge on the upside. The MACD's are very bullish for both. This time, the move in gold is confirmed by the move in HUI. In fact, the HUI 50 DMA has crossed the 200 DMA on the upside, which is also very bullish. Note also that the miner index has surpassed the value it had in April. Thus, we are beginning to re-establish the pre-April 2011 pattern of the miners moving up faster than gold.

Let us discuss now several issues related to the gold price.

Issue #1. Larry's calculations predict gold prices of $5,000 in the time frame of 2013-2016. This would mean that O'Bummer got re-elected in 2012 and he succeeded in destroying the US dollar and economy. I do not believe that this will happen. I believe that we will follow that 1980 scenario, O'Bummer will get defeated and gold will hit its high between now and 2012 Summer.

Issue #2. Larry's formula predicts that gold will not hit 2,100 till way into next year. My calcs show gold hitting 2,100 sometime in September and October.

Larry said that if gold hits 2,100, it will then head into the next up phase.

Issue #3. KWN reports that customers now want direct delivery of gold and the bouillon banks can not influence that. In fact, there is not enough gold to go around and the shortage will show up in fast price rises and the breakout of the gold and silver mining stocks.

Gold at inflection point.

Gold may be at a what some people refer to as an 'inflection point.' In this case it means that gold prices are poised to start changing at a faster rate. This can be seen both on the chart that depicts gold on a weekly basis (top graph) and on a daily basis (second from top graph). Looking at gold price on a shorter basis (third graph), we see a wedge formation that indicates a coming change. The same wedge pattern can be seen in the Index that tracks the PM miners (HUI, last graph).

We are in the early phase of the new trend (i.e. faster change in gold prices), so Analysts wait for confirmation. There was a breakout of gold on the upside then a very fast drop to 1,700, which was partially reversed during the same day. A same day reversal in price is a very bullish sign. Then gold began to trade sideways around 1,820 and is now poised to move out: either up or down.

What would drive gold prices upward? On the European side of the Pond, German Chancellor Merkel has caved on the issuance of EuroBonds, which is the European version of our QE. The FED is about to meet in September and it is anticipated that some form of QE will be announced. In the meantime, Obama is to announce a new jobs program of maybe as much as $1.6T and even if the cowardly Republican pare that to half, it will add that much to the deficit and the National Debt.

The new Obama jobs program is a purely political gimmick. Government spending is counted as part of the GNP, so adding that much spending is designed to create the perception that we are not in a recession. It is a re-election gimmick by Obama. While, Obama and the Media may fool the Country and the cowardly Republicans, they can not fool the Market. Gold is going up. Gold miners will go up.