Tuesday, July 27, 2010


UPDATE below. The futures are now down $24.60.
Original post:

The futures are off a buck at $1,186.00.
From Pragmatic Capitalism:
As most people  know, gold has been in a raging bull market for more than 10 years rallying from about $250 per ounce to more than$1,250 per ounce. Many people are now wondering if the world’s currencies have any value at all and are flocking to gold as the only hard asset that historically has always had value.
Gold coin purchases are at an all time high. There are people walking up and down city streets and in shopping mall, holding signs saying “We Buy Gold.” There are even vending machines where  people can purchase gold bars. Of course, there are the ubiquitous commercials on TV about gold.

Does a contrarian look at all these factors and take the other side? Possibly, but the problem is most of these factors have been present for more than two years and gold has rallied more than $400. Why would gold be any different now?

I believe the psychology of the gold market is in a dangerous place, but manias can go on longer than people think. This happened in the real estate market in 2005 when everyone rushed in. Real estate TV commercials ran nonstop, many were buying second homes as an investment with no down payment, bankers were giving loans to anyone.
It took about three years for it to finally come apart. The gold and real estate markets are not related, but the mass psychology is eerily similar.

Are we finally at that tipping point? I believe we are.
Until two weeks ago, gold had been in a steady uptrend since February.  It was going up because of inflation or deflation; it was going up because Euro weakness or Euro strength or it was going up because of stock market strength or stock market weakness. People on CNBC have even said gold will never go down.
But close inspection of the gold market at this time show many technical difficulties that may bring it down. Below is a candlestick weekly chart of the gold market.

goldTop1 s GOLD TOP?
Source: Barcharts.com

Gold set the all time high of $1,264.80 per ounce during the week of 6/21/10, but that week also formed a candle stick called a “hang man”. This is when a market breaks off the highs but then runs all the way back up to the previous daily or weekly close. The next bar is critical because it must run back down and close under that previous low.  As you can see, this is exactly what happened.

The chart below also shows some import reversal patterns. This is a daily candlestick of gold. On June 21, gold made an all time high but closed below the previous day’s low. This previous day was the all time high. This can bea very bearish sign. Also notice it happened again just five days later....MORE
To my mind an even more important call was Kitco's John Nadler on May 3:
$800 Gold Prediction. No, A Zero Is NOT Missing.

Kitco is in the business of peddling gold and Nadler is their top analyst.
If you do a Google search for John Nadler the suggestions include:
John Nadler idiot
John Nadler is wrong
John Nadler is an idiot
John Nadler stupid
John Nadler wrong
Ya gotta love  the gold-bug crowd, and Nadler. We've had Kitco on the blogroll since we started the blog.
UPDATE, from FT Alphaville:

About that gold sell-off…
Spot gold prices continued their recent sell-off on Tuesday – chart via Kitco:

And in case there was any doubt, last week’s rumours of significant speculative liquidations appear to have been confirmed by CFTC futures data.
The figures out last Friday showed that money managers cut their long gold futures positions by 18 per cent last week.
Barclays Capital offered a little more context on Monday:
Indeed, the weekly drop in exposure was the second-largest weekly drop since February while non-commercial positions as a percentage of open interest has dropped to 32%, its lowest level since December 2008. In contrast, physical gold ETP holdings remained unchanged at 2087.9 tonnes, less than 15 tonnes of the peak reached in mid-July. However, platinum ETP holdings dropped by 11koz from its peak.
As too did Société Générale’s analysts...MORE