Ed Bugos

Last week we saw a bounce in the stock market that threatened to send the price of gold down to the $920 mark. After a lightening advance celebrating the approval of the quasi-nationalization of America’s too-big-to-fail mortgage providers, the market caved on reports of continued stress in the homebuilders.

The Dow gave back almost five days’ worth of gains in one fell swoop.

So should we not have seen a better bounce in gold? Maybe it’s too early to call the Dow.

Further weighing on gold prices were a lifeless bounce in oil and the market’s shift in focus to signs that gas demand is ebbing. Sometimes, however, there is a delayed reaction in gold, which happens more often than efficient market theorists would like to admit. Gold’s fundamentals are still bullish.

Mining costs continue to increase, which pushes up the floor on gold prices.

Several months ago, I calculated that production costs had more than doubled for the gold mining industry since gold traded at under $300 per ounce some eight years ago, and, consequently, that the decision to shut down mines would today occur at $600-700, rather than $300. The supply situation is already tight. It is getting increasingly difficult to replace gold reserves. And of course, there is no end in sight to the readiness of central bankers to inflate, guaranteeing a strong flow of gold demand.

As for the prognosis, I see two possible scenarios for which there is some technical precedent.

Technically, the market is trendless. Neither bulls nor bears have gained much traction since the correction began in March. The seasonal low could be in, but it remains unconfirmed by a higher high.

A casual glance at the chart would tell you nothing except that the market could fall to $750 as easily as it could rally to $1,200. Technicians would call it a neutral pattern, though some may read bullish or bearish biases into how it is developing. I won’t get into that. But one does not have to be a technical analyst in order to grasp some useful truths from the chart.

It is true that history never exactly repeats itself. But there are similarities, or regularity in the behavior of prices, that can help with our outlook.

For example, if you look at the corrections since 2001 in the chart below, you’ll notice that rarely have they lasted much more than a couple of quarters before the bulls took charge again. You might also notice that the first leg in each correction has been followed by a second one that usually fails to make a lower low — 2004 being the exception. The market also likes to brush up against its 50-week moving average before completing the correction.

Moreover, we can even infer a loose relation between the extent of a rally and the depth and duration of the ensuing correction. These things are called “technical” mainly because they have nothing to do with the fundamentals. And let me tell you, it is dangerous to put too much weight on past performance and behaviors when we’re talking about investors and the market.

phpIBkcws

Notwithstanding, if this were just a typical correction, we could expect to see a second “attempt” by the bears to make a lower low over the next month or two before the bulls break out, sometime in the fall.

But the exception is worth considering, too.

Give The Gold Rally Some Elbowroom!

The market is at an important number and inflection point, which threatens to complicate the situation central bankers face today — their control of interest rates, to be precise.

Naturally, the “powers” will do everything they can to resist this change.

Similar conditions prevailed back in 2004, when gold was trying to break past its old 1996 high, about $425ish, which would reverse the downtrend in the longer-term charts and signal a new bull market — note in the chart below how the moves became more violent once gold broke past this level.

As it is now, the Fed was then about to embark on its tightening campaign, after having talked about it for almost a year… making gold bulls nervous about the impact of higher rates. Of course, the Fed’s job was a tad easier then. There was no series of financial crises to contend with. The stock market hiccupped, but the economy was producing jobs, and nobody much minded the Fed gradually ratcheting up interest rates.

As it turned out, however, it was just enough to keep bondholders happy, but not enough to rein in the effects of the Fed’s previous inflation policy. The bears pushed down on gold prices, but did not realize just how tight the springs were and got caught in a lower chart low before gold whipsawed higher.

The market hasn’t looked back since.

phpI4sUXA

So it is possible that the market could make a lower low, if only to make more elbowroom in the chart for the breakout… sort of like pulling a slingshot back further to get a little more energy out of it.

On the other hand, the Fed’s hand is weaker than it was in 2004-05. Because of this, I have to favor the former scenario, in which the correction low in gold is already in.

Regards,
Ed Bugos
July 29, 2008

P.S.: While we wait for the gold correction phase to end, and the next phase of the gold rally to begin, investors are facing a great opportunity for investment. As you just read, the technical and fundamentals point to the price of gold going up once again. This is the price dip you’ve been waiting for, and now you can really begin making some money in the coming blowoff phase.

Ed Bugos

Ed is a former Howe Street broker. During the late ’90s, while many Wall Street firms were abandoning commodities altogether, Ed toiled for his clients on the Vancouver Stock Exchange. He was able to make his clients money even during the most vicious bear market for gold in the past two generations. Ed is now excited to take his skills and knowledge of precious metals and apply them to one of the biggest bull markets history has ever seen.

Recent Articles

Why the Fed Will Launch Another Round of QE

Richard Duncan

Ben Bernanke introduced the world to the concept of "quantitative easing" back in 2002. It was an "unorthodox plan" to save the economy from the horrors of deflation. But the monstrous economy it has actually created is in some ways far worse. And as Richard Duncan explains, it's not going to end any time soon. Read on..


How to Safeguard Your Digital Currency

Dominic Frisby

While the technical details of Bitcoin may intimidate the novice, they shouldn’t keep him from getting in on a digital currency revolution that -- while taking different forms -- isn’t going away. How do you get the simplest, easiest-to-act-on tips about how to invest, safeguard and grow your digital wealth? Dominic Frisby has more…


Solar to Save the World, Ebola to Maim it

Chris Campbell

The duality is stark. In one hand, we have an energy renaissance underway, in the other, a virus is threatening to wreak havoc on the markets and, potentially, your life. Nothing we’re currently doing to fight the Ebola virus will work in 2014, say the researchers. Nothing we’re currently doing will beat it in 2015, either. We need a new game-plan. Read on…


How to Profit From the “Cycle of Hype”

Greg Guenthner

Lose your shirt in 3D printing stocks this year? Don’t kick yourself. You’re not alone. (Okay, kick yourself a little if it’ll make you feel better.) You need to make sure you don’t lose your 3D-printed shirt in the next tech craze. Because there will be a next time. Look, it’s really not your fault if you got taken for a ride on 3D stocks. Greg Guenthner has more...