Sunday, December 18, 2011

Gold Tests of 200 Day Moving Average

One of our GGR members who happens to hail from Sweden posted a comment in our recent VultureInReview  piece about Rick Rule. “Johan” also posted a link to a Sunday Reuters story on gold by Frank Tang, which suggested that gold was heading below $1,500 the ounce based on a survey Reuters conducted of 20 hedge fund managers.

Johan’s comment, posting as “Swedish Vulture” asked simply:  “Perfect for a rally in Q1...time to walk over to the empty side of the boat?”

Our response to Johan is below, unedited, and we thought now would be a good time to revisit the long term chart for gold along with it.  The chart is below the response. 


 Response to "Swedish Vulture" Sunday, December 18.     

It just goes to show, Swedish Vulture, how rotten sentiment has become toward precious metals when a near majority of 20 hedge fund managers “said” they think gold will fall to $1,450 the ounce in 2012. 

Short term just about anything can happen.  I was laughed at in New Orleans this year (in October) when I said in a panel discussion that I wouldn’t be surprised if gold tested $1,250 at some point, but before I could mention the context of that idea, the discussion moved on.  I expected to be challenged on that comment, but instead it was scoffed at as being ridiculous. 

The point was in the event we got into another major rush to liquidity, like in 2008, I thought there could be that much volatility, depending on the degree of panic. At the time gold was near $1,700 but it had been rising up off the $1,535 test in September.  Perhaps the same comment today might not be laughed at quite as hard. 

The point I should have made then, in retrospect, was that if we saw enough panicky volatility to drive gold as low as $1,250 then people ought to use that opportunity wisely by converting other assets, other resources into gold as they can. 

Just for the record, calling an all time top in gold merely because it has crossed the 200-dma (for something like the eighth or ninth time in this bull) is unlikely to be the correct call looking ahead.  For that to be true, it has to mean that global confidence in fiat currencies (and the governments that print them) will have to be in a new bull market (global confidence in politicians to show restraint in debasing their currencies will have to be increasing), and that I view as being highly unlikely. 

Indeed, I think I am on fairly solid ground in the notion that confidence in fiat currencies and in the governments that print them is much more likely to erode further looking ahead, not improve.  Once it becomes crystal clear to the general public that governments have chosen to deflate their debts by massively inflating their currencies even further, there are few choices for wealth to hide.  Gold and silver are two of them, so, right or wrong, I want a portion of my wealth reside in metals that can’t be “printed” with a computer keystroke at the U.S. Fed, the ECB, the BoJ, the… you get the idea. 

It’s a shame that Mr. Tang, in that Reuters article, misrepresents Mr. Gartman’s stance on gold.  By clipping Gartman’s quote he gives the opposite view of Gartman’s longer term views on the metal in my opinion. 

So, is it time to move to the “other side of the boat” as you mentioned?  Perhaps, but I would feel more comfortable doing so if gold manages to almost retest the Sept lows ($1,530s), but then holds firm and shows us a sign of strength then.  Absent a global collapse of the banking system, absent a world devolving into chaos, we can expect the central planning politicians and central bankers to continue to do exactly what has caused the value destruction for fiat currencies up to now.  The problem is that they sincerely believe the answer is more of the same medicine, just in different bottles and larger doses.  And that is the kind of thinking that gives us unshakable confidence in precious metals looking longer term.

Expect higher volatility ahead, but don’t be frightened by it, if possible, is our view. 

End of comment. 

We invite readers to view the remainder of the comments and a test posting of (and comments about) the long term chart below.  Part of our comments, as they originally appeared in the VultureInReview section, are reprinted below.

“In response to a comment by a Sweden based Vulture and off the cuff, we said that calling a top in the gold market merely because gold had breached the 200-dma “for the eighth or ninth time” in this gold bull market is unlikely to be the correct call looking ahead.

Just below is a long term gold chart we have published before, but it didn’t reduce to posting size all that well in the past. We are going to use this graph in a short piece later this evening (Ed. This piece) or tomorrow and we wanted to see if it will reduce to viewable size before using it (using a different technique for reduction - it is a huge sized chart to start with). Thus the test below.

Oh, by our count this is more like the fifteenth challenge of the 200-dma. There have been nine challenges to the 300-dma. That is all for now.”

End of comments. 

With that, just below is the long term chart showing previous challenges of the 200-day moving average (blue arrows) and challenges of the 300-day moving average (red arrows).

Gold, daily since 2003. If the image is too small try clicking on it for a somewhat larger version, but for many readers the pop up will be the same size. 

We can recall numerous times when gold fell below the 200-dma hearing that the gold bull market was then over, can’t you?  Indeed with a bit more effort than we want to tackle while on vacation, we could easily dredge up some of those big gold bear calls from the past.  (Especially the 2006 parabolic break, the 2008 panic collapse, and in the April 2009 correction.) 

Instead of dragging out those past bearish calls by the gold bearish camp, however, we are going to quietly get back to our holiday vacationing.  We suppose this could be the beginning of a protracted gold bear market.  It could be in the sense that anything is possible, but it won’t be merely because gold has crossed a moving average line it has crossed 15 times before. 

Come to think of it, the gold market has not respected the 200-dma all that well since Day One.  It has routinely made fools of those who mechanically trade via moving averages and so-called “death crosses” in the decade prior.  Why on earth we should start thinking it will respect them now, is … well, it’s just kind of a “cry-wolf” kind of thing, is it not? 

Oh sure, some day the wolf will actually come and end up eating the sheep of the people who become complacent, but we’d wager that day is a long way off and most likely won’t arrive until sentiment for gold is very strongly bullish, not sickly and fearful as it is today.

We’ll see.  Happy holidays from Got Gold Report.   


The Original
Vulture Speculator

Trading gold, silver and mining shares since 1980 with a focus on taking advantage of volatility extremes, Gene Arensberg analyses the markets through a basket of technical and fundamental indicators and shares his findings from time to time here at Got Gold Report. Mr. Arensberg has been quoted in the Wall Street Journal, Dow Jones MarketWatch, USA Today and dozens of other news organizations.

"I've been a huge fan of Gene and his amazing work for years..."

Brien Lundin, CEO, Jefferson Financial, Host of the annual New Orleans Investment Conference and Publisher of Gold Newsletter

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