Created: 05 November 2009
In our latest piece (within a series of analyses that detail both the technical and fundamental landscapes of gold, silver, copper, oil, the CRB (Commodity Index), the US Dollar, the EURO and the remaining major currencies of the G8 in relation to one another), we at Fibozachi present an initial look into the technical composition of gold.
Tuesday morning we wrote, “As participants of all stripes across the global financial marketplace continue to chatter on incessantly about the topic of “runaway inflationary pressures” and the, allegedly imminent, “collapse of the US Dollar,” we at Fibozachi … bond markets and the $DXY (US Dollar Index) each seem to be anticipating many far-reaching implications from Uncle Ben and Co. about the winding down of QE (Quantitative Easing), essentially the open spigot force providing full fire hose-like liquidity the world over.”
Yesterday’s FOMC statement told us that:
“… With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time ...”
- Read: while effectively taming the yield curve in the process of monetizing much of our recent debt, the strong undertow of deflationary pressures continue to abound across not only the short-term horizon but also well into the intermediate future.
The full release, reproduced here, went on to conclude that:
“… In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.”
When we copy and paste the last paragraph into Microsoft Word, a single noteworthy grammatical structure within the prose appears to employ a “Passive Voice” that Word continually implores us to “consider revising.” For those who will take our word on it, the phrase is “will be executed.” Certainly, the fact that this grammatical “error” (or Freudian slip) escaped the keen eye of Uncle Ben and Co. may prove to be not only hilarious but also insightful as the Fed continues the tedious task of steering the battleship that is monetary policy back toward the tighter waters of an increased discount rate in the months ahead.
For a thoroughly insightful synopsis of yesterday’s Treasury Minutes, we highly recommend reading the entirety of an article written by EB, entitled “Treasury Minutes Suggest Fed to Remove $1 Trillion in Excess Reserves by March 2010,” that is available at Zero Hedge.
Before presenting our initial examination into the technical composition of gold, please allow us to preface our singularly technical work with a few links to some of the most insightful fundamentally driven research articles of the past few weeks. While, we at Fibozachi predicate our work upon almost exclusively technically oriented research, we certainly appreciate the importance of well-written fundamentally driven research pieces; in this vein we direct your attention to a handful of some of the very finest such pieces.
To understand why, “[the]venerable institution … of the Federal Reserve … must be insulated from political influence and intimidation”, please enjoy the brilliant prose of Marla Singer, whose article, “On the Populist Capture of the Central Bank(s) in the United States”, takes the “opportunity to offer a pair of novel and contrarian theories”, into the political accountability of the Federal Reserve System itself.
Similarly, Tyler Durden thoroughly details the Fed’s accounting machinations in a masterful piece, entitled, “A Rare Glimpse into the Fed’s Discount Window Courtesy of the Brewing Lehman–Barclays Scandal”, which helps us to understand why:
“... [there are] over 300 members of Congress who already support Ron Paul’s “Audit the Fed” Initiative [and to] consider the implications of what the Lehman fiasco has taught us, and how this unique look into the Fed’s balance sheet should be a very critical reminder of just how much risk the Fed is willing to take on with taxpayer capital when bailing out a financial system that, absent ongoing accounting gimmickry and endless Reserve Banking System subsidies, is still rotten to its core.”
Lastly, we direct your attention to a recent interview by Laura Crigger, of / available at HardAssetsInvestor, in which Jon Nadler, Senior Analyst at Kitco, comprehensively details the fundamentals of gold from a distinctly bearish vantage point. In what we consider to be the single best bearish synopsis of the basic fundamental drivers behind gold, Nadler’s comments have become nothing short of a lightning rod for gold bugs, who continue to respond with increasing derision to any data point or point-of-view that does not effectively proclaim future gold prices that reach into the exosphere.
Having noted the breadth of detail within those top-notch articles and research pieces that our fundamental analysis could add very little if anything to, our personal opinion at Fibozachi is that after a very sizable correction, gold will eventually reach parity with the Dow Jones Industrial Average at either 2700 or 3800 sometime in the not too distant future. That said, such is only our personal opinion and bears absolutely no reflection on our comprehensive technical analysis, which suggests that while the short-term (1-3 month) bull market in gold may have already exhausted or will soon exhaust itself, that the outlook over the intermediate horizon (6+ months) is decidedly bearish due to various technical metrics that we detail below. We hope that you enjoyed our most recent analytic works, “Silver: Hangin’ on by a Sliver”, and, “FCX: Inflationary Goldmine or Deflationary Pyrite?”, which, in collection with today’s initial examination into the technical profile of gold, simply strive to spur further debate about the argument of “inflation versus deflation” from a decidedly technical vantage point.
As legendary strategists and tacticians of all stripes from David Einhorn and John Paulson to Jim Rogers and Paul Tudor Jones, publicly proclaim that the pedestal of gold prices will increasingly escalate alongside mounting inflationary pressures in the years ahead, David Rosenberg recently added himself to the list of high-profile gold bugs by proclaiming that yesterday’s IMF sale of gold to India “…certainly helps establish a floor!”
While Tyler Durden summarizes the points within Rosenberg’s recent note here, we would like every inflationista to please note how Rosenberg references the price of gold (pog) in not only a $USD denomination but also that of the €EURO, which is not at a new nominal high in price. Moreover, only the pog denominated in $USD is at such new, nominal highs. This is an extremely insightful technically oriented fact with far-reaching implications for the intermediate / long-term direction, which has been seemingly overlooked within the fundamental short / intermediate term analysis of most mainstream analysts. We at Fibozachi will address this inescapable fact alongside much greater technical detail on these pages in the weeks ahead.
Possibly, just possibly, there very well could be a new floor under the price action of gold at the current price area, when denominated in rupees. That said, at its Socionomic core, the Indian CB / gov't is no wiser or more foolish than that of the US Fed, ECB or BOE, who infamously dumped all of their gold a decade ago at prices c. 25% of today's. And in the same Socionomic vein, the Indian gov't is buying when their very citizens have become net sellers of scrap gold, creating an undeniably marked non-confirmation of the trend itself if not an outright negative divergence within its final throes. Reproduced below is a chart that shows gold denominated in US Dollars, Aussie Dollars, Euros and Yen; with the help of TradeStation, we hope to exhibit updated versions of not only the charts below but also gold denominated in all G8 currencies, in a future installment to this series.
Gold's Bullish Pennant Breakout
Reaching new nominal highs denominated in US Dollars, gold, as measured through the trading vehicle of the GLD ETF, is highlighted in the first chart below. After noting the simple pennant pattern, please note how volume decreased as the pennant developed and how the breakout was accompanied by increased volume. Various technical guidelines from, The Encylopedia of Chart Patterns, are freely available for the pennant pattern here, at Thomas Bulkowski’s website.
From the inception of the symmetrical triangle that developed within the pennant formation, there were approximately 139 trading days (TD’S) from the 2/20/09 high to the point of the upward breakout on 9/02/09. If, from its inception to its very apex, price action had remained within the boundaries of the pattern, it would have spanned 176 trading days; to this end, price broke out at 79% of the full depth of the triangle. As discussed within the last installment of this series, the 75-80% depth range is a frequent and healthy breakout point for patterns of various shape, size and variety.
A possible measured move target of 14.06 from the last bar of the pattern at 93.90 presents an anticipated profit target of 107.96. With yesterday’s high of 107.68, GLD registered a perfect Evening Doji Star, with a close that was just 1 cent below its open. Today’s price action will complete an Evening Doji Star candlestick pattern if it opens with a downward gap and closes below the opening print.
Thanks to the bi-annual, “Free Week”, that Elliott Wave International currently provides anyone who clicks here, we borrow a chart with full Elliott Wave labeling and quote below from the 11/04/09 edition of EWI's "Short Term Update", written by Steven Hochberg. As clients of EWI, we at Fibozachi highly recommend that anyone with an interest in learning more about the Elliott Wave Principle take of their limited 'Free Week' by visiting EWI or simply clicking here.
“… Yesterday’s strong gain carried the Daily Sentiment Index (trade-futures.com) to 91 percent gold bulls from 83 percent the day before. The single day 8 point jump in optimism is the largest daily increase since an 11 point jump from 75 to 86 from March 18-19, 2009, one day prior to the March 20 gold high ($967.95), which remained intact for two months. In addition, each of gold’s prior short-term highs coincided with optimism pushing above 90 percent, which it now has … With silver still failing to confirm gold’s push and with optimism back in the range of prior highs, odds favor that gold’s surge is in its latter stages.
Anecdotally, the depth of belief in gold’s unlimited upside potential remains strong, as our office is still receiving emails claiming that the U.S. Dollar is on the verge of being “devalued,” thereby resulting in an immediate doubling of gold’s price to $2000. The U.S. dollar cannot be devalued because it’s not linked, backed or convertible into anything, which would allow it to be devalued. Such was not the case back in the 1930s, when President Roosevelt devalued the dollar by raising the price of gold from $20.67 to $35.00. But back in 1934, one could, by law, convert their dollars into a set amount of gold. No such linkage exists today, making devaluation impossible.”
Put in other terms, allow us to whimsically ask: how much credit card debt do you have that denominated in Euros? Is your 2nd mortgage denominated in Yuan? Any remaining fixed interest student debt that is denominated in gold or pounds? How about car notes denominated in silver, oil or the Amero? You see, the simple inescapable fact about fiat currency, particularly the $USD (with $52 T of USD denominated debt, of which half is personal), is that damn near all our collective debt is denominated in the all-encompassing power of its "value;" where value is an entirely notional metric that is dependent upon the whims of our collective thoughts, feelings, emotions, insights, outlooks and interpretations into the collective future valuation of human enterprise.
When measured against the backdrop of this $52 T number outstanding and an undeniably deflationary landscape that has witnessed a sharp and unprecedented contraction in the velocity of the money supply, $2 T in targeted Fed credits to financial intermediaries who have hoarded much of the "money" into the relative safety of various Treasury spreads begins to seem rather paltry. For a complete explanation into the tenets of Socionomics, please see Robert Prechter's groundbreaking work within, Pioneering Studies in Socionomics, and The Wave Principle of Human Social Behavior and the New Science of Socionomics, which are collectively entitled, Socionomics: The History of Science and Social Prediction.
HUI: The Gold Bugs Index & Fibonacci Cycles
Kitco describes the $HUI Index and lists its components, here, stating that, “The AMEX Gold BUGS (Basket of Unhedged Gold Stocks) Index represents a portfolio of 15 major gold mining companies. The index is designed to give investors significant exposure to near term movements in gold prices – by including companies that do not hedge their gold production beyond 1 ½ years.”
Much like the CBOE Gold Index (an equal-dollar weighted index composed of 10 gold miners further detailed here), the $HUI’s inability to eclipse its old highs at 520 combined alongside the fact that silver, precious metals, oil and the CRB (Commodity Index) are nowhere even close to plotting new nominal high, serves to significantly support the primary Elliott Wave count for gold. It is extremely important to examine the chart profile of $HUI because it contains a price data series that extends at least one full cycle from the 2000 low; whereas the GLD ETF and the @GC, the continuous contract for gold futures, each do not contain such far-reachin price series data, since they were each respectively introduced into the marketplace on 11/18/04 and 5/14/01.
In examining the monthly chart of the $HUI Index below, it is extremely interesting to note that there exists a perfect alignment of monthly Fibonacci cycles that has remained accurate thus far. Measuring from the closing low of 2000 to the closing high of 2008 creates a Fibonacci 89 months; gold now finds itself 20 months from that same March 2008 high.
Due to this ‘naturally harmonic cyclicality’ within the $HUI, we at Fibozachi remain on high alert to the heightened possibility that sometime within the next month may mark a significant inflection point for gold. While we anticipate that this month will mark a significant high in the $HUI that will kick-off of its next down leg, we must remain vigilant to the possibility of a rapid acceleration during this period; ushering in yet more new nominal highs in very rapid succession.
While this initial look into the technical composition of gold is by no means meant to be complete, we at Fibozachi would like to thank you for taking the time to examine this initial technical profile of gold with us today. The next upcoming installment within this series of analyses (that strive to comprehensively detail both the technical and fundamental landscapes of gold, precious metals, oil, the CRB (Commodity Index), the US Dollar, the EURO and the remaining currencies of the G8 in relation to one another) will be published both here and on Zero Hedge Monday morning. We hope that you have enjoyed our work and look forward to spurring further insight about the comprehensive technical profiles behind the debate that continues to rage on about “inflation versus deflation” over the days and weeks ahead.
Disclosure: no current position