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The New Gold Seasonal Trends


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Trends of Golds performance and review notes....

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The New Gold Seasonal Trends

  1. 1. --Contrarian analysis of gold sentiment is bullishGold prices have been rising at a compound 16.8% per annum since the bull run began 11 years ago from a base of$255/oz. That price rally can be attributed to a change in fundamentals - flat gold mine production and a huge rise ininvestor demand (thanks primarily at the advent of the ETF) which has more than offset a decline in jewellery demand.This, coupled with central bankers turning from large net sellers to net buyers, plus miners unwinding of their hedgebooks and you have a solid, sustainable and long term bull run.It is interesting to note that during the recent sharp sell off in gold, the VIX index ("fear index") held resolutely close tothe 40 level - (it has had only 6 episodes above 40 in the last 30 years) which suggest that market tension remains highand that golds sale may have been a one-off from a possible "official" source. In other words, the story pre-sell offremains unchanged. For that reason we remain modestly bullish now and solidly bullish well into 2012 .With so much of the recent speculative heat now taken out of gold, it should more sensibly move on a gentle trendhigher. With ultra-low interest rates in Dollar zone seemingly a given until 2013, gold has the benefit of that additionallayer of protection - meanwhile as the recent data has shown, the market will remain hair trigger sensitive to inflation andjobless claims data for the balance of 2011.In other areas, physical gold supplies in the form of small bars and coins are at un-precedentedly low levels - demandamongst retail clients has been especially buoyant and some refiners have suggested stock will not be available for atleast six weeks. Some take the view that a market must be topping out when the little guy gets in - while itsright to be wary of such a thing - the little guy is sometimes empowered with quite unpredictable, volatileand dramatic effect. Golds sentiment stars are aligned in favor of bullion rallying to even higher prices. This alignment represents a big shiftfrom the situation prevailing in the last half of July, when I last devoted a column to gold sentiment. I wrote then that thewall of worry that previously had existed in the gold market had largely disintegrated, replaced by excitement andexuberance. To be sure, the resultant contrarian-based caution was premature. But contrarians can claim some vindication in thehuge drop that bullion suffered in late August--when spot gold dropped from an intraday high of $1,929.00 onAug. 23 toan intraday low of $1,702.80 just two trading days later. As I wrote in July, the excitement that then existed in the gold market was"close to the fever pitch that prevailed in lateApril. Soon after that previous crescendo of bullish enthusiasm, of course, gold encountered a stunning air pocket and fellmore than $100 per ounce." Regardless, that huge two-day drop in late August did scare a lot of erstwhile bulls into becoming almost stubbornlybearish--which, from a contrarian point of view, is bullish. As a result, even though gold bullion is now back withinshouting distance of its August highs, gold market sentiment remains remarkable subdued. Consider the average recommended gold market exposure among a subset of the shortest-term goldmarket timers tracked by the Hulbert Financial Digest (as measured by the Hulbert Gold NewsletterSentiment Index, or HGNSI). That average currently stands at 40.3%. To put that in context, consider thatin late July, when an ounce of gold was trading for nearly $300 less, the HGNSI stood at 67%.
  2. 2. In other words, even though gold bullion is 18% higher today than then, the average gold timer is only slightly more than half as bullish. Since the typical pattern is for gold timers to become more and less bullish as the market rises and falls, respectively, this development is bullish from a contrarian point of view. The bottom line? What has played out in recent weeks is the bullish scenario that I outlined nearly two months ago: In my July 19 column, I wrote that itwould be bullish for the metal if, in the wake of subsequent gold marketweakness, "traders were to quickly run for the exits. That would suggest that there remains an underlying climate of skittishness about gold, which wouldallow the wall of worry to be quickly rebuilt." That wall of worry appears today to be quite Has Gold Unwound its Overbought Status? One of the biggest questions being written about which is on traders and analysts minds is whether Gold has moved into bubble territory and is about to start a major reversal, or is going to keep on While my fundamental hat suggests it’s likely to continue its trend (as a hedge against bad govt’s), I also have to see what the technical picture is communicating. For looking at whether a market is in an extreme phase and is set to reverse, we often look towards our weekly 20Exponential Moving Average spread. This model plots the distance from the weekly closing price to the 20EMA as a gauge of market extremes or whether the trend is likely to continue. If a market is at an extreme level, it usually has a very large spread from the 20EMA. Any abnormal spread from the 20EMA is likely to return to the 20EMA. Looking at the chart below, you are seeing the weekly chart on Gold over the last 6 years. In this chart, you can see price’s movement and its relationship to the 20EMA, along with the lower indicator/model representing the spread between the week’s closing price and the 20EMA. We have highlighted the key peaks which generally occurred around a 1258 reading, or price having $125.8 price spread from the weekly closing price to the 20EMA. This generally led to a pullback minimally to the 20EMA within an average of 4 weeks and a maximum of 10. We would like to note that historically, since April of 2005, Gold has spent only 43 weeks below the 20EMA (closing basis) out of 541 for a total of 8% of the time, statistically displaying its tendency to trend upward. It also means should Gold break below the 20EMA, the chances of price staying below it for extended periods of time are unlikely.
  3. 3. What we do have to note is the most recent parabolic run away from the 20EMA created an abnormal spike never before seen in history with a reading of 2718 or price closing $271.8 away from the 20EMA. So the next logical question becomes what do we make of this and is it the end of this massive uptrend? Our view is this is unlikely, considering the historical relationship to the 20EMA as noted before (8% of time below). In fact, we may consider a pullback to the 20EMA to be a healthy thing as it will put Gold through a re-distribution phase and allow the order flows behind it to start another run higher. But, the extreme nature of this suggests price is likely to pullback to the 20ema within the next 2mos or by year end. Across most instruments, price rarely has this kind of extreme or unstable relationship to the 20EMA and usually means the orders behind such movements have to normalize a bit before starting another run. Keep in mind, this does not have to happen with a violent sell-off and could be the result of price hanging around the $1700-$1900 range while the 20EMA catches up to current price levels. In fact, to add any new positions, we’d rather wait to let the spread normalize and move back into the prior range which suggested a very healthy trend. We also do have to add to the bullish prospects how price had one of its biggest weekly drops from an open of $1860.92, to an all-time high of $1911.89, then shedding $209 to the weekly $1702 low to do what??? Bounce strongly and end the week at $1827. This is highly suggestive of how the buyers were ready to stand up to one of the most violent and largest % based weekly sell-offs and send the metal within roughly $40 or 2% of where it opened the week. Thus, although the short-term price structure may suggest consolidation or mild pullback to the 20EMA, our medium and long term technical view is still strongly
  4. 4. Does Upside Remain in Gold and Silver?The 2008 crisis caught plenty of investors by surprise. I don’t blame folks for not seeing it coming. Discerningbetween a bubble and strong growth can sometimes be difficult. That’s the very reason so many lost big timein the recession. The boom itself must be convincing.Furthermore, even if one saw the crisis coming, the proper reaction isn’t obvious. Assume an investor in 2003saw a major bubble on the horizon. Well, what does he do? Foresight alone can’t save him. Of course, theinvestor could bet against real estate, but that could mean four years of losses until the bubble bursts.There’s no value in finding oneself correct but bankrupt four years later. As the saying goes, “The market canstay irrational much longer than you can stay solvent.” The investor could also try to ride the bubble and thenexit early. The timing problems here are obvious. With either decision, bubbles can give even the prescientinvestor a headache.The current European crisis is different in one major way: Everyone can clearly see it coming. Though thedilemma of riding a bubble or waiting for a crash is present here as well, the options are different for worldgovernments this time. During the last crisis, the floodgates had already been opened. In 2007, investorsbegan to realize that real estate and sub-prime mortgages were a problem, but there was nothing anyonecould really do. The Fed had already pushed money at low rates for years. The excess liquidity was stillflowing throughout the system. All the houses were already sold, and the mortgage backed securities werealready packaged.The only thing an investor could do was sell his own home or mortgage-backed securities. Of course, if allinvestors try to do the same thing, the end result is a self-fulfilling prophecy of a crash. By 2007, there wasno turning back from the waterfall around the river’s bend.What’s different this time? In Europe, we arelooking at perhaps the most preventable crisis of all time. The crisis is not about the houses already sold; it’sabout debt levels. These countries can still make extreme cuts and save themselves from a crisis. Wouldthese actions be painful? Of course! And they would likely increase the unemployment rate of thesestruggling economies. Furthermore, hard-core austerity would be equivalent to political suicide.Nonetheless, Europe has the choice of unwinding this crisis in a painful but controlled manner or sending theentire world into a downward financial spiral. It’s their choice. Europe is not akin to 2007 America. The badreal estate and MBS deals couldn’t be undone. In the case of Europe, the debt levels can be undone. Perhapsa European slowdown is unavoidable, but a crisis doesn’t need to happen.How Much Upside Is Really Left in Gold and Silver?With gold a stone’s throw away from $2,000 and already up 30% on the year, the objective investor mightbegin wondering how much higher both it and silver can climb. After all, gold is nearing its inflation-adjusted1980 high – and that peak was a spike that lasted only one day.
  5. 5. So, how much return can we realistically expect in each metal at this point? And is one a better buy than theother? There are dozens of ways to calculate price projections, but I’m going to use data based strictly onpast price behavior from the 1970s bull market.First, let’s measure what today’s inflation-adjusted price would be if each metal matched their respective1980 highs, along with the return needed to reach those levels: Returns Needed to Match Inflation-Adjusted Price Inflation-Adjusted Percent Climb to Metal Price Match 1980 High Gold $2,330 28% Silver $136 227% As of 8-31-11Based on the CPI-U (the government’s broadest measure of inflation), gold is a couple of jumps away frommatching its 1980 high of $850. Silver, meanwhile, has much further to climb and would return over threetimes our money if it reached its former peak.But the CPI is a poor measure of real inflation. Let’s use John Williams’ Shadow Government Statisticscalculations. His data are much closer to the real world, and the statistics are calculated the way they wereduring the Carter administration, stripped of later manipulations.Check out how high gold and silver would soar if they adjust to this level of inflation: Returns Needed to Match Shadow-Stats Alternate CPI Price to Match Percent Climb to Metal ShadowStats CPI Match ShadowStats Gold $15,234 735% Silver $348 738% As of 8-31-11Clearly, both metals would hand us an extraordinary return from current prices. Those are some admittedlyhigh numbers, but keep in mind that’s what the CPI figures above would register if government officials hadnever changed the formulas. What’s tantalizing about these levels is that we’re not even halfway to reachingthem.Let’s look at one more measure. I think another valid gauge would be to apply the same percentage gain thatoccurred in the 1970s. From their 1971 lows to January 1980 highs, gold rose 2,333%, while silver advancedan incredible 3,646%. The following table applies those gains to our 2001 lows and shows the prospectivereturns from current prices: Returns Needed to Match 1970s Total Percent Gain Price to Match Percent Climb to Metal 1970s Total % Return Match 70s Return
  6. 6. Gold $6,227 241% Silver $160 285% As of 8-31-11Gold would fetch us two-and-a-half times our money, while silver would give an almost quadruple return.Regardless of which measure is used, it’s clear that if gold and silver come anywhere close to mimicking theperformance of the last great bull market, tremendous upside remains.One might be skeptical because these projections are based on past performance, and nothing says theymust hit these levels. That’s a valid point. But I would argue that we’re in uncharted territory with our debtload and money creation – and neither shows any sign of ending. We had a lot of problems in the 1970s, butour current fiscal and monetary abuse dwarfs what was taking place then. The need to protect one’s assetsgets more pressing each day, not less so. That to me is the key signaling this bull market is far from over.One may also be skeptical because the media continue to claim gold is in a bubble. To date theirproclamations have been nothing but a great fake-out, every time. Want to know when we’ll really be abubble? When they stop saying it’s one and actually start buying and recommending gold. When they beginrunning 15-minute updates on the latest gold stock. When you are sought out relentlessly by your friends andrelatives because they know you know something about all this “gold and silver stuff.”All told, I think the baked-in-the-cake inflation – rooted in insane debt levels and deficit spending – will beone of the primary drivers for rising precious metals this decade. This means the masses will look for a storeof value against a plunging loss of purchasing power. Enter gold and silver.The current correction may not be over, and we can count on further pullbacks along the way. But the datahere suggest the upside in gold and silver is much bigger than any short-term gyration – or any worry thatmay accompany it.QE or Not QE, Asian Markets Are Driving GoldWe’ve seen some real gold volatility in action… up to nominal records then down in a quick retreat. So,what’s next?Much will depend on whether the US Federal Reserve will embark on another round of quantitative easing(QE3). If QE3 goes live, anticipation of future inflation will persuade many investors to down the trusted pathof securing their capital in gold.But the reality is that even without QE3, gold can go up – one is tempted to say it must go up. As discussedmany times and in many ways, the economic problems already on deck are not being solved, and any one ofthem can make gold soar.Gold is in the unique investment class of “ultimate safe haven.” Demand will be much higher once pushcomes to shove and fiat currencies lose what little credibility they still have. This is developing, with orwithout another round of quantitative easing.
  7. 7. And demand for gold has been accelerating recently. The focus is now on Asia. China, India, and a range of smaller countries showed impressive demand for gold in Q211. The second-quarter update of Gold Investment Digest, published by the World Gold Council, reports on physical bar and coin demand: Turkey and India were the two strongest markets, chalking up growth rates of 90% and 78% respectively. China (+44% year-on-year) also accounted for a significant portion of the growth in global demand. It will be quite interesting to see third-quarter statistics, but anecdotal evidence already shows that higher prices don’t scare Asian gold buyers, instead prompting them to purchase more on the dips. “The surge in prices has sparked another gold-buying craze. The 50 gram and 100 gram gold bars were selling like hot cakes,” said Ms. Liu, a store manager at Shanghai’s major jeweler Lao Feng Xiang Co Ltd, who said gold sales this month were up at least 30 percent from a year ago. This summer was an interesting one, not quite the tranquil Shopping Season we had hoped it to be. Gold closed at $1,536.50 per ounce on May 31; it closed on August 31 at $1,813.50, an 18% increase. Fall shall be an interesting season, too. The current price action is already hot, but traditional Indian and Chinese festive seasons are approaching, and those often boost gold prices. This may be one of the reasons why sales in Asia are flourishing at the moment – buyers expect the gold price to continue its ascent and want to use the opportunity to buy cheaper.The New Gold Seasonal Trend : Weddings and Festival TimeShamik Bhose on September 7th Wednesday at 2.05 PM ISTGood afternoon,Absence of correction consolidation in gold makes us a little jittery as well. I predicted 2200$ or 32,000/-Rs per 10 gms to ET Now Channels Investors Guide programme over the weekend, but for Nov2011 ; diwali is during late lateOctober. Methinks great volatility and brutal one day corrections shall be the norm now as everybody and their mom-in-law is gung ho now about gold. Shakedothe weak hands, but if there is sovereign buying lurking beneath the seas as suggested( and this was a latent theme earlier as well just before Helicopter BensJackson Hole star turn)then all rationale bets are off probably.Silver will be on good run now, suddenly spurting towards 50$ and beyond. Local stockist mood suggest too much bias for gold...that usually means silver will mfaster.My suggestion of 3000$ in 2014 during 2010 survey for Resource Investor seems to have been conservative. Consensus is towards 5000$ and consensususually not a good bet. We are in a time when you have to look at much longer cycles than the one traders and technical analysts like to use and that is no longer than 5 years andsometimes 20 years but no more. Its time to look and pay attention to 60 and 100 years cycles.....It shows that gold is a constant (not in the scientific definitionclose). It just maintains its value in real terms. See what happened to gold since the introduction of paper money in 1900. Gold in the long term is just hard cashjust maintains its value. It’s not gold going up but paper money going down.
  8. 8. To judge if Its the value of money going down . Look at food prices going, thats demand plus shortage and then the funds activities . With gold and silver- to acertain extent its the fear that is rising. What might happen? One of the men in that list i posted from Resource Investors is Jim Sinclair. He had a theabout gold being valued vis-a-vis dollars in circulation and total dollar denominated debt due.I do not know if this will include all the leveraged bets and CDOs of today but given the total dollars ( notional value) in circulation where should gold be priced.Mr.Sinclair said between 790-880$ in 1979-80 and apparently sold out around 840$. Now he predicts 12450$ value for gold. Weird or spectacular ? The unwindof leverage that Satyajit Das(Traders,Guns & Money) predicts will turn 99% of banks insolvent and the Great Contraction that Ken Rogoff talks about to bring sato asset prices , if they are postponed or glossed over does gold go those levels ? For that we need to answer a question , where and how far down in real termsand how fast will paper money values go ? Over the last 10 years gold has gained on average 10% in the period between early August and year end. This solid and quite consistent gainmay in part underscore strong seasonal gold buying and it may in part reflect weakness in the equity markets which is often more pronouncethe end of the summer period. By rights we should in a typical year have made gains of 8% YTD with an additional 10% to be enjoyed by year end. Gold rehas been remarkably consistent as well as accommodating. Well 2011 is looking different.Gold has gained 34% YTD and we are only one week into the buying season. Looked at a different way, gold is 27% over its 200 day moving average whichindicates that it is currently over-extended. All things being equal we should have seen a correction or at least a reasonable period of consolidation but we seemhave by-passed that nicety and gold is demonstrating a keen-ness to move much higher. In short, gold is becoming a little un-gold-like in that it is pandering tomass appeal - instead of quietly performing its role as a wealth preserver. has been clear for quite some time that physical retail gold sales have been strong and is underpinning this market. It is also clear that desmodest buying in the West, in the East they quite literally have cannot get their hands on enough.But the scale and speed of buying seems toexceed even those very significant factors. My hunch - which is yet to be borne out - is that there is quite probably some central bank buyingsupporting this market.Although overbought, we would not be surprised to see gold edging towards fresh highs at $1914 in the next few days although it is difficult to what the stimuluwill be that takes it through. At this time it is the bulls have the whip hand and it is for the bears to prove their case. What also seems to be going on is thethat the gold market as a whole, has a set value (as in you can add all the gold up that has ever been produced and work out the total). Ifestimates are correct, there has been around 158,000 tonnes of gold produced so far (or 5,079,817,925 troy oz). At todays price this would gyou a nice big total of $9,651,654,129,320 (just over nine and a half trillion dollars).
  9. 9. Now if you compare this to the current US debt of $14,715,060,463,781 (just over 14 and a half trillion dollars), you cant help to notice howsmall the gold market really is, compared to just one debt figure. As more and more people keep turning to gold as a safe haven, and the priccontinues to rise,we will continue to see more large spikes and corrections in the price. What normally would have been a nice and steady $10 correction is now a fast and rampa$60 fall (and sudden gain), and the problem is that both of these scenarios happen on the same stimuli (in this case profit taking and save haven appeal). One conly hope that gold can float like a butterfly and sting like a bee, and not the other way around. Is Gold on a Bubble Zone ? Or is it reacting to a perfect storm of factors ?by Shamik Bhose on Wednesday, August 24, 2011 at 2:06pmWith $2000 and 2500$ per ounce being one of the louder numbers being “whispered” on peoples lips, the potential for the bull run to step up a gearseems to be more substantial each time a negative story about the US is published. With the world sticking to the saying “When America sneezes – therest of the world gets sick” world wide economic worries would seem to have the wide shoulders to carry gold kicking and screaming to this magic numall by itself.However, we would then have to contend with a potential gold market bubble, which for a safe haven asset would be dangerousterritory indeed. Gold’s major strength in the last 5000 years has been its stability, its ability to store wealth in times of hardship andprotect your saving from becoming worthless. At this point, in time we can see that gold is reacting to a perfect storm of factors in thshape of high demand from China and India , a weakening US Dollar, mine supply decreasing year on year, sovereign debt crisis inEurope and an increase in worry in the market as a whole.In most of the last 11 years we have seen gains in gold prices of between 18% and 22% - this year we have seen 32% and we are yet to enjoy the fouquarter which is traditionally the strongest quarter for seasonal factors. It is tough determining the level or price which represents fair value and whenhas moved well beyond it. That said, the parabolic nature of the gold price chart in the last few weeks suggests to us that we are ahead of ourselves anthat a pull back or correction would be a healthy one.The Fibonacci Extensions suggest that $1915, $2111 and $2232 are top price projectio- take your pick..... probably Friday (we always seem to have the big moves up on a Friday afternoon London time).But, Lets not be too greedy. Jackson Hole this Friday MIGHT just provide that turning point.At what point does gold go from being simplyoverbought and actually into a bubble phase ? Its a question well worth pondering as we seem to be on the cusp of both. We do hold to our view thatgold is in overbought territory technically. Long term investors looking at a 30 week trend for gold will have seen gold extend 20% beyond its trend lineonly 3 times since 2007 and in the last 2 occasions (March 2008 and December 2009) it sold off sharply and reverted to its mean. We are there againtoday at 21% above the trend. Bollinger bands are also a good guide and show the deviation of prices from 20 period average points on a weekly chartsimilar gauge if you like. We are presently beyond the upper limits of the bands again, suggesting that gold is technically overbought. These guides tellgold is due a rest.There is not a particular price point at which we could say that we are in a bubble - it is the manner - or speed - of getting there that defines it. This burun has been 11 years in the making, it has been founded upon solid supply/demand fundamentals - it has been accelerated by innovation on the demaside and some extreme macroeconomic factors which to our minds justifies the current price; as such, the gold price is inherently strong and hasresilience.With the gold price again reaching a record high today of US $1878 - continually close to breaking this at time of writing - and with economicwoes seeming to carry on for the foreseeable future, the outlook for gold, in its natural safe haven mode, is strong. As gold gallops to a fresh record hiand is performing its roll in measuring sentiment in the financial markets, in this sense the tiny gold market is a classic case of the tall wagging the dogin that regard, gold is telling us that the financial market are under severe stain and is incumbent on policy makers to pull together clear long term planresolve the crisis.
  10. 10. In the short term, there will be enough steady interest in gold (from negative market cues) to keep us moving up at the current $1860 / $1880 range bunless there is a new major crisis popping up anytime soon, we feel that gold is currently over-brought and should see a small correction. However, asmost perfect storms there is always an air of uncertainty that under-lays most systems, and a single factor such as more countries following Venezuelalead or yet more debt downgrades, could easily push gold closer to US$ 2000 this year.The markets are awash in a sea of red numbers (FTSE downNASDAQ down S&P 500 down and with continuing knocks to the confidence of investors, the gold prices of the past will be a distant memory, even thefirst Gold Fix of 2011 seems strange to look at as its only US$1,410. If someone told me that 10 years ago the gold average used to be around$260 I would call them a liar (and then secretly check on Google to see if it was true). We recently wrote that a period of consolidation would be constructive for gold before moving higher, possibly even a flushing out of weak longs on Cbefore stabilising. Fat chance. Recent economic events in both Europe and the USA ( US debt re-rating and banning short -selling in Eurozone coupledbuying of Spanish and Italian debt) were politically inspired economic stop gaps. No more. We are yet to see long-term sustainable policies in plto put the over-indebted nations back onto the path of financial probity. What we read in golds price action is that clearly the relief r(in equities) from these recent policy decisions have been brief and the market remains impatient and skeptical. So are we in a bubbleour view is no but the potential to be so is very much there if the FED starts the ball rolling on a QE 3 at Jackson Hole this FridayWhy were we wrong and what does it tell us about the psychology of the market ?Technically gold is in overbought territory by any number of technicameasures on the charts - be they bollinger bands, RSI (Relative Strength Indicator), MACD Indicator, Fibonacci extensions or Elliot Waves. Golds failureadhere to what chartists would tell us is reasonable behaviour - that is continue to rally when by rights a period of consolidation or profit-taking wouldexpected suggests that gold is either simply not in technical "mode" and that other external factors are driving us higher or that we are in a panic phaswhich inevitably leads to a blow-off at the top.In short, long gold has been a wondrously profitable position to hold but a degree of caution is now in order