Before I share my thoughts on gold hitting $1,300, and the markets breaking through resistance, I have something much more important to share with you. Actually, it’s not important at all, but it’s really cool. Here’s what I want you to do: install Google Chrome on your computer (if you don’t already have it), (you can use Internet Explorer or Firefox, but it’s not quite as fast), and then go to the Wilderness Downtown website. Type in the address where you live, or grew up, or any address in a city that has been mapped by Google Street View. A personalized music video will be created for you, featuring a cool song by Arcade Fire, a Montreal band. I think the video is the coolest thing I’ve ever seen, and I should know, since I wasted quite a bit of time at the office and at home this week punching in different addresses and playing if for people. It’s free, I have no financial interest in Arcade Fire or Google; I’m telling you this because it’s cool.
I’m also sharing this because it’s a perfect example of the new world we live in. If I have a product to sell (like a music album, for example), I could spend millions on advertising (the old fashioned way), or I could create a cool video that goes viral and get the word out for much lower cost. That’s the new way of doing business.
Okay, enough about cool music videos; no now to the two important topics of the day: gold, and the markets.
Gold
Remember two weeks ago in my commentary Stuck in a Trading Range, Except for Gold when I sketched out the speed at which gold rises:
… gold is volatile, falling from $1,000 on March 17, 2008 all the way to $705 241 days later. Of more interest is the speed at which gold can move:
- it took 137 days to go from $500 to over $600;
- only 22 days to go from $615 to $700;
- $805 to $900 took 73 days;
- $900 to $1,000 took 63 days;
- $1,005 to $1,100 took 59 days;
- and the push from $1,100 to $1,200 was accomplished in only 22 days.
Yes, I understand math, and I understand that a move from $1,100 to $1,200 is only a 9% move, as compared to a $500 to $600 move which is 20%, but the facts are clear: when gold goes on a run, it can move very quickly.
Well, intra day gold briefly hit $1,300 on Friday, and $1,200 was first achieved on December 1, 2009, 297 days ago. That’s not exactly evidence of a runaway manic phase of buying.
I’ve been saying it for two weeks now, including last week in Patience – Gold will shine, but a small pullback is probable, that gold will continue to make new highs, but not in an un-interrupted straight line. As the chart above shows, the Relative Strength Index is at 78.66, a very high level. I’ve circled the three times this year the RSI has crept over the 70 level, and the prior two times has led to a substantial correction.
In mid-November, 2009 when gold was around $1,150 the RSI first exceeded 70; gold rose all the way to $1,225 over a period of about three more weeks, with the RSI exceeding 80, before the inevitable correction occurred, bringing gold all the way down to the $1,075 level after another three or so weeks. The blip up in May was followed by a very short pause.
What will happen this time? I don’t know, but my guess is that the gold suppressors will do what they always do: ride the price up, then pile on the shorts and cream it to make money going down. My current guess is that gold has topped out for this move, but we could see further upward movement to $1,325 or $1,350, but I doubt it. It’s more likely that a correction back down into the $1,200 or $1,225 range is imminent.
We all know that historically September and October are weak months for gold (although obviously that hasn’t proven accurate in September, 2010), so a drop from here would not be at all surprising into October.
So, again, my game plan is to place stink bids on precious metals stocks, with a view to picking up some bargains over the next four to six weeks.
As an aside, thanks to sidewinder over on the Buy High Sell Higher Forum for pointing out that Martin Armstrong, from prison, has published his thoughts on gold: Gold: An 11 Year High for 2010? You can read his full report, but the salient points are:
First, if gold were to rally up to $1,480 during the last quarter of 2010, it would still be in a normal trading range, not a phase transition or manic phase.
Second, to quote Mr. Armstrong (page 7):
I began to notice that EVERY market makes a FAKE-OUT move just before a major advance. The market needs to swing the sentiment back to bearish BEFORE it rallies. you need the energy to rally and that is created by the wrong traders who fight the tape. They provide the fuel for the early stages of the rally.
From page 11, after a discussion of cycles, where he comments that $1,300 is a significant resistance level:
From a Cyclical Perspective, we have September as a potential high on a short-term basis during the week of the 13th/20th with a change in trend for the subsequent 4 to 5 week period.
Yes, I believe that’s exactly what I just said above, wasn’t it?
So, to summarize, slight weaknesses over the next few weeks, and then onward and upward. Which leads us to the second topic of discussion:
The Stock Market
Nice action this week, eh?
To continue my thoughts of recent weeks, despite high unemployment and the crashing real estate market, the S&P 500 remained stuck in a trading range between 1,040 and 1,130.
Well, a close at 1,131 puts us above the trading range, if only just barely. What does this mean?
Perhaps nothing. We spent five days below the trading range in July, so the five days above the trading range this week may mean nothing at all. Weakness early in the week may push us back into the trading range again.
Or, it’s possible that we are out of the trading range, and the bear market correction may continue. My guess? We are stuck in a trading range, perhaps with a bias to the high side in the short term.
If we start with the assumption that the markets are manipulated (via the Plunge Protection Team), it would be reasonable to assume that the markets will not crash before the U.S. midterm elections in early November. They will continue to muddle along.
And that’s where this analysis all comes together: the powers that be don’t want a high gold price prior to the elections, since that just emphasizes the underlying weakness of the U.S. dollar, and the U.S. economy. But, they don’t want a stock market crash just prior to the election, because that would destroy the incumbents. I therefore assume that they will prop the markets up until after the elections, and then let the inevitable correction happen.
It is that correction that will be the buying opportunity for low priced precious metals stocks, which should shine again in 2011.
Until the correction begins there is little point in determining exact entry points on individual stocks, since I don’t know if the correction will be mild or severe, so for now I’ve covered the few remaining blue chip stocks I own, and I will hold my cash, waiting for the right moment to deploy.
Those are my thoughts; thanks for reading; see you next week.
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