Gold Scents

The rally out of the February intermediate and yearly cycle low has now traveled far enough and long enough that it is due to take a short breather. That breather would be in the form of a short term pullback into the midcycle low.

The initial move out of the July intermediate cycle low lasted 22 days before forming a short term top.

Tim Iacono

Reuters reports on comments made by China’s top foreign exchange manager at the annual gathering of the National People’s Congress in Beijing on the subject of gold purchases.

Yi Gang, head of the State Administration of Foreign Exchange, said that while gold was “not a bad asset,” it would never become a big part of China’s overall investment portfolio.

“The international gold market is very limited. If I purchase gold on a massive scale, it will definitely push up global gold prices,” Yi said at a news conference on the sidelines of China’s annual parliament.
…
China’s $2.4 trillion in foreign currency reserves and its relatively small gold holdings have fueled speculation the country is continuing to buy, although officials have insisted that any increases have come from domestically produced gold and the international price is too high.

“It is, in fact, impossible for gold to become a major investment channel for China’s foreign exchange reserves. We have 1,000 tonnes now, and even if I double that holding, according to current prices, that would be about $30 billion,” Yi said. “It would just increase the level of gold (in China’s reserves) to about 2 percent from the current 1 percent.”

They’re damned if they do and damned if they don’t and the numbers involved are not likely to get any better before they get worse.

Absent a dip in the price of gold back down below $1,000 an ounce (at which time, they’ll probably snap up that 191 tonnes of IMF gold), they’ll probably just keep adding to their gold reserves quietly and, as they did last summer, announce long afterward that they have made substantial additions to their holdings.

As noted by Yi above, at current prices 1,000 tonnes of gold costs about $30 billion, however, not only is that $30 billion only about one percent of their foreign exchange reserves, the corresponding 1,000 tonnes of gold is the equivalent of almost half of annual mine production around the world, or nearly one-third of global supply for the entire year.

They simply can’t make large purchase on the open market without pushing prices significantly higher, but they clearly want to buy more and should buy more, a point that should be obvious to any sensible public official whose country goes on continuing to accept money backed by nothing more than faith from trading partners around the world.

While the above comments were really just stating the obvious, Yi went on to note the long-term performance of gold, offering the following:

“Gold prices in recent years have risen very nicely, but if we look at the price over the last 30 years, gold prices moved in great swings,” he said. “So as an investment, its yield is not very good from a 30-year point of view.”

This is quite an interesting comment indeed.

By now, ten-years into the commodities bull market, everyone knows that gold’s 30-year track record is unimpressive but, if you go back another 10 years it is very good - as good or better than just about any other asset class.

One could argue that he is simply restating what has passed as conventional wisdom amongst financial advisers in the West for decades - that gold provides no return and is a largely useless artifact of an early, outdated system - or, this could be one more in a series of gold-bashing comments by a government that desperately wants to exchange more of its dollars for gold, preferably at lower prices.

Not knowing anything about Yi Gang, it’s impossible to know what his motivation was, but the fact that China is run by engineers makes me think that it is more likely the latter explanation (talking the price down so they can buy more) rather than the former (the hopelessly naive view of most economists and politicians in the West who don’t realize that we’re on the back end of another experiment with fiat money that has gone horribly wrong and will end like all the others before it).

Read more…

I can virtually guarantee that what I’m about to suggest isn’t on anybody’s radar screen. But before I share my prediction, a little background analysis is in order.
There have been seven previous bull markets that were born in the depths of vicious bear markets similar to what we just went through. Each one of those bulls racked up impressive gains during the initial thrust out of the final low. Throwing out the `32 to `37 bull as an anomaly not likely to be repeated, the average gain for the first two legs of bulls with similar DNA as our own has been between 41% and 73%. After the second leg each one of these bulls underwent a mild corrective pullback of 8% to 14%. I’ve been looking for that pullback since December and we obviously got it from mid January into early February.

Next I’m going to put up a long term chart of the S&P from the `02 bottom to present so we can make some comparisons for what should and should not happen in a “normal” bull market…if there is such a thing. Both bulls were born on the back of massive liquidity injections by the Fed. So it’s not surprising they have followed a similar path…well at least up to now.

Generally we will see the most aggressive moves at the beginning and the end of a bull market. At the beginning smart money piles into perceived value. At this stage of the game retail traders are still too shell shocked from the bear to trust the rally.
Finally towards the end of the bull, retail investors will panic into the market on fears of getting left behind sending the market surging higher. This is of course when smart money is unloading their shares.

You can see that the `02 -`07 cyclical bull followed this script almost to a T. The sharpest rallies occurred from March `03 to early `04 and then again as the market surged out of the `06 bottom into the final top in October of `07.
The cyclical bull we are in right now is about to morph into a completely different animal than just about any other bull market in history. And most certainly this bull will not fit in the same category as the `02-`07 bull. I think we are about to bypass the second phase of a normal bull market and jump straight to phase three, the ending stage.

This is a bull spawned by the printing of literally trillions and trillions of dollars by central banks around the world. You can see by examination of the chart above that this bull has been much more aggressive than the last one, rallying over 70% in its first 10 months.
The recent move to new highs by the Russell, Mid Caps, and Nasdaq suggests that the third leg of the bull is now underway. As most intermediate term rallies last 20-25 weeks trough to trough and this rally is on week 4, we probably have at least 10 to 15 weeks left before we can expect a top.

Now keep in mind that this has transpired while the dollar has been rising. As a matter of fact, the dollar is the key element in what I’m about to suggest.
So next, let’s take a look the dollar.

I’ve marked the last two major 3 year cycle lows with a blue arrow. Now to understand where I’m going with this you need to understand the concept of left and right translated cycles.

A left translated cycle is a cycle that tops left of center. For instance, if the rally out of a 3 year cycle low were to top out in less than 18 months we would consider it left translated. Generally speaking the majority of cycles that top in a left translated manner move below the prior cycle low.
You can see in the chart (above) that the 3 year cycle that began in December of 04 did in fact top in less than 18 months. As expected it broke to new lows at the next 3 year cycle low in `08.

We are currently in the same position in this 3 year cycle as it has obviously topped in a left translated manner. As such, we should expect to see the dollar break to new lows by the next major 3 year cycle low due sometime in 2011.
Now if we zoom in a bit I’ll tie this together with how it relates to what I think is brewing in all asset markets.
There’s no doubt the rally in the dollar over the last three months has been violent (the most violent rallies occur in bear markets). However, as you can see from the chart below, so far the dollar has not been able to move above the peak of the last intermediate cycle.

We now have a failed intermediate cycle in the making. If the dollar fails to break the June `09 highs and continues to roll over it is in jeopardy of succumbing to the secular bear trend again.
Next I’m going to note that last week was the 14th week of the dollar rally. The intermediate cycle in the dollar rarely lasts more than 20-25 weeks so not only is the dollar getting deep into an intermediate cycle and in jeopardy of topping at any time but it’s also contending with the multi-decade resistance level at 80.
Not only that, but sentiment has now turned to extreme bullishness for the dollar and extreme bearishness on the Euro. That is a recipe for running out of buyers of dollars and a prescription for a violent short covering rally in the Euro.

Now remember, the stock market has been rallying despite the dollar. Oil is over $80 despite a strong dollar. Copper is only about 15% from all time highs despite a strong dollar. Gold, the strongest commodity of all, is holding well above the prior bull market high of $1025 in defiance of a strong dollar.
All asset classes are now wound up as tight as a drum. If, or should I say when, the dollar begins the trip down into the next intermediate cycle low all assets are set to explode higher.

As hard as it is to believe I think there’s a very good possibility that the third leg of this cyclical bull could match the first leg and tack on 200-300 points in the next few months. I think virtually everyone underestimates the effect that the multi-trillions of dollars the Fed has pumped into the system is going to have on all markets.

Unfortunately that’s probably the single worst thing that could happen for two reasons.
First, I’m afraid that not only will the stock market surge higher but so will the commodity markets in an inflationary explosion. It was $147 oil and $4.00+ gasoline that eventually broke the back of the global economy in `08 when it was already reeling from a bursting credit and real estate bubble.
Second, I’m afraid the average investor is going to fall for the hype that the Fed has “fixed” all of our problems. If the S&P is trading north of 1400 it’s going to appear that the coast is clear.
Nothing could be further from the truth, so when the market tops and rolls over into the next bear phase virtually no one will recognize what’s happening and everyone will again get sucked down into the depths of the bear.
Only this bear will be much worse than the last one.
This bear won’t be caused by problems in the credit markets. No, this bear is going to be driven by structural problems in the currency markets and soaring inflation. Unfortunately we aren’t going to fix a currency crisis by printing money. Money printing is going to be the cause of the crisis in the first place.
The only asset class that is going to offer any protection in this environment is commodities. And the one sector that will thrive in a currency crisis is the precious metals.
Not only will gold and silver outperform in the pending inflationary surge, but they will protect investors during the inevitable crisis that the Fed’s insane monetary policy is going to unleash next year.

Toby Connor
Gold Scents

A financial blog with emphasis on the gold bull market.

Courtesy of JESSE’S CAFÉ AMÉRICAIN

If another author had said this I might not pay it so much attention. Lately some have been given over to a tabloid approach to overstatement and sensational headlines to attract attention. This is a strong temptation as the blogosphere expands, similar to the development and evolution of newspapers as a popular medium in Victorian London for example.

But as you know, I have a great deal of respect and admiration for Janet Tavakoli and her knowledge in this area. If she is seeing a new demand for Credit Default Swaps on the US payable in gold I would credit it since this is her area of expertise and industry connections, but would ask for some particulars, which I have done. This would match up with some other data I have seen from other sources, and desire to continue to put the puzzle pieces together without traveling false trails.

It does make sense, of course, to price a US default in something other than dollars. The question that comes to mind though, is not the suggested method of payment, but the nature and quality of the counter-party who could stand reliably behind such a claim without it being a fraudulent contract by its very nature.

If the US should default, what major financial institutions will be in a position to have written and then uphold the terms of these CDS, payable in anything at all? Surely only a sovereign bank like the US Fed, the Treasury, or the IMF, or some other central bank could be so capable. But what possible motivation could a non-profit-seeking official institution have in writing CDS on a US sovereign default? Perhaps more likely a private bank or GSE, with the buyers thinking it has some sovereign guarantees that would be upheld in extremis.

Truly, remember AIG? It was insolvent when payment was demanded, and acted improperly in paying collateral to Goldman ahead of its inevitable insolvency, and then receiving the support of the Treasury to pay obligations in full, above all others. It ought to have been placed in a receivership and its assets allocated with the previously disposed collateral clawed back. This kind of private arrangement between parties involving the sovereign wealth of nations may be indicative of things to come. The recent example of Iceland comes to mind.

I agree with her that credit default swaps should be curtailed. Indeed, I would tend to severely limit the trading of most if not all naked derivatives and stock sales by requiring capital requirements near 100 percent and secured by good collateral.

But I think the gold aspect of this may be overdone. The US has more gold than any other individual country, and still values it cheaply at a sub-fifty dollar historical price on its books. If a counterparty fails, it will fail, and a settlement will be arranged. The issue of course, is if some encumbrance of the gold in the US has already been accomplished through unfortunate leases to bullion banks who will not be able to return it.

Indeed this horse may already be ‘out of the barn’ as some evidence indicates that a few banks like JPM are already short more gold and silver than they can possibly deliver under the conditions of the contract without selective default to paper if demanded by their counter-parties.

If there is any sort of government guarantee, it will be payable in dollars, unless some private arrangement is made for the benefit of the recipient. For example, if a bullion bank is caught short of gold, and requires it to avoid a default and ’systemic risk.’ The rationale will be to pay the debt in full so as to avoid a collapse, even though there was no guarantee involved. If we did not have such a recent historical example of AIG I would say that such an abuse of the Treasury for the benefit of a few for placing the system at risk was not possible. And yet here we are.

There is another possibility, based only on speculation as far as I can determine, that a major purchaser of US debt is now demanding it be backstopped against ratings downgrades in gold payable CDS. Until now I have given this little credibility. How can such a thing be arranged in secrecy and maintained as such? How could a private bank, even a money center, write such a swap in good faith?

You see, to my knowledge no private corporation has the right to engage in contracts that encumber the US gold reserves, not the Fed nor the Banks, and not even the President or Treasury alone. Only the Congress, with the knowledge of the people, may allocate and distribute such a sovereign asset. If swaps and contracts and leases are being made on the US gold reserves, the people then are the subjects of a monumental theft and fraud. And if the US is writing or guaranteeing CDS in gold, then most likely it is doing so as a means of rescuing those who have already gone hopelessly short the gold market, and need to arrange a ‘back-door’ bailout.

So the rule at hand would be the epigram of the famous trader, Daniel Drew:

“He who sells what isn’t his’n
Must buy it back, or go to prison.”

Unless they have good friends at the Fed or the Treasury, or in positions of power in the exchanges perhaps. But does anyone believe that the American people would stand again for another bailout of the very same banks that it has bailed out previously? I would hope that there would not be a Reykjavík on the Potomac in my lifetime.

In short, if the existence of CDS on the default or downgrade of US sovereign debt payable in gold bullion be true, who would be in a position to stand behind these Credit Default Swaps with any reliability, and what buyer would be in a position to make such a demand of a credible source?

The US most likely will resist the banning of credit derivatives because it is in the hands of the Banks, and such derivatives are the source of enormous profits. Further, such a ban might cause the existing bulk of derivatives to fall in value, destabilizing the financial system. Nothing could be more obvious, at least for now. So this situation will continue most likely until it falters, and the entire system is once again placed at risk. But these markets are so opaque, and the intentions of government in them even less apparent, that one can only watch and wonder.

At some point the Banks may seek to make the people yet another offer they cannot refuse. And America will choose. But first I think, the UK will reach this point.

Huffington Post
Washington Must Ban U.S. Credit Derivatives as Traders Demand Gold
By Janet Tavakoli
March 8, 2010

…Remember AIG? When prices moved against AIG on its credit default swap contracts, AIG owed cash (collateral) to its trading partners. AIG paid billions of dollars and owed billions more when U.S. taxpayers bailed it out in September 2008.

U.S. credit default swaps currently trade in euros. After all, if the U.S. defaults, who will want payment in devalued U.S. dollars? The euro recently weakened relative to the dollar, and market participants are calling for contracts that require payment in gold. If they get their way, speculators on the winning side of a price move will demand collateral paid in gold.

The market can create an unlimited number of these contracts very rapidly. The U.S. wouldn’t have to ever default to trigger a major disruption in the gold market. Spreads (or prices) on the credit default swaps could simply move based on “news,” and demand for gold would soar.

If this speculation drives up the price of gold, and the available gold supply becomes limited, are you willing to post your children as collateral? I am pushing the point so that we put a stop to this before it is too late.”

Joe Weisenthal of Money Game

By Jeff Clark, Casey’s Gold & Resource Report

In a recent conversation with a fellow gold analyst, he was emphatic that the price one pays for physical gold should be ignored. “What’s far more important,” he insisted, “is how many ounces I own in relation to the total value of my assets.”

Building a core position in gold bullion is a smart goal, to be sure, and a strategy Casey Research has been advising for years. However, ignoring the price you pay for gold could be seen as foolhardy; sure, it’s insurance, but isn’t price part of the consideration when you shop for insurance?

So, who’s right?

The World Gold Council just released their 2009 annual report on gold trends. From the densely populated pages of interesting data, there’s one compelling tidbit I gleaned that may shed some light on the buying behavior of gold investors.

Overall investment in gold was 7% higher in 2009 than 2008. This is significant when you consider that demand in the fourth quarter of 2008 – during one of the worst financial meltdowns in history – was so great that shortages of physical metal abounded everywhere. And yet investors bought more gold in 2009 when investor fear about global financial uncertainty was subdued.

Further, 2009 total funds invested in all forms of gold exceeded 2008 by 20%, and the average price was 11.6% higher. In other words, investors were buying gold even though the price wasn’t necessarily “low.” To be sure, that’s a broad statement. But the fact remains that year-on-year, more gold was purchased at higher prices when the markets were less scary, than when the price was lower and Hank Paulson was on CNBC every 15 minutes pontificating on how to save America’s financial system.

This isn’t to suggest one shouldn’t pay attention to price. And the data doesn’t identify how many of those who purchased gold last year were first-time buyers, as certainly there were newcomers to the sector that contributed to higher demand. But it begs the question, who would continue to buy gold when the price is higher?

Whoever doesn’t own enough, that’s who. The gold I bought last month was certainly higher priced than what I paid in 2008. But I’m trying to position my assets for protection from eventual dollar debasement and rising inflation. So perhaps focusing more on acquiring sufficient ounces to withstand a storm rather than stubbornly buying none, waiting for “cheaper” prices, however you define that, is a better mindset. Not owning enough gold is equivalent to holding a million-dollar mortgage and having a $10,000 life insurance policy. It won’t help much when you really need it.

Of course we should pay attention to price. But the trick is not letting that distract you from buying what you need. You’re not buying gold bullion as a speculation (although we expect to make a bundle on our holdings), but as a sound form of cash in an environment where government has no respect for a balance sheet and sees inflation as the only way out of its black hole of debt. During periods of inflation, the government does fine; it’s the citizens that suffer from the lost purchasing power of their savings. It’s clear our currency is being debased. What’s your plan of defense?

For those diligently accumulating gold, how do you know when you have enough? Check your anxiety quotient. If Ben continues printing money or Obama promises more goodies than he has the money to pay for, and you remain calm, then you likely have adequate gold. These are the investors who can afford to be stubborn about price as they build their holdings. In my opinion, this is where we all want to be.

What form of gold should you buy? It depends on why you’re buying it. If you understand gold’s role in history, owning a physical form will come naturally to you. If you see the threat of inflation on the horizon, or you worry about what is being done to the dollar, you’ll own both coins and an ETF. If you’re worried about possible exchange controls someday, you’ll consider a Perth Mint Certificate. And the more gloomy your outlook about the global economy, the greater the percentage of all forms of gold you’ll buy.

That said, we maintain a bias toward physical ownership. GLD and other gold ETFs are fine and do offer protection. But the custodian isn’t going to airmail gold to you when you cash in your shares; having the “hard money” in your hand gives you the freedom an ETF cannot. In our book, owning physical gold, in the form of one-ounce coins, is where your first dollar should go.

I remember when my wife and I decided it was time to get life insurance. We just had our kids, and it was time to play grown-up. Given what 5,000 years of history has taught us about the value of gold, and given what’s happening at this moment in history to our currency, are you playing grown-up with your investments?

Is the current price of gold a good time to buy? Check out our four “clues” in the new issue of Casey’s Gold & Resource Report, risk-free here…

When the tech bubble burst in 2000, Greenspan tried to “fix” the problem by cutting rates and printing money. Fix the problem he did … well sort of! What Greenspan did was create two new bubbles in the credit and real estate markets to replace the tech bubble that had burst. Millions of jobs were created in these two industries. Much needed jobs to replace the ones lost as the tech boom came to an end.
I think we will all admit it was one heck of a party, but like all good parties there’s a price to pay. The Hangover!
The truth is the economic boom of the mid 2000’s was built on a lie. Instead of a foundation of productivity the last bull market was founded on an ocean of liquidity. That ocean of liquidity fostered risky investments and massive speculation. It was only a matter of time before the house of cards came crashing down. And crash it did. The world suffered through the second worst bear market in history almost taking down the global financial system in the process.
Apparently the powers that be have learned nothing from this near death experience because they are back at it again, printing, printing, printing in another vain effort to create prosperity with the printing press. I dare say the average 6th grader can understand that the act of putting ink on paper does not create wealth. It’s too bad our elected officials can’t understand this.
So here we are, we’ve survived the credit crisis and all appears to be well in the world. I’m here to say that all is not well. We now have a cancer growing under the surface of the economy many times bigger than the one Greenspan created. This cancer isn’t going to show up in real estate or credit markets, that bubble has already burst, never to be inflated again. No, this time I expect the cancer is going to flare up as inflation in the commodity markets.
Witness the strange resilience of oil at $80 despite a very strong dollar the past 3 months. Gold has been holding over $1100. Sugar is at multi-year highs. Copper is less than 15% from all-time highs.
The commodity markets are now poised to unleash a massive inflationary storm. I think there’s a very good chance that storm will strike this spring.

The dollar is now deep into a counter trend rally and in jeopardy of putting in an intermediate term top at any time. When it does the flood gates could break and we will have to deal with the unintended consequences of Bernanke’s actions.
Unfortunately, there are no painless cures for spiking inflation, especially in an ongoing recession. The cure is to let the market clean out the excesses. The cure is to raise rates and drain liquidity, to induce a recession. That course leads to 20%+ unemployment and a deflationary depression. Does anyone really believe our elected officials will choose the that course of action?
On the other hand, doing nothing leads to higher and higher inflation and running the presses faster and faster to stay ahead of rising prices, eventually culminating in a hyperinflationary event if government debt is allowed to spiral beyond the point of no return.
Unfortunately, I think it’s probably too late to stop the storm. Let’s face it, you don’t start turning the Titanic when it’s 100 yards from the iceberg. By then it’s too late and the ship is doomed.
The same principle applies with our economy. If the Fed waits until inflation starts to pop up it is too late. The damage is already done and there’s no going back. If the inflation Genie gets out of the bottle there’s no easy way to get him back in. I would argue that the commodity markets are already trying to tell us there’s trouble coming.
History has been crystal clear - every time oil spikes 100% or more within a year’s time, it has pushed the our economy into a recession. We already have a spike from $32 to over $80 and this is against a backdrop of high unemployment. The last thing we need in an economic environment that’s already under stress is surging energy prices again.
The question investors have to ask themselves is whether it’s more likely the powers that be will do the right thing, raise rates, drain liquidity and force the world into a deeper recession before inflation gets out of control or will they continue to kick the can down the road making the problem bigger and bigger?
Knowing human nature, my bet is that our elected officials will do whatever they have to do to avoid short term pain - even if it means compromising our future.
The storm is brewing. It’s time to batten down the hatches.
That means gold and silver!

John Townsend

The Smart Money Tracker

Since March of 2001, the stock market has been and continues to be in a secular bear market. Beginning in March 2009, stocks have been in a cyclical bull market. This means our current stock market is in a relatively short term bull rally within a much longer term secular bear market decline.
The current rally will serve to separate the second phase of the secular bear from the third and potentially most damaging leg down in the ongoing bear market.

Now that doesn’t mean the rally since March 2009 is finished. I doubt it is.
What it does mean is that one can’t make a timing mistake and expect to be rescued by the secular trend.

At some point this bull is going to expire and we are going to head back down and break the SP500 lows at 666, either nominally or on an inflation-adjusted basis. I suspect it will be both.

The reason it’s going to do that is simply because we don’t have a fundamental driver to power a long term bull market in place. For instance, from 1982 to 2000, the stock market was in a secular bull market. The fundamental driver for that bull was the personal computer and the internet. Those were world changing new technologies. Millions and millions of jobs were created during this period.

There were certainly nasty corrections during the secular bull, for which 1987 is an example. But the secular trend was up. So as long as one was willing to hold onto positions, any entry no matter how poorly timed, would eventually end up being a winning trade. (It’s the strategy Buffet used to become a billionaire, by the way).

Simply said, only traders can lose money in a secular bull market. The only way to lose money in this type of market is to buy high and sell low. And, a buy and hold strategy is the only sure fire money maker in a long term bull.

The problem with the stock market since 2000 is that there is no longer a fundamental driver to produce a secular bull. We haven’t discovered the next “big thing” yet. The new technology that will change the world again, drive massive economic growth and create the millions and millions of new jobs the world needs so desperately.

Now all we are getting are phony cyclical bull markets built on money printing. Those are not the kind of fundamentals that can support a sustainable long term bull market.

So what happens? Well, eventually the false fundamentals fail and the market collapses.

The Fed is now at it again trying to build another bull market on a fundamental base of nothing more than trillions of dollars of liquidity (printing money out of thin air). It didn’t succeed when Greenspan tried it earlier in the last decade, and it’s not going to succeed for Bernanke in this decade.

Until we get the next fundamental driver (i.e. personal computers & internet 1982-2000, electronics 1945-66, automobile and mass production 1920-29, trains in the late 1800’s) we are not going to have another secular bull market for stocks.

There is a sector however that does flourish on a fundamental base of money printing. That sector is the commodity sector, in general, and the precious metals, specifically.

Gold is in a secular long term bull market. This means several things. First off, we can expect this bull to continue until the fundamental driver is taken away. That means the money printing presses have to be turned off. Second, any entry will ultimately turn out to be a winning position as long as one is willing to hold on.
Investors would do well to remember that the bull will eventually correct any timing mistakes.

That being said it is possible to maximize gains and minimize draw downs if one can recognize where gold is in its wave cycle at present. As all of the gains occur during a C-wave advance one wants to be fully invested during this period.

Probably more importantly one needs to recognize when the C-wave is coming to an end and exit positions before gold enters the inevitable D-wave correction.

At the moment gold appears to be entering a second leg up in the ongoing C-wave. The trick will be to sell at the top when things look the brightest and then re-invest at the bottom of the D-wave… when things look the bleakest.
I will be monitoring the advance closely over the next couple of months so as to get subscribers out prior to the onset of the next D-wave.

Gary Savage authors the Smart Money Tracker and daily financial newsletter tracking the stock & commodity markets with special emphasis on the precious metals market.

The Mess That Greenspan Made

It wasn’t much, but yesterday’s addition of 4.6 tonnes of gold to the “tonnes in the trust” at the world’s most popular gold ETF - SPDR Gold Shares (NYSE:GLD) - was the largest one-day addition since the middle of December.
As compared to last year at this time, there’s not much happening with the GLD inventory these days. Recall that during the first few months of 2009 they were adding gold bars like never before - a whopping 350 tonnes during just the first three months of the year.

The inventory is still about 20 tonnes below the all-time high reached last June, however, given what’s happened with the gold price in recent days, that could soon change.

The question now remains whether gold is stuck in a D-wave decline or whether the action since December has just been a very tricky midpoint consolidation before the C-wave finishes its run.

I will say the recent strength despite a strong dollar is very encouraging.

There are four important requirements that have to be met before we can say with a high degree of confidence that the C-wave is still in play.

First, the single most important is the dollar. We simply must see the intermediate dollar cycle top. No C-wave has been able to fight a rising dollar. What I’ll be looking for is a weekly swing high on the dollar chart as a sign the intermediate cycle has topped.
I will note the dollar is getting late enough in the cycle that it could put in a top at any time. Not to mention we are starting to see a large momentum divergence forming.

Second, the next requirement is for gold to put in a right translated daily cycle. If this remains a D-wave decline then all daily cycles should be left translated. If gold can eclipse $1131 this week then we will have a right translated cycle and the second requirement will have been successfully met. With today’s close above $1133, this key requirement is satisfied.

Third, the next hurdle for gold is the $1161 level which has to be surpassed. Gold has to break the pattern of lower highs and lower lows. It will do that if gold can top $1161.
The $1161 price level will also eliminate the December trough as the intermediate cycle low. Instead, the most recent intermediate cycle low would become February.
This is very important as it would mean gold is on week 4 of the intermediate cycle (which typically runs about 20 weeks) instead of week 10. In effect, this puts 6 more weeks on the shot-clock for the second leg of the C-wave to progress.

Fourth and finally, we need the miners to start participating. If the HUI can cut through the 420 resistance level that will be a big step in the right direction. With the HUI close today above 420, this key requirement as also been met.
If miners can break out to new highs later this month all resistance in the gold market will be out of the way and the path will be clear for the second leg of the C-wave to rack up another monster move.

Gary Savage, The Smart Money Tracker

Gary Savage is currently retired and lives in Las Vegas. He is the author of the Smart Money Tracker, a financial blog with special emphasis on the gold secular bull market.