Chart Courtesy of Stock Tiger

Gold Report Sign Up Below

Now, here are few data series that I’ve never seen on the same chart before – U.S. debt, the debt ceiling (just for fun, apparently), and the price of gold. This is from a presentation yesterday by Nick Barisheff, President & CEO of Bullion Management Group, at the 2012 Empire Club of Canada Investment Outlook Luncheon.

Perhaps today, gold is acting more like a hedge against debt than inflation…

Nick’s presentation “Why Rising Debt Will Lead to $10,000 Gold” can be viewed at YouTube here and is available for download here.

It Ain’t Over ‘Til It’s Over

If there is one lesson to be learned from the Japanese experience with deleveraging over the past few decades it’s that deleveraging cycles have there own special rhythm of reflationary and deflationary interludes.  Pretty simple thinking as balance sheet deleveraging by definition cannot be a short term process given the prior decades required to build up the leverage accumulated in any economic/financial system.  If deleveraging were a short term process, it would play out as a massive short term depression.  And clearly any central bank would act to disallow such an outcome, exactly has been the case not only in Japan over the last few decades, but now also in the US and the Eurozone.  We just need to remember that this is a dance.  There is an ebb and flow to the greater (generational) deleveraging cycle.  Just as leveraging up was not a linear process, neither will the process of deleveraging be linear.  Why bring this larger picture cycle rhythm up right now?  The recent price volatility we’ve seen in assets that can be characterized as offering purchasing power protection within the context of a global central banking community debasing currencies as their preferred method of reflation for now, specifically recent the price volatility of gold.

Time to step back and have a look at the “rhythm” of gold over the last decade to hopefully provide perspective on not only the price of gold itself, but really on the character of the deleveraging cycle.  We’ve experienced quite the nasty price correction in gold as of late.  Is it really that Euro banks have been either liquidating or accelerating gold leasing in order to raise precious capital?  Sure could be.  We’ve also had a lot of recent converts to precious metals given the prior 25%+ two month run in prices we saw earlier this year.  As is usually the case, the market gods need to teach these folks a lesson and separate the traders from the real investors.  That’s more than well underway.

We’ve always maintained that THE most important activity we face each and every day, especially in the tech supercharged multi-media world of the moment, is separating white noise from meaningful information.  If we had to guess, 90% of daily Wall Street “commentary and analysis” is white noise.  It’s hot air.  And maybe that number should be much closer to 100%.   So, one of the noisy drumbeats that has resurfaced as of late is that “it’s over for gold now that it has pierced its technically important 200 day moving average to the downside”.  Fact, gold pierced its 200 day moving average to the downside in seven of the last nine years (inclusive of 2011).  This is far from some rare occurrence.  Far from.  In fact the only two years of the last nine not to witness this technical break were 2009 and 2010 – the two years in which we witnessed the US Fed print the largest amount of money on record.

For now, the thinking that gold’s break of the 200 day moving average is the sure sign of bull market death is white noise.

Although this is just our own personal interpretation, at least over the last three years gold has not only reacted to central bank monetary largesse, but it has done a great job of anticipation of the very same.  The following chart documents gold since 2009.  We’ve marked the periods where the Fed started up the quantitative easing (QE) process in 2009 and 2010.  Notice the rallies in gold prior to each QE initiation?  In each case gold anticipated the event a number of months in advance and actually corrected a bit when the process finally started.  The short term “buy the rumor and sell the news” type of trading behavior?  You bet.  Question, was the large run in gold this year over the June through August time frame strong anticipation of a European Central Bank (ECB) money print that simply has not arrived quite yet?  Moreover, was the run back up in price into late October from the spike September lows again anticipation that the ECB would commit to QE in the Euro “summit” and subsequent late October “fix it” proclamation?  With investors ultimately disappointed in no immediate money print/currency debasement, we now find ourselves in corrective mode once again.  Sound reasonable in terms of short term price rhythm?  Hopefully keeping it simple makes sense.

If we look at the intraday highs and lows in gold since August of this year through last Friday, we find that the metal has experienced a so far top to bottom price correction of just over $360.  This is the largest nominal dollar per ounce correction since the gold bull began in 2001!!  In nominal dollars per ounce it even eclipses the 2008-2009 price correction, which was one nasty price decline.  So naturally it feels bad and can easily trigger quite the emotional response.  But I’d suggest to you it should be expected as gold has moved to ever higher nominal prices in its bull market journey so far.  And “journey” we would highlight as a key character point.

In top to bottom percentage movement terms, the correction in gold we’ve seen so far just happens to be almost smack dab in the middle of top to interim bottom percentage price corrections we’ve seen in gold since the decade of the 2000’s began, as is documented in the next chart.  And this is the definitive end to the gold bull market?  Noise, for now.

If we were to witness gold drop in a percentage magnitude similar to what we witnessed during the 2008-09 correction, we’d be looking at something near a $1,350 low.  If that were to occur, the short term “bull market is over” noise would simply be deafening.

We know we’re talking to ourselves primarily, but we need to remain open to multiple outcomes at any point time.  An ongoing truism, at the very least simply to retain our sanity and allow non-emotional forward decision making.  As we always tell clients, we need to hope for the best, but plan for the worst.  After all, it’s all about risk management in this wonderful world.  So from this contextual standpoint, a few realities that might not seem so pleasant, but need to be part of ongoing monitoring and decision making.  We think it’s important to have a look at data point anecdotes we’ve seen in prior gold bull cycle corrections.  Specifically, let’s have a look at the fingerprints of Bollinger Band experience in prior gold price corrections.  To the point, as is seen in the chart below, when gold has met up with the lower portion of the weekly Bollinger Bands over the last decade, the first “touch” of the lower band was not the last. Gold has tended to “ride” the lower band for a while before again resuming flight after a needed breather.  Over the last few weeks we’ve now experienced the first “touch”. Although there are zero guarantees here, the history of the gold bull tells us to anticipate one or a few more testing “touches” of the lower band.  And that may certainly mean lower prices will be probed as gold tests for an interim bottom in its ongoing price journey.  It feels weird right now because we have not had this experience in two and one half years – the longest stretch yet in which gold has avoided an encounter with the lower weekly Bollinger band.

Again, although this is strictly our own personal interpretation, just how low could the price of gold descend in an absolutely worst case scenario?  What lies below may seem shocking, but hopefully will become a bit clearer in looking at the chart after this.  Below are what we consider to be very important total bull market price levels.  Shocked yet?  If gold ever corrected to the lower level near 1050, we’d personally be stunned if there were even one gold bull left on planet Earth!  But it’s all within the realm of potential outlier possibility.  Do we actually think this will happen?  Personally, no, but our personal thinking is not what’s important.  It’s planning for a range of market outcomes and developing a plan around each that’s so important to the total investment process. This is clearly an extreme potential outcome.

But what forces us to at least consider extremes is what you see below that are two critical longer term technical trend lines for the current gold bull market.  Again, the gold community would probably be catatonic if we ever kissed these lines; we just personally hope to avoid the catatonic state if at all possible.

One last technical anecdote to keep an eye upon as we consider the important asset class that are the precious metals. The bottom clip of the chart shows us yet another important technical indicator that is the monthly stochastics for gold.  In very simple terms, gold has been in bull market flight when the monthly stochastics have remained above 50, as it is now, and vice versa.  Even the meaningful 2008-09 correction saw a very short lived dip below this line as being the only violation so far n the secular bull cycle.  This very simple technical indicator would have kept one “on the right side” of gold for two decades now.

Finally, as we step back and look at the fundamental landscape, it’s very hard to imagine a world devoid of money printing ahead.  We see currency debasement in the current cycle as being driven by two very important phenomena.  Of course debasement is being used by central banks as a rhythmic offset to the really macro global deleveraging cycle playing out right before our eyes each and every day.  Secondly, you’ll remember that in the 1930’s deleveraging cycle we witnessed countries across planet Earth erect trade barriers as a means of combating the deflationary effects of the global deleveraging cycle of that period.  Our personal viewpoint is that the currency debasement of today is taking the place of the trade barriers of yesterday given the politically incorrect nature of trade barriers within the context of a current globalized economy where cooperation among not only governments, but importantly central banks, has become crucial.  And so the global debasement activities are over for this cycle?  Only if the deleveraging cycle is complete, which we all know it is not.  Europe will have absolutely no choice except to overtly print money ahead.  The only question is whether this occurs before or after a hard default.  In stealth form the printing has already started.  No printing means the European deleveraging cycle happens very quickly, but of course it would be accompanied by a deflationary fireball of historic proportion that would impact the entirety of the global economy quite negatively. And that is how likely to happen?  The end of the global deleveraging cycle is so far from complete that in no way can it be currently “seen”, and yet the end of the gold bull can?  We beg to differ.  Bull markets in any asset class “breathe” as they both inhale and exhale.  It’s all about rhythm.  For now, gold is simply exhaling.  Just remember, it ain’t over ‘til it’s over.

From the recent price action shown on the GDX chart I am expecting to see prices trade sideways or lower in the coming days. A sideways move would actually be bullish and would signal a possible breakout to upside. So that is what I am hoping will unfold in the coming days/weeks.

SUBSCRIBE AND BECOME A TECHNICAL TRADER TODAY–This is a COMPLETE, one-of-a-kind service!

The gold bull is now on the verge of launching the most spectacular up leg of this 10 year bull market. This spring we should see the final parabolic rally of the massive C-wave advance that began in April `09 with a test of the 1980 high at $860.

First off let me explain gold’s 4 wave pattern (and no it has nothing to do with Elliot wave).

Gold moves in an ABCD wave pattern, driven not only by the fundamentals of the gold market (which I will get into in a minute) but also by the emotions of gold investors and the thin nature of the precious metals market.

The A-wave is an advancing wave that begins and is driven by the extremely oversold conditions created during a D-wave decline (more on that in a second). A-waves can often test the all time highs but rarely move above them. Usually they will retrace a good chunk of a D-wave decline.

The B-wave is a corrective wave spawned by the extreme overbought conditions reached at an A-wave top.

The C-wave is where the monster gains are made. They can last up to a year or more. The current C-wave is now almost two years old. They invariably end in a massive parabolic surge as investors and traders chase a huge momentum driven rally.

Of course as we all know parabolic rallies are not sustainable. So the final C-wave rally ends up toppling over into a severe D-wave correction as the parabola collapses. This is about the time we hear the conspiracy theorists start crying manipulation. In reality all that has happened is that smart money is taking profits into a move that they know can’t be sustained.

FREE Weekly Gold Updates HERE

Then the entire process begins again.

Next, let me show you the fundamental driver of the secular gold bull. It’s probably no surprise to most of you that the Fed’s ongoing debasement of the dollar is one of the main drivers of this bull. But let me take this one step further and show you how the dollar’s three year cycle drives these major C-wave advances and how the move down into the dollar’s three year cycle low always drives a final parabolic C-wave rally.

Let’s begin with a long term chart of the dollar. I’ve marked the last 7 three year cycle lows with blue arrows. The average duration from trough to trough is about 3 years and 3 months. As you can see the dollar is now moving into the timing band for that major spike down in the next 2 to 3 months.

The extreme left translated nature (topped in less than 18 months) of the current cycle gives high odds that the final low when it arrives will move below the last three year cycle low. That means that sometime between now and the end of May we should see the dollar fall below the March `08 low of 70.70.

That crash down into the final three year cycle low will drive the final parabolic move up in gold’s ongoing C-wave advance. Every major leg down in the dollar has driven a major leg up in gold since the bull began. I really doubt this time will be any different.

I will be watching the dollar over the next couple of months for signs that the three year cycle low has been made. Because once the dollar bottoms and begins the explosive rally that always follows a major three year cycle low it will initiate the severe D-wave correction in the gold market. Gold investors will want to exit at the top of the C-wave if at all possible and avoid getting caught in the D-wave decline.

There is a developing pattern on the gold chart that once it reaches its target will be a strong warning for traders and investors to exit so they don’t get caught in the D-wave profit taking event as the parabola collapses.

This T1 pattern is a four part pattern with the first and second legs up being almost equal in magnitude, separated by a midpoint consolidation that allows the 200 day moving average to “catch up”. The current T1 has a target of roughly $1650ish once gold breaks out of the consolidation zone.

The fourth part of the pattern is the D-wave correction which should retrace to test the consolidation zone between $1300 and $1425. At that point the next A-wave will begin and we’ll repeat the whole process all over again.

Let me be clear though. I have no desire to buy gold. I doubt I will ever buy another ounce of gold again. The real money will be made in silver during this final C-wave advance and in the miners (I prefer silver miners).

During the last major moves higher in the gold market, miners, which are leveraged to the price of gold, stretched 35% to 45% above the 200 day moving average. At the latest peak the HUI was only 25% above the mean – a strong clue that this was not the final C-wave top.

I expect we will see the HUI stretch 40 to 60% above the 200 DMA at the final top later this spring. But like I said, I really have no desire to buy gold or the major gold miners. The real money is going to be made in silver and silver miners.

Silver has been exhibiting exceptional strength compared to gold for 7 months now. The consolidation on the silver chart is much larger than on the gold or gold miner charts. I expect that massive consolidation to drive silver up to test the old 1980 high of $50 by the time gold puts in its final C-wave top.

The time to get on board is before gold breaks out of the consolidation. Once it does the parabolic move should be underway and your chances of a significant pullback to enter the market will decrease significantly.

I’ve been helping investors time the gold and silver bull for several years now. If you are the kind of person that needs a coach to keep you focused on the big picture, someone to cut through the meaningless noise of all the myriad top callers and bubble proponents, someone to show you how these long and intermediate term cycles operate so you can actually make money from the gold bull, I have an invaluable offer for you.

FREE Weekly Gold Updates HERE

For those of you that need a coach and want to learn how the gold bull works, I’m going to make available, this week, a special 15 month subscription. For the regular price of one year I will add three free months to your subscription which includes the daily and weekend reports. To take advantage of this offer, click here.

Choose a username and password and enter goldscents15 in the promotional code box, then click continue. You will be taken to a page with the 15 month offer.

Now is the time to act before the bull comes roaring out of the gates and the golden fireworks begin.

6 months of detailed trading guidance, pre-market videos, low risk alerts, and trading education for less than 50 cents a day!

Dave Banister-  www.MarketTrendForecast.com

My more recent forecasts for Gold were intermediately bearish from the $1390’s area as we saw a clear triple top breakdown from the 1425-1430 ranges about 8 weeks ago. However, the drop to $1310 fulfills a potential Fibonacci pivot low according to my Elliott Wave views on Gold, and investors can begin building long positions with the following views in mind if I’m right.

The rally up from the February 2010 $1,044 lows has been a large “Wave 3” structure which is not yet complete. We have completed 3 of the required 5 waves for this structure, and the current correction is a 4th wave. This pattern looks like what I call or Elliott termed a “3-3-5” pattern. This means you see 3 waves down, 3 waves up, and then 5 waves down to complete the correction. Note below the chart I sent my subscribers several days ago forecasting a possible pivot at $1310:

Now, as you can see above we did end up dropping back down from $1,345 an ounce to $1,310 last week and pivoted higher. This confirms a possible 4th wave bottom after a 7-8 week correction period. This type of movement works off the overbought sentiment levels of traders. In addition, we had the exchanges increasing position limits in the New Year and caused some additional liquidation selling.
The long term views now are for $1287 to hold as a worst case bottom in this 4th wave, and the 5th wave to begin if it has not already to over $1,500 per ounce at the next interim highs. I expect this could take quite a few months before we can even consider attacking the $1430 areas, but in time we should climb back above that wall. See my updated long term Elliott Wave based chart below. The general advise for traders is to take a long position with a stop at $1285, but add to your position on any tests of $1310 and down to $1287.

Gold is in a 13 Fibonacci year bull market. This is much like the Tech Stock bull from 1986-1999 in fact, and this would be similar to 1997 in the Tech Bull, still a lot of room on the upside to come for both Gold and Gold Stocks yet. The Fibonacci 8 year period ended around $905 last August, which is when I forecasted a huge 5 year bull run in gold and gold stocks to commence. Don’t fall off the wagon on the shakeouts.

If you would like to stay ahead of the crowds and the curves on the SP 500 and Gold, join my free list and/or subscribe today at www.MarketTrendForecast.com

Gold has been consolidating other than a spike to an intermediate wave 3 top of $1424, for about 7 weeks or so now. It’s typical to see Fibonacci periods of time as part of consolidations whether it be an individual stock or a precious metal in this case. Gold was overbought at the $1425 pivot highs a few weeks ago, and that terminated what I label a “wave 3″ pattern. This led us into a 4th wave corrective pattern which we remain in now. My worst case pivot low is expected at $1,321 and so far we have seen $1,331 an ounce and then an ensuing bounce to $1370 ranges.

In the intermediate term then, I’m looking for further consolidation likely for another week or so followed by a breakout over $1425 leading to my objectives of $1480-$1525 to complete the entire rally from the $1040 lows in February of this year. Many are starting to get bearish on Gold and Silver up here, and to me that is bullish and indicative of “4th wave mentality”. In a 4th wave, there is growing bearish sentiment, but not so much as to topple the bull structure.

To wit, last week in my ATP service I recommended a brand new Core Position in a Gold,Silver stock and it rallied as much as 40% intra-week at it’s highs. We are in a super bull market for Gold stocks as I outlined in August of 2009, and we have another four years left to go. I’m seeing alot of amazing chart patterns in the Junior space that are in relentless climbs. Owning the the explorers that are finding the Gold is how best to take advantage of the remaining four years. At ATP, we are exposed to Rare Earths, Silver, Gold, and Oil and Gas related plays in our Core Positions. Make sure you own hard assets and precious metals resources one way or another. My silver forecast in late August was basically predicated on the small investor swarming into the Silver market to buy up coins, look for that to continue and Silver to be over $30 in the not too distant future.

Below is my updated Gold forecast using a weekly chart, remember to Keep it Simple!

You can follow our weekly updates or consider subscribing by going to www.MarketTrendForecast.com

FREE Weekly Gold Updates HERE

Gold also looks to be topping and could actually be starting to form a Head & Shoulders reversal pattern.

Mid-Week Trend Trading Conclusion:

In short, understanding inter-market analysis is crucial for traders/investors to know. Not understanding how they affect one other can be very costly in the long run. Remember that volatility and volume rise together at the end of a trend. You can view the recent volatility index (VIX) to see its price action also. Volatility changes also make for great low risk options trades if options are your thing. Focus on trading with the trend, bounces in a down trend are typically muted or trade sideways making is very difficult to make money buying in a falling stock market.

Chris Vermeulen
www.TheGoldAndOilGuy.com

Get More Free Reports and Trade Ideas Here for Free: FREE SIGN-UP

My most recent article discussed using a short term calendar spread to capture time premium of the gold ETF GLD’s weekly options. While I do not recommend that traders place trades based on my articles, I would like to point out that the most recent GLD calendar trade I posited would have produced a significant double digit gain as of the opening bell Friday. I do not mention this to boast, but simply to point out the power of calendar spreads using weekly options and their rapid time (Theta) decay.

The horizontal volatility skew of the weekly options places the short-term calendar strategy at the top of my list based on current market conditions. By this I mean that the implied volatility of the weekly options since their recent introduction has tended to be greater than that of the corresponding longer dated options. However, calendar spreads can be utilized in longer term trades as well as a cheaper surrogate for equity ownership.

Currently gold appears to be going through a pullback and possibly a major correction based on price action in the dollar and it could setup for a possible longer term entry in time. The weekly gold chart is listed below.

Traders that believe inflation will continue to rise dramatically over the next few years might consider the following long-term calendar spread versus outright equity ownership. The strategy is precisely the same as its proverbial cousin the short-term calendar spread, however the characteristics and risk profile is somewhat different due to volatility differences on longer dated option chains.

The strategy involves buying GLD leap (option that does not expire for 1-2 years or more) call contracts and regularly selling weekly call contracts against them. The process continues every week while the premium collected helps reduce the overall cost of longer dated GLD calls. The construction is fairly basic, however relatively deep in the money calls should be used for the long leap side of the construction. The weekly options to be sold against the long position will typically be at-the-money or even slightly out-of-the-money and the position will be classified as a diagonal calendar spread.

Since the longer dated calls are deep in the money and have a significant amount of time before they expire they are somewhat insulated against volatility and have a relatively low time decay risk. The sheer nature of option pricing enables the longer dated calls to withstand harsh volatility changes while providing the trader the ability to have similar price action as he/she would by owning GLD common stock outright. The primary advantage of utilizing options versus stock ownership is the reduced price of the option contract versus stock ownership.

As of the writing of this article, GLD in Friday’s pre-market action was trading around $136/share. An option trader could purchase a January 2012 125 Call contract based on Thursday’s close for $2,165 not including commissions. Purchasing 100 shares of GLD would cost an equity trader $13,600 or $6,800 if they were using a Reg T margin account. In either case, the long dated GLD leaps provide similar price action with reduced capital. For the price of 100 shares of GLD a trader could purchase 6 GLD January 2012 125 calls for 6x the exposure. However, as most astute traders will point out it is theoretically possible to lose the entire amount invested in the option contracts should gold have a major pullback in short order.

While this accusation is indeed correct, through the use of contingent stops based on GLD’s price this risk is mitigated to an equal amount of risk as an equity trader utilizing stops on GLD’s price. In the end, the risk is inherently the same setting aside time decay suffered by the long option, which early on in this trade will be next to nothing. Additionally, the trader will be selling weekly calls against the long dated GLD leaps to reduce the overall cost of the position allowing a trader the possibility of reaping additional upside.

The trade construction is as follows:

Buy 5 GLD Jan 2012 Leap Calls at the 120 strike for around $23.00

Sell 5 GLD November 2010 136 calls at the 135 strike for around $2.05

The profitability graph for the November expiration (Friday, November 19, 2010) is illustrated below:

It is important to recognize that the illustrated graph represents the first of 62 anticipated sales of weekly calls against these long options that will be available prior to the LEAP’s expiration.

The risk for this trade is twofold; the first risk occurs if price moves beyond the bounds of profitability. The second risk, volatility risk is not as obvious. One of the functional characteristics of LEAPS is that they are exquisitely sensitive to changes in volatility. It is for this reason we have chosen a deep in-the-money call to buy; remember that volatility changes only impact the time (extrinsic ) component of option premium and the deep in-the-money options have the least time premium embedded within their price.

Trade management includes exiting the trade if specific stop targets are hit, specific profit/loss targets on this trade are met, or violation of technical support or resistance. In order to understand this trade, the aspiring option trader needs to follow both price and volatility impacts that are respective of this trade’s construction. I suggest the trader journal not only the relevant prices of the underlying and its corresponding options, but also the implied volatility of each.

As with everything in life, there are no guarantees. However this trade harnesses the power of theta decay and capitalizes on one of the basic truths of life:  tomorrow there is one less day for all of us – the same can be said for option contracts.

If you would like to receive my Free Options Strategy Guide & Trade Ideas join this free newsletter: http://www.OptionsTradingSignals.com/profitable-options-solutions.php

J.W. Jones

Options Webinar Tap Here