The Document

Login Subscribe Now
August 15, 2008

Panic on the Yellow Brick Road

Do you believe in cycles? Today's plunge in precious metals comes one day shy of exactly a year after a similar such panic. Since the markets are closed tomorrow, we'll call it an even year. So the question posed to traders is whether we just witnessed a near-term low. I believe the answer is yes. Apart from the perfect match for a cycle low, the miners may be giving us a clue:

stock chart

The miner's ETF blew away its previous record volume during Monday's panic session, and with the PMs themselves setting new lows today (by a wide margin), GDX held its own and did not break Monday's intraday low nor set a new closing low. Today's volume for the ETF was still the 5th highest ever, so it seems anyone who did not panic on Monday likely panicked today. Divergence between the miners and the metals frequently betrays near-term turning points.

Gold has now done two things that it has not done for the length of the bull market: it violated the mid-point of the recent parabolic run and it violated its 75WMA:

gold chart

It seems that some technical damage has been done that will take longer to repair than for previous pull-backs. The picture is even more stark on silver's chart, and it all adds up to a protracted down cycle. Now, the macro picture for PMs has not changed. We still have wars and social security to pay for. We are embedded in a banking crisis which is more likely than not to draw more crisp bills from the Fed's presses. The debt levels carried by our country blow away what we saw in the 1970s. We are entering the most severe recession since the 1930s.

The Fed will print. No matter what they say about inflation, they will print. And when metals come out of their current funk, which may take quite some time, the next bull phase will dwarf what we saw from 2002-08. In the meantime, this is a trader's market. Some quick hits on the long or short side will be fair prey until it's time to just get heavily long again.


blog comments powered by Disqus
Recent Blogs

Macroeconomic Blog | Cycle Trading Newsletter | TrendBands Fund | Library | About | Contact Us | Members