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December 14, 2011

Sheer Panic

Precious metals trading devolved into panic mode today as silver plunged more than $2 and gold dove $50 to within a whisper of its September low. The action has spurred much debate in the Member comments section about whether gold is completing one long 24-week intermediate cycle or two short ones. There is simply no need to be distracted by academics at this point. Gold is in the final stage of an intermediate decline, and whether or not the September low holds, gold is going to behave as if the last 24 weeks were one big cycle. Our task is to find a spot to enter.

We really have only two proper methods within our methodology for executing an entry. The first, of course, is to buy a swing low. A swing low for gold is currently $70 overhead. Perhaps Thursday's session will lower the mark, but for now a move to $1646 is needed to trigger this signal. The second method would be to buy a tag of a historically-important pivot level. On the weekly scale, the 80-week moving average has supported the entire bull market save for the plunge into an 8-year cycle low back in 2008.

Gold Weekly

I cannot tell you how much I would welcome a further panic down to that level. Not only would I be entering at much cheaper prices... allowing me to potentially enjoy a larger bounce... but I would also be able to enter with a larger position since my stop would be very close rather than $70 away. While I certainly cannot predict a final, $100 plunge... nor do I give it a strong liklihood... I do believe gold has the potential for at least one more day of weakness.

CRB Weekly

A few weeks ago I noted that based on history, the CRB should find its 2.5-year cycle low after marginally breaking a previous low in conjunction with a positive divergence in sentiment.

CRB Sentiment

It appears we are on the cusp of that low, and with commodities needing just a little more downside to find solid ground, PMs could get dragged a little further. Obviously, there is no rule which states gold and the CRB have to bottom simultaneously. Gold could very well be up $50 tomorrow with the CRB down, but caution is warranted.

The stock market has been only slightly pressured by all this mess.

SPX Daily

If a major deflationary event were underway, stocks would certainly not hold up so well. Once commodities bounce, equities should return to rally mode, as well, and simultaneous rallies by stocks and gold should be very good news for a most undervalued sector, mining shares.

XAU Gold

For years, the XAU traded between 0.19 and 0.27 ounces of gold, so at 0.116 ounces of gold, mining shares need to rally 100% to get back into the middle of their historical band... without gold rising at all. One may also note that gold miners bullish percent has dropped back to a dismal 13%. This reading hit zero in 2008, but rarely drops below 20%. The fact that we've seen two readings below 20% in the 4th quarter tells me a major shakeout has been underway to prepare these stocks for a monster rally.

Mining shares are not the only asset undervalued relative to gold.

Gold Silver Ratio

While a retracement of silver's huge gains into early 2011 was to be expected, the general trend for silver during this bull market has been to strengthen versus gold. Once silver's parabolic run is fully shaken out, the general trend should continue. So, once we find an entry point, I plan to focus again on silver and mining shares.


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