Okay, with the “I Told You So’s” out of the way, it’s time to take a longer term look at $GOLD and explain some things so you might learn. Maybe you didn’t see this coming and weren’t prepared for the possibility, it’s okay. Experience can be gained so you can understand better next time.
Gold Monthly chart below.
Looks like we are simply correcting to the longer term trend. The 1250 area is about where we broke out of the price channel and went parabolic to the upside. Then we went into bear market territory from there. Formed a double top after over a year of no real progress and now we have broken down. Longer term trend remains intact on a monthly chart. However, we could pull back below 1000 at some point in the future and really flush everyone out claiming “broken trend” before it reverses.
The volume profile tells you where transactions take place. The price of ANYTHING is ONLY when the demands/requests of a buyer and seller meet. The high volume spikes occurring during certain prices is a sign that lots of buyers and sellers met there, and therefore, there is a market at those levels. Minimal volume areas or “volume pockets” mean there is not much of a market there, and prices likely will gravitate to an area where maximum transaction can take place. Should there be more buying demand than selling demand, the price will generally quickly gravitate to the next highest major “market-zone” If there are more selling demand than buying demand, the price will generally quickly gravitate to the next lowest major “market zone”.
That’s not to say transaction might not pick up somewhere near the area and that past buyers or sellers might quickly adjust NEAR that area, however in general it is simply fundamentals of supply and demand that drive price. Observation of past “markets” may not always tell you the future, but it provides a good understanding of what is likely in order to manage and understand the risks.
This is just one tool to add to the toolbook to determine when the given market is a “buy the dip” type of market or “sell the breakdown”.
I correctly identified that gold was a sell the breakdown market, and avoid buying the dip as it had no legs to stand on below it’s support level around the 1520-1570 range. This is not an “I told you so” but a “how I told you” for those wishing to learn that my call was not “magic”. Of course, if I sold you on that idea, it might be better marketing for some $2000 subscription or whatever, but I am not here to sell you anything.
You can see from the channel down support why I don’t have a problem with anyone buying the dip here. Channel trendline support in oversold conditions. I may speculate from time to time with some capital, but I prefer to wait until the longer term trend or longer term support indicates action before making any major changes.
Personally I have no plans to add a long term position in gold until we go below 1250, or unless some other setup occurs that convinces me otherwise.
I’m more interested in WHY this gold flushout is occurring now and what that means for everything else. This kind of forced liquidation can spillover into other markets. I think the Fly made a great point there and we certainly see at a minimum at least that occurring today.
The margin liquidation and forced selling in any market can cause a demand for cash. That demand may have to be met by raising cash from other markets. The other markets that are sold may trigger further downside pressure. Eventually there is an excess amount of cash on the side and those waiting to buy the blood strike with force, then the money on the side can then chase higher. When that happens though is anyone’s guess.
I also think that gold is not about inflation, but about currency alternatives free from government mismanagement of the money supply. When government’s ability to raise revenue and pay the bond holders, and/or fears of them inflating the currency (a side effect of gold going up with inflation not inflation being the cause), gold is the alternative.
A shift away from gold may be a signal that confidence is returning either into the Euro (I doubt it) or the Dollar (more likely) or some other government currency. Whatever caused smart money to move out of currency and into gold has moved into whatever currency they think is the strongest going forward. I suspect that is very bullish for the dollar. That probably goes well with a volatile market and/or a market decline as well.
These are likely to be very trying times ahead for people with a position (so everyone) as we can see early warnings of high volatility and major capital shifts. Bitcoins was just a microcosm of the overall market sentiment shifting. Then Gold followed. Gold is a major market. It isn’t anywhere near the debt markets, but what is? Anyways, It should be a wakeup call to those that think the stock market can’t do the same thing.
Having multiple asset classes and extra cash with a few short term speculative positions as well as long term positions is a great way to diversify over multiple timeframes and multiple asset classes. Someone long gold from $800 who holds through the storm and rides this all out and doesn’t sell may eventually in a few years come away very well just as the person who speculates and grabs some puts. Both may be right even if at a given moment the positions may be opposed. This is just one way to protect yourself even though at times you may have multiple long positions. But if you protect yourself right, you profit.
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