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Gold: Stronger for Longer?

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What to do at this stage in gold's journey.

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Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial).

For starters, gold's resiliency has been impressive, a one-of-a-kind type of fortitude, even as commodities all around it -- from copper to oil to corn, you name it -- have experienced sharp corrective declines on pace with the general equity retreat in the US, Europe, and most notably, China. Over the years, my trading style has been top down -- figure out the most macro of issues and then apply traditional, historically based relationships to "predict" future price movements of less macro, more specific entities like metals and energies. From time to time, the highly useful method of evaluation fails to address certain unique fundamental elements that will override historical relationships. When the price action over a period of time begins to stray too far from what may have been expected, thesis deconstruction/reconstruction is essential. This is where I am now in regards to the metals, most specifically, gold.

Yes, it's true, the subject of gold has become a hot topic. Certainly much hotter than when I first began to dabble, sub 300USD/ounce in price in the early part of this new millennium.

In the beginning, right as me and a small group of investors were about the prospects of gold, it was two steps forward and one step back. The mythical gold cartel (I won't elaborate for brevity's sake) would come in every once and awhile and hammer the price, all in what can now be called a futile attempt to preserve the status quo -- namely that big banks were heavily short paper gold, and that gold was in a bear market.

Fast forward and we've come to understand, with each previous breakout drive, that a certain capitulation of all but the biggest entities formerly playing this game of shorting mass amounts of paper metal against most reasonably concluded smaller amounts of physical metal has occurred. Ted Butler, noted silver analyst, commonly refers to these banks as the raptors, no longer under the clutches of a game gone increasingly sour. The raptors, coupled with a more expansive base of investment interest, has definitively changed many things, including just how one reads the formerly reliable, almost to a tee, COT reports.

As a bull market ages, all of this is expected; these challenges are what we're here to analyze.

I've been talking recently about this phase 1, phase 2, phase 3 bit for gold. I've spoken about many of the expected characteristics of each phase. According to the theory, phase 3 is the final, most mature stage in a gold bull. It's the most explosive stage, the one where more than 90% of the gains could be registered. It's with good reason then that I continue to ponder if it's the infancy, the pregnancy, of this stage that we're witnessing now. If so, clear strategies will emerge.

Additionally, a gold bull's maturation to a full blown parabola leaves one wondering what catastrophic catalysts would drive it there, and more importantly, exactly what it means for our lives, these paper nest eggs many have carved out for themselves. Monitoring this unfolding situation, in my view, is as essential as diet and exercise (though I'm fair at the former and just plain awful at the latter).

Gold rising in all currencies, wider participation, longer up moves, quicker rebounds, shallower dips, less relation to the USD -- these are all theoretical characteristics of a phase 3 gold move and they've all been occurring since late last year. It makes you think. Here's my consideration: During breakout drives past (of which there have been two), we've seen some of these characteristics assert themselves, but for brief periods of time. Now in June, a shaving from its all-time high, gold is proving that these positive occurrences aren't nearly as fleeting as in the past. Sure May featured an 85-point bashing from high to low, but May is often the cruelest of months, and we've rebounded strongly. We actually set a fresh high days ago, triggering a technical sell signal, which we've been digesting over the past few sessions.



The sell signal was a trend line that connected the December 1225 high with the early May 1248 high. Moving lower left to upper right, as all trend lines connecting marginally higher peaks do, I extrapolated a price in the 1255-1258 region. Giving a few bucks to the locals would have had you out at the top. But none of this matters much. What's beginning to matter more is the fundamental question of "What is gold's price action telling us, and, ultimately, what does it suggest about our future?"
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Position in gold, silver, FAS, copper
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