Panic Selling in Gold: What's Next?
The panic selling in gold and mining shares has accelerated and the Gold Miners ETF (GDX) is the clearest example of how sharp the selloff has been, down more than 2.5% midd-day as I write. On Minyanville's Buzz and Banter on July 24, I noted the potential head and shoulders pattern that was forming on the weekly chart:
Buzz and Banter, July 24:
Here's a weekly chart of the Market Vectors Gold Miners ETF (GDX) showing a deferred potential TD-Sequential 13 sell signal.
Click to enlarge
As well, we could be seeing a potential head and shoulders pattern form. A key to identification would be neckline violation on expanding volume. The right shoulder has already recorded a weekly volume bar that was greater than the left shoulder volume bar peak, and that increases the probability of the formation completing in my interpretation. I should also note that the GDX has given a double bottom point and figure sell signal (1x3 chart) and violated a trendline from the May lows.
Now that this has transpired, the question is: What's Next?
The GDX has blown through another retracement level that could have served as a potential stopping point. This is an important session today. A close below 34.43 would increase the probability that the selloff is not done and note we still have an unfulfilled DeMark TD-Sequential buy countdown in place, this bar currently on 8 of a potential 13. A close above that level and next week the ~33 area may provide a trading point for longs as the fulfillment of the downside count from the head and shoulders. 
As for gold, I would like to be more positive on the metal itself, but I believe this selling is related to a buildup of longer-term deflationary pressures in the credit markets that will dwarf the inflationary mask of (formerly surging) food and energy costs.
When debt and leverage are this excessive, cyclical inflation simply accelerates the deflationary outcome and makes the unwind more severe. Watching the Consumer Price Index is like driving over a cliff with your eye on the rear view mirror. Deflationary pressures will cause bids to evaporate and disappear as financial assets that must be sold to repair balance sheets and destroy debt overwhelm the capital available to compete for them.
Few see this coming because the leveraging of debt in our economy simply to get it to work has been so massive, so all-encompassing, that the vast majority of market participants have forgotten what normalcy is.
I most certainly believe gold will eventually be an asset to own in coming years. However, at the onset of deflation, gold will be sold indiscriminately - like all assets - to pay down debt and repair balance sheets.
The initial asset price inflation and central bank reflation efforts that made gold seem attractive during the building of the asset price bubble sow the seeds of the selloff as speculators attracted to the metal simply as a detached, non-fundamental momentum play will need to unwind their leveraged bets. Weak holders will be shaken out and ultimately replaced by those seeking a store of value. That is why the selloff won't make sense on a fundamental basis.
I show on the metal itself DeMark exhaustion sell signals on the long-term quarterly and monthly charts. But, the only people that should really be concerned about whether gold is going up or down right now - other than in the macro sense - are those very people who will likely need to sell and therefore be resonsible for it overshooting on the downside. I expect in the next few years for gold to retrace part of its long-term move, perhaps coming below 600 and, in the worst case, possibly even coming below 500. A 50% retracement of this major bull move would be about 458. But that doesn't change the long-term, secular bull market for gold.
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As debt is destroyed and the economy contracts, societal acrimony may manifest itself at the level of nation-states. That is, the European Union may come unglued, and invading your neighbor may be a politically attractive alternative to telling your citizens that they get to be poor for a generation or so. If China's economic growth ends and they undergo an actual contraction, how will the dictators keep the lid on dissent? Can you say "Nationalism"? I knew you could!
Gold does pretty well when there are wars and rumors of wars. I suspect that Georgia will be on our minds for a while to come as the first round of a series of wars.
While the credit contraction is huge, inflationary rise of oil prices will be multiplied in the economy in a negative way. This is because oil is in everything we use.
Surging oil prices are also deflationary. But slowly rising ones are inflationary (after Steven Leeb) . With them falling recently we are back to net inflationary effect.
The key thing is I just don't see the FED allowing a deflationary spiral to occur. I think the credit markets will contract, but things will be manipulated so that the net effect will always be some inflation. So all of that credit and debt will just slowly evaporate into this air. In other words the wealth will be destroyed. And it will not be pleasant, as people will have to pay it down slowly, and change their habits.
And when that process is complete, we can look forward to the oil crunch, followed by trying to pay the baby boomers their benefits, while they spend less.
So not just stagflation, but the possibility of "reciflation" (recession+inflation). In other words the reduction of the standard of living.
Lets hope oil stays down for a while. When it comes back, another round of growth killing could happen, followed by more inflation.
The only way out is growth in new industries, and producing goods the whole World wants. For example the iPhone. This will require innovation, and leadership. Not to mention getting off of oil, But at least this will be an investment in the future, unlike the "willy-nilly" spending of the recent past
A stronger dollar looks good, right? But not start any kind of panic, by allowing a deflationary spiral occur. The wealth just blows away in the wind.
Note how I did not use the word manipulation.
When banks starting to collapse one by one (which i believe you are in denial) flight to safety will bring investors back to gold.
dollars fake run is doomed very soon.
This internet site verifies real data which I cannot find another source in a hurry.
http: //fly.hiwaay.net/~becraft/ FSanders.htm
The problem with that is that AAPL and MSFT with their innovation may be able to feed millions of shareholders but not 320MM citizens.
Back to even is hardly a secular bull.
Silver was $50.00 per ounce in 1980. It is now $12.00 per ounce.
That is a secular "bear."
Someday, people will look back at this time much like I do...In 1980, I wish I had bought more Manufatureres Hanover, or Chemical bank, (Now JPM) or Primerica, (which is now Citigroup.)
My returns on those stocks are in the 1000's of percent upside.
Commodity rallies aside, the vast majority of food supplies are now secure forever. We have millions of acres to plant and the sun still rises.
By a good index fund and walk away. :)
Peace,
Lee.
Investing is not easy. There are short-term trends, long term trends, etc.
I think one of the key principles is to "invest in what you understand"
I for one am not a gold expert, so I have not touched it, yet. Simply because I do not think I fully understand it.
By the way one of the best investment books is "Poor Charlie's Almanack" by Charles T. Munger.
One of his guiding principles is not to commit capital until you are absolutely certain that it's a "no-brainer". He says he sits out most deals presented to him, till the time is right.
It is to be avoided at all costs. And that is why I think we will see more financial engineering in the banking sector.
There are other forms of consumer rescue, including another incentive check.
I don't know how much deflation one can have before the spiral starts. But as long as the consumer doesn't completely shut down, there will still be commerce going on.
Tricky, tricky
Actually, it's one of the few investments I do understand. It's just a lump of metal that doesn't tarnish and has been used for a few thousand years as money in one part of the world or another. It's no longer directly used as money but it is easily convertible into the form that Wal-Mart takes.
And then you either believe a)that with gold's recent past history it will not be a protection against the current economic climate or b)given gold's recent history it's undervalued and it will be protection against the current economic climate. And then you buy some gold or you don't. I'm not sure there's anything that fancy to understand.
I tend to agree with Warren Buffet's (I think) view of it that gold is pretty pointless because it doesn't encourage actual economic activity. (The line is that people spend a huge amount of effort to dig gold out of the ground just to bury it in their backyard.) On the other hand, when most of the planet is busy debasing their currency for 1 reason or another, it can make a pretty good hedge against that activity.
Commodities down 30% on average.
World equity markets US about 15trln + 15 Europe +15 Asia = total of 45 down 25% throughout = 11 trillion gone. + half a trillion US loan losses and 15% at least on Real Estate. Is there any other word for that than deflation? Meanwhile the FED, staring at CPI, frets about inflation. Now put in perspective a measly 120bln of tax "rebates", then you see how powerless CB's will be.
stocks including dividends about 9%....so that in the end a 1000 dollar investment in 1913 would have yielded about 50k in gold and about 4.5MM $ in equities...Why bother?
The one critical issue I have with your line of thinking, however, is that I do not have 100 year investment time frame. (I have no intention of leaving my ill gotten gains to my kids. *grin*)
I need use a much more realistic 30 year horizon when planning my investments. And all investments run in secular cycles that I need to consider when deciding where to put my money.
For instance, what if, in 20 years, stocks dip from the dot com heights and reach back only to break even? (This the exact scenario happened during the Depression by the way - it took until the 50's to reach the '29 heights) . 2% dividends would not be enough to overcome the opportunity costs of keeping your capital in a "brain-dead" 4% return investment for 20 years. And then I'd have to be guaranteed a fantastic bull market for the last 10 years of my investment horizon to somehow come up with 9% over the 30 year time span that I actually have to invest my money.
Given the aging of the worldwide baby boomer population and the disconnect of modern currencies from any standard means there is enormous pressure to debase currency. (The US in particular has far greater pressures to do so.) Gold is a possible hedge against that scenario. For me it's not so much an "investment" as it is a means to preserve/insure wealth.
Kevin, could you please explain the source of these terms? I am totally unfamiliar with them and what to make of the information, which does appear useful even tho' enigmatic.
Thanks very much...jsc
The difference in the long-term returns is that stocks are based on earnings which compound over time, where as gold does not.
But right now the debt destruction appears to be creating deflation. My point has been that I think the FED (and the Berries) will try to prevent too much deflation from occurring. But this is trying to predict "Berry" behavior. I think it is their only option left.
Beyond this debt destruction (into the future), there are inflationary pressures on commodities from Global growth (especially when it returns), oil (if demand returns to again outstrip supply), and all of the baby boomer benefits promised (although their retiring should reduce consumer spending, and limit growth)
I look at it as large rogue waves (on the radar) heading for our ship, with the debt unwind already hitting the bow.
Indeed euity markets seem to go up in about 26y cycles and then "rest" for the next 13 or so. We seem to be just in such a period which could mean another 5 years or so sideways, at best, and if one retires that is not a pretty picture.
Hi! I know about the crash in the 80's for gold (bottom was about $250 an ounce) and I've put some thought into that as well. I think there will be a time to sell off gold, although I don't think it's now. I think of gold as wealth preservation because the current Fed chief has openly stated that he thinks it's a good idea to debase the currency to prevent deflation.
I'm also bullish on gold because, adjusted for inflation, the high in the 80's was $2K an ounce. Everything else looks overvalued to me - most P/E ratios are still out of wack by traditional standards, real estate is insanely priced, and bonds, given the current interest environment, look almost silly. The only things I see with an actual upside are precious metals, commodities, and possibly some individual stocks. Add to that the inflation dangers and gold looks like it's got potential for the next few years.
I also agree that we'll see deflation - but I'm also guessing that the government will be busy diluting the currency within that environment.
*shrug* In the end, I guess every vehicle that you could plunk your money into has risks. (That includes the bank and the mattress.) :) Because they are so easy to trade in and have been the favored investment since the 80's, I think there is a tendency to give equities a special place that they don't necessarily deserve. As an asset class I like them better than gold or cash because they represent the working economy that brings me food and iPods. *grin* However, I'm more than a little wary (obviously) of their current "you can't go wrong investing in them" status.
