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Crazy Bullish Gold Count

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December 23, 2009 – Comments (17)

Before I hear the inevitable criticism that my personal stance on gold is coloring my TA of gold (and I have already heard this unfounded criticism repeated .... ad naseum, so if that is what you are thinking then just save it), let me just say that this is a possible count.

I am not advocating it.
I am not saying this is what I am trading.
I am not saying that there are not other counts out there.

I am saying this is a possible count. That's all. It breaks absolutely no rules and is a viable interpretation of the wave structure.

Blah, blah, blah ... doesn't have the right look. Blah, blah, blah ... Gold made a new high while the Dollar didn't make a new low. Blah, blah, blah ... Gold is only 30% over its 1980 peak.

I have heard it all before. Again, I am not saying this is the only possible count.

Daneric for example has a very plausible bearish count for gold: http://danericselliottwaves.blogspot.com/2009/12/gold-update.html. And quite frankly there are many bearish counts out there that are very similar. I am not an EWI subscriber, but EWI is publicly known to be bearish on gold, so I would suspect they have a similar count.

But I am not bearish on gold. I am very bullish on gold for the long term and the intermediate term. I think it will be very volatile but is in the middle of a massive bull market. For my long term take on Gold (fundamentally and technically), see this post: The Gold Blog. Gold/Silver/GSMs (and a little Oil for good measure), for my long term take on the Dollar (fundamentally and technically), see Thoughts on the US Dollar, Analysis of the USDX Long Term, Follow up on the Gold Blog.

So you can go to a dozen sites and find a bearish count for gold, or analysis saying that it is at the top of bubble that just bursted. But since I am bullish, I will show you my bullish count.

Again, this is not the only possible count. I acknowledge that preemptively, like I have already done many times ***and like I do with all my analysis***. This is one interpretation and I give you links to the other side (bearish) too. It is up you you to decide which case makes the most sense to you.

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17 Comments – Post Your Own

#1) On December 23, 2009 at 11:19 PM, Tastylunch (29.40) wrote:

Binve man you read this CAPS post by jesusfrekinco (that has an article by armstrong)?. Never saw you comment on it. If you haven't I strongly reccommend it.

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=293614&t=01007614523203038290

I finally got around to reading it today (it's been in my to read tabs for a long time) and it fits my personal view of Gold very very well.

as you know i think the Prechter crowd is incorrect in assuming Gold is just an inflation hedge.

 

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#2) On December 23, 2009 at 11:27 PM, ChrisGraley (29.74) wrote:

I've been thinking a lot about peak gold lately, but I've been thinking even more about peak silver. I can't see a scenario where either goes down other than in the very short term. I think that in the very long term, silver will eventually be worth more than gold. The scarcity vs the global money supply just seems to be increasing exponentially.

Fundamentally, how do you see the precious metal supply? 

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#3) On December 23, 2009 at 11:55 PM, ozzfan1317 (78.55) wrote:

I appreciate the work and while I disagree I feel that all viewpoints are valuable. I think silver has more upside at this point just my two cents.

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#4) On December 24, 2009 at 12:01 AM, binve (< 20) wrote:

Tastylunch,

Hey man, I had not seen that particular post (thanks for the link, I went ahead and recced it), but I have seen that document before. There is much in that report that is very common sensical that I very much agree with.

as you know i think the Prechter crowd is incorrect in assuming Gold is just an inflation hedge.

Exactly. The same kind of over-simplification that drives me insane. Our discussion in this post of mine (http://caps.fool.com/Blogs/ViewPost.aspx?bpid=307950) is very good and much closer to the truth.

Thanks man!.

ChrisGraley,

Thanks for the comment

I think that in the very long term, silver will eventually be worth more than gold. The scarcity vs the global money supply just seems to be increasing exponentially.

I don't really agree with this, and let me just offer a few counter-arguments. Silver is about 60 times more abundant that Gold in the Earth's crust. So from a rarity point of view, the long term Gold/Silver Ratio should be ~60. It is more complicated than that since gold has been money (and is warehoused) whereas Silver has straddled the line between money and commodity. Most of the things you would use gold for, you could use Silver instead at 1/60th the cost. Also gold is one of the most non-reactive elements around, which makes its stabillity attractive monetarily.

Currently Gold demand is 85% investment and jewelry (which is mostly Asian and Indian = investment) and 15% commodity. Silver is more like 70% commodity / 30% investment (rough ballpark).

The problem, and I think where you are coming from, is that the above ground current warehousing of gold far exceeds Silver. Only ~500 million ounces is being warehoused, which is tiny in comparion to mine production.

So lets just say that gold and silver replace fiat currency tomorrow, silver is much more scacer than gold in actuality (obtainable from a warehouse) and hence should be more valuable.

The problem with this argument is that what comes out of the mines from that point on will all go into circulation as money. Silver would not be treated as a commodity any more (which would make for lots of problems in several industires, but lets just ignore that for the moment). And because the mine output of Silver far exceeds that of gold, the "Silver reservoir" so to speak, would fill back up quickly.

I think if Silver becomes part of a widespread monetary standard again, the commodity usage and recycling efforts of Silver will change dramatically (gold is almost completely recycled right now, whereas Silver is not, just not economically viable at current prices).

So if Gold and Silver were to be used in this fashion, I would expect the long term warehouse ratios and price ratios to reflect the rarity ratio.

Just my thoughts on the matter :). This also sort of answers your metal supply question too.

Let me know what you think, agree/disagree. Thanks!..

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#5) On December 24, 2009 at 12:02 AM, binve (< 20) wrote:

ozzfan1317, Fair enough. And no worries, the point of the post was not to convince anybody of anything, just sharing a viewpoint. Thanks!..

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#6) On December 24, 2009 at 8:14 AM, ChrisGraley (29.74) wrote:

binve, that's pretty much the same thought process that I had and I think that we came to the same conclusion, but I do believe that there may be a brief amount of time that silver may be worth more than gold due to the speculative nature of the market. Also, once we hit the point of realization, I think that the gold/silver ratio will be a lot closer to 1/1. Then I think that gold will replace silver in some industrial uses and that ratio will widen again.

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#7) On December 24, 2009 at 10:06 AM, binve (< 20) wrote:

Hey Chris,

but I do believe that there may be a brief amount of time that silver may be worth more than gold due to the speculative nature of the market.

Sort of like the Hunt Brother event? That is a poor analogy, since that was the product of very specific manipulation. But I could see if at the COMEX, alot of investors demanded delivery instead of rolling over contracts, just a relatively small amount of public demand would overwhelm warehouse store and cause and enormous speculative spike.

That is a very possible outcome. It would be relatively transient (I bet a spike like that would last for a few months, beyond that the "silver reservoir" analogy above starts to happen), but if you were well positioned that might be a move that makes/breaks an investors carrer.

Interesting thought man :)

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#8) On December 24, 2009 at 10:11 AM, leohaas (31.21) wrote:

binve,

No need to apologize so profoundly about a possibility you see. Just explain that TA is a method of possibilities: it does not show what WILL happen, just what is COULD happen. TA is only slightly more reliable than a coin toss. Over time, this can make the difference between an average portfolio and a great one.

"So lets just say that gold and silver replace fiat currency tomorrow, silver is much more scacer than gold in actuality (obtainable from a warehouse) and hence should be more valuable."

This is 100% correct if the assumption holds. But it doesn't. Fiat currencies are here to stay, like it or not. They will only disappear if society collapses. In that case, silver will catch up. That is not of my concern, because if society collapses, I will be dead...

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#9) On December 24, 2009 at 10:27 AM, binve (< 20) wrote:

leohaas,

I am not apologizing. I was explaining my position. As I have done many times. In all of my large analysis posts I go to a lot of trouble to say this is my opinion, and that there are many other viable counts out there besides the one I am showing. And despite that, I always get criticized for being one-sided, or that I am over speculating and using EW in the "wrong" way. It's more annoying than anything. But I just keep writing my disclaimers, and I think people will continue to ignore them 95% of the time. I fully expect some "gold bug" flames in the comments.

This is 100% correct if the assumption holds. But it doesn't. Fiat currencies are here to stay, like it or not. They will only disappear if society collapses. In that case, silver will catch up. That is not of my concern, because if society collapses, I will be dead

Leo, it wasn't even an assumption. Chris and I were discussing the theoretical price of silver based on current warehouse ratios, not the rarity ratio.

I am also not one of those gold investors who holds gold because they see the world going back to a metallic standard. I don't, not itn the near future. There are many things that would have to happen first (such as overhauling or abolishing the Fed), things that I am certainly not counting on in my investment lifetime.

Nor am I an "end of the world" gold investor. I do not think socieital collapse is a likely outcome. See this post for why I consider gold investing an optimistic endeavor: Thoughts on the Dow/Gold Ratio, the paragraphs in blue at the end of the post.

But I think the desire to save in an currency other than the dollar is beginning to gain mass appeal. And yes I believe gold is a currency..

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#10) On December 24, 2009 at 8:54 PM, ChrisGraley (29.74) wrote:

I agree with binve, leohaas and I don't think we could get back to a metal standard if we wanted to. The important thing to think about when you are sitting on a pile of metal is what the next movement will be and how the metal traders will react. binve does this with charts and I do it with fundamentals. Gold is not oil. It could cease to exist and the world would still turn. There are no Alstry type conspiracies here, just 2 guys trying to make money off of what happens next.

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#11) On December 26, 2009 at 4:02 PM, LiveOakGrey (< 20) wrote:

Interesting thoughts, all of you (Binve, Tastylunch, ChrisGraley, leohaas).

Binve

Since everyone accuses you of being biased and one-sided, in spite of your disclaimers- maybe you could just have a surgeon general's warning label next to the 'binve' box on your charts.  "Warning: The Surgeon General Knows TA to be only slightly more accurate than a coin toss and may only represent one of several possible outcomes, so quit yer snivveling and take this as part of a balanced due-diligence meal... not an appetizer to be eaten only on it's own."

I'm still only just looking into TA as something to begin learning about, but even if it's validity is only slightly better than a coin flip that shows results over the long haul... that in itself is a fascinating concept!  If due diligence supports a company on other fronts, then by that reasoning TA could be a useful adjunct for entry points, or even options plays.  

If Tastylunch is right about a silver reservoir being limited for a while, and the price spiking, would it be a good idea to sell off silver shares for those few months, or would this be overly risking that you wouldn't be able to get back into long-term silver stocks, if the price kept rising over the next few years?

About gold/silver being more than an inflation hedge... are you guys referring to the fact that gold is money ( a form of currency), and that is why it is more than an inflation hedge?  Obviously, it is a form of currency.  I was just reading this quote along those lines: "Gold still represents the ultimate form of payment in the world." - Alan Greenspan 

Is there any risk diversification to buying a company's stocks on the exchanges of more than one country?  For example: buying Hecla on the Toronto/Vancouver/etc. exchange as well as on one of the U.S. exchanges?  Is there any risk of currency collapses causing a nation's exchanges to freeze up at some point, or to lose your access to those stocks?

What about risks of the Futures markets or Options markets being inaccessable in some kind of massive credit freeze or currency confidence-crash?  Anybody see any likelihood of something like this happening?  I'm pretty negative on owning much within the U.S., directly, and wonder if anyone else is likewise suspicious?

How about Central Fund of Canada, or GoldMoney.com.  What does anyone think of these companies for security and whether they are more likely to be resistant to expropriation by various governments on the assets of their citizens?  Are they safe, and are they likely to remain liquid when you want access? 

Chris and Binve,

you both think we can't get back to a metal standard in the next few years?  I thought it was inevitable that we'd have little other choice, if we have a hyperinflation and nobody wanted to touch our currency, without some kind of reforms after a disastrous financial fall-out some where down the line.

ChrisGraley

As far as you anticipating how traders will react, you say you use fundamentals.  How do you use them for that purpose?  I can see figuring fundamentals to look for a long term value in a company, and don't doubt you have a workable method, I just haven't learned what it might be, yet.  Can you elaborate on that?

Thanks folks,

-Grey 

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#12) On December 28, 2009 at 12:55 AM, XMFSinchiruna (27.12) wrote:

binve

The geological rarity ratio of gold to silver is 16:1, not 60:1. If you have a source that claims a 60:1 rarity ratio in the Earth's crust, I would love to see it.

This is why the long-term price ratio trended in that 15:1 to 20:1 range for centuries. A multi-year bull market can be expected to realign prices more closely to that relationship, so in that sense my price targets for silver are based heavily upon their relative geological scarcity.

ChrisGraley

Silver will never reach nor exceed parity with gold. Any conditions like those discussed above where you have a COMEX run on physical supply, for example, would send gold up correlatively. I have a ratio of 30:1 in mind, though something in the 20:1 area could be plausible. Gold and silver will always be tied together by the slingshot rubber band. Silver can't go to the moon without gold, and vice versa.

As incredibly useful and difficult to replace as silver is in industrial applications, I think it's safe to say you can kiss 99% of industrial demand goodbye if we ever hit $1,200 silver. :) Keep your targets closer to Earth, my friend ... we have to get to $50 silver before we can get into the thousands.

Just a touch of unsolicited advice for the New Year. :)

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#13) On December 28, 2009 at 1:02 AM, XMFSinchiruna (27.12) wrote:

The source I cited for my last silver article indicated 15:1.

I had 16:1 in my head from David Morgan's book "Get the Skinny on Silver", I believe.

I've seen 15:1, 16:1, and 17:1 variously, as in truth these are but extrapolated estimates, but in any event I think it's safe to say the real number lies in the teens. 

Sinch

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#14) On December 28, 2009 at 1:31 AM, binve (< 20) wrote:

Hey Sinch,

Thanks for the info! Yeah, I looked the number up quickly on some random geological website, and it jived with what was in my head. But I think in my head was "sixteen" which sounds a lot like "sixty". .... Doh! :) Shame on me for not digging into that more deeply. You are right of course. 16:1 (or thereabouts) is the geological scarcity ratio of silver:gold. Thanks man!

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#15) On December 28, 2009 at 10:14 AM, binve (< 20) wrote:

LiveOakGrey,

Hi LiveOakGrey, thanks for the comment!

Since everyone accuses you of being biased and one-sided, in spite of your disclaimers- maybe you could just have a surgeon general's warning label next to the 'binve' box on your charts.  "Warning: The Surgeon General Knows TA to be only slightly more accurate than a coin toss and may only represent one of several possible outcomes, so quit yer snivveling and take this as part of a balanced due-diligence meal... not an appetizer to be eaten only on it's own."

Actually, leohaas was the one who said TA is only more accurate that a coin toss, not me. That statement itself shows a misunderstanding of TA. TA, like FA, is not a completely predicitve tool. If you do FA on a company and determine it is undervalued the company may not gain in price from where you did your analysis (might be hiding losses, terminal decline before bankruptcy, etc.). TA is similar. It has very powerful forecasting abilities, but any smart technician does NOT use it to predict the future. The best way to use FA and TA (and both are needed) is as a risk mitigation tool. The help you to find low risk / high reward setups. The coin toss comment from leo is counterproductive and I have adressed comments like this one many times. I was tired (and a bit annoyed) and did not feel like addressing it again. I suppose I am making an exception right now.

About gold/silver being more than an inflation hedge... are you guys referring to the fact that gold is money ( a form of currency), and that is why it is more than an inflation hedge?  Obviously, it is a form of currency.  I was just reading this quote along those lines: "Gold still represents the ultimate form of payment in the world." - Alan Greenspan

Here is what gold is (IMO): (http://caps.fool.com/Blogs/ViewPost.aspx?bpid=307950) And it is much more than an inflation hedge. In fact calling it an inflation head with no additonal qualification is misleading.

Is there any risk diversification to buying a company's stocks on the exchanges of more than one country?  For example: buying Hecla on the Toronto/Vancouver/etc. exchange as well as on one of the U.S. exchanges?  Is there any risk of currency collapses causing a nation's exchanges to freeze up at some point, or to lose your access to those stocks?

I like to think in terms of risk management and 'not putting all your eggs in one basket'. So that is a good idea. Another idea, is if you have miners that you plan on holding for years, you may want to list directly with the Transfer Agent if your broker allows that, and if not, then request stock certificates Not for everything, but for investment grade miners, that might be a good call.

Thinking along the same lines of risk management for bullion, I own gold in several forms (miners = leveraged future gold, CEF, Bullion Vaults (goldmoney or BullionVault), and actual physical). None is mutually exclusive. But a serious gold investor will want to spread out risk (IMO)..

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#16) On December 29, 2009 at 3:40 PM, LiveOakGrey (< 20) wrote:

Binve,

Good stuff, thanks!  Regarding actual physical PM ownership, I like the idea, but in case you hadn't seen that video, be sure to remind people not to leave anything of value in bank safety deposit boxes.  Especially in California.  Since, the state governments hire locksmith firms to drill the boxes open, if they are listed as 'abandoned,' after one year (varies from state to state I guess).  

In CA, the State Controller, John Chiang, admitted it has been a scandal over the last two decades.  In Carla Ruff's case, the valuables were taken, even when the documents in the safety deposit boxes clearly listed the name of the owner, and that owner was still clearly alive, and may live only a few blocks from the bank.  In a Good Morning America expose involving Carla Ruff's experience, at her Noe Valley neighborhood Bank of America in San Francisco,  this included the state selling off family heirlooms like pearl necklaces for a small fraction of their actual value, stocks, etc.  The money is then put into the state general fund (in CA) and the locksmith gets some kind of commission.  The banks keep quiet, but B of A and the State of California, is being sued in a class action lawsuit by attorney Bill Palmer, and the bank is making some kind of settlement.

Naturally, B of A, deeply regrets the situation, they say so in the article. There's a video you can watch on the site below, from the t.v. show, too.

I can't seem to create a link, but here's the URL, from ABC News, to the article by Elisabeth Leamy, May 12, 2008.  

http://abcnews.go.com/GMA/story?id=4832471&page=1 

Our government is so flagrantly dishonest, and the banks are so deeply in collusion, that the old-timers that 'didn't trust banks,' turn out to be not totally crazy after all.  Maybe in 40 years some unforeseen set of circumstances will make kids finally have to agree with me, that I wasn't so crazy when I kept muttering incoherently about how "I don't trust ball point pens." 

 

Conspiracies abound, and as Dr. Pangloss said: "We should each wear our hats."  Mine's made of tin foil.

-Grey 

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#17) On December 29, 2009 at 4:11 PM, binve (< 20) wrote:

Hey Grey,

Yeah, that video made it around Caps (or one similar) when it first aired. I do not own a "safety deposit" box (used *very* loosely) nor will I ever.

Yes, I too am a fan of tin foil hats :)

Reinstating the Tin Foil Hat Zone

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