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XMFSinchiruna (27.97)

The Only Technical Analysis of Gold You Need Right Now

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June 24, 2009 – Comments (17)

I'm going to keep this short, though the post will be thick with links for the curious. :)

Savvy precious metals investors employ a range of TA techniques within the rubric of an over-arching and far more crucial qualitative fundamental analysis. I'm not much for chart making, which thankfully is a skill covered for Fools by the amazing work of binve, but I have become well versed over the years with interpreting EWT, Fibonnacci, etc.

Sometimes, though, the best analysis is the simplest.

When it comes to understanding the gold and dollar markets comprehensively from both a fundamental and technical perspective, frankly Jim Sinclair has no equal. If anyone is invested in gold and not keeping track of JSMineset, then I dare say you are not practicing sufficient due diligence. :) His circle dots over the 'i's are funny to me, but the guy's expertise is no joke.

At this juncture, the technical characteristics of the USD and gold are so plainly visible in the simplest line charts that more "sophisitcated" techniques or indicators are not only unnecessary right now, but would only add noise to the picture. By zooming out a bit, the charts are telling Fools what's ahead.

Chart 1 is the USDX, showing in stark reality the steepness of the present short-term downtrend channel within the long-term USDX downtrend that began in 2002.

I think that the dollar cheerleading from Japan and Russia after the recent G8 financial summit represent a concerted effort to hold the line at the crucial 0.80 technical pivot point in the USDX by staving the receding tide of demand for USD debt to fund our aggressive spending activities. These efforts aside, I believe that the dollar lacks any fundamental support and so will continue the near-term downtrend more or less uninterrupted into the lower 0.70s before snother stand can be forged by those trying to counteract this major currency depreciation event. 

Chart #2 is gold, revealing a reverse head-and-shoulders formation so clear that the upside-down dude can be heard saying: "Dude, gold's prepared to break out big time!". Gold will not dip below $860 on this correction, and in fact could launch at any time for one last minor test of $1,000 before moving quite swiftly above $1,200 ... faster than most might consider plausible.

From Jim Sinclair: "It is my opinion that gold is in a positive phase of this leg of the bull market, seeking $1224 as a first target after a normal $1000 battle."

Jim has predicted a major breakout for gold beginning in June. Time will tell if he nailed the short-term timing (it would not be the first time), but either way I agree with his thesis:

"I have no doubt that the gold price is going to and through $1000 here on its way to $1224 and $1650. Following that it will move on to Alf’s numbers [into the thousands] via its normal drama."

"Gold is the inverse of the US dollar and has been manipulated lower via the paper market. Such action creates a coiled spring about to squeeze Jack out of the Box."

"Financial TV’s new spin is that crude is the new gold. What they have missed is that crude is your first example of how a currency has the potential of delivering hyperinflation as cost push without any meaningful demand pull."

 

There you go ... along with the information in the links provided, especially binve's bog post, I think that's everything Fools need to know about gold at this point in time. :)

Fool on!

 

 

17 Comments – Post Your Own

#1) On June 24, 2009 at 10:10 PM, Seano67 (41.26) wrote:

I've got some AUY and some SLW, so I'm feeling fairly well-covered in the gold (and silver) sector. That knowledge is very comforting to me on a variety of different levels.

 

Cheers!

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#2) On June 25, 2009 at 12:46 AM, checklist34 (99.73) wrote:

i maintain that if you like gold buy silver.

sean, your interest in gold makes me more interested, but i still think that if you like gold for inflation reasons buy silver, or buy coal, or buy natural gas, etc.

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#3) On June 25, 2009 at 12:51 AM, portefeuille (99.56) wrote:

for those the confused. the charts are here (pdf) (from that JSMineset site mentioned above).

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#4) On June 25, 2009 at 12:53 AM, portefeuille (99.56) wrote:

for those the confused.

for the confused.

 

(I guess I am one of those.)

 

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#5) On June 25, 2009 at 12:57 AM, Seano67 (41.26) wrote:

sean, your interest in gold makes me more interested, but i still think that if you like gold for inflation reasons buy silver, or buy coal, or buy natural gas, etc

 

Oh I'm loaded with commodities dude, all of which I bought at prices I considered to be pretty favorable, but we'll see. Coal, I've got some PCX and ICO, not a lot of either but enough I think. Don't have any pure nat-gas plays, but some indirect exposure to that thorough COP, which dabbles extensively in that realm (and XOM, BP, CVX to a lesser extent), and through EXLP. I took this beatdown as an opportunity to buy, slowly and on dips. I hope it all works out.

 

Cheers!

 

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#6) On June 25, 2009 at 1:03 AM, portefeuille (99.56) wrote:

Well, I am not a believer in inflation for the next year or so and do not see why those two charts got you so excited. Maybe I buy some next year (at $700 hehe ...).

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#7) On June 25, 2009 at 2:31 AM, mustbepatient (29.69) wrote:

I am a long-term gold bull and expect a further drop.  I want to start reaccumulating later this year.  Make of that what you will.

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#8) On June 25, 2009 at 2:36 AM, AnomaLee (28.88) wrote:

"Maybe I buy some next year (at $700 hehe ...)."

We'll see how that goes. But, I do agree with you portefeulle. I don't know why any of these charts would excite anyone, and I don't necessarily agree with you that gold won't dip below $860. I think it's a less than likely outcome considering that most indicators have been bullish on gold since March but you can't remove that possibility from the table at this point.

Yes, there is a strong negative correlation between the dollar and gold, but it is not a perfect correlation.

I stated my opinion about the dollar in one of your recent posts. My reasoning for being slightly bullish is that this currently rally is reminiscent to the rally seen from December 04 to December 05. (FYI: During that time gold prices still rose.) Big trends in the forex market typically last at least 8 months to several years. This current rally has already surpassed the prior multi-month rally in length of time and it could last much longer, but that by no means detracts any upside potential away from gold(though it may limit it temporarily).

The dollar re-entered into an uptrend which began on June 3, 2009. At this moment the dollar would need to stage a very swift dip towards the 77 range to signal a reversal in the forex market or trade below 80.62 by late July. I can't say with certainty this won't happen, but I say the odds are less than 50%

That's my opinion.

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#9) On June 25, 2009 at 2:44 AM, uclayoda87 (29.51) wrote:

It's interesting that the US government stopped reporting the M3 money supply, which would give us a reasonable idea of how much money is out there.  Then we would just have to estimate how much real production was  achieved in the US, to estimate real inflation.  I suspect that the real inflation rate was greatly underestimated by the CPI, which would likely become apparent if the M3 number was still available.

I believe that gold will be found to be severely undervalued because of the hidden inflation, so I buy GLD in place of putting my excess cash in a money market account.  CEF is another good option if you want some exposure to silver.

I disagree with Peter Schiff about buying a mutual fund of foreign currencies, since all countries have a fiat currency and each in some way is tied to the dollar and what happens in the US.  So if we are exporting inflation to other countries, why trust their currency over a hard asset like gold or silver.

Oil, natural gas and food appear to have more real value than any fiat currency, which is why I also own mutual funds covering energy and the food/agriculture sectors.

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#10) On June 25, 2009 at 8:06 AM, icuryy4me (< 20) wrote:

uclayoda87,

You can find M3 and other goodies (estimated) here

 

 

 

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#11) On June 25, 2009 at 10:55 AM, XMFSinchiruna (27.97) wrote:

portefeuille

Thank you for posting a link to the larger charts ... I didn't mean for them to shrink down like that. :)

As for your opinions about inflation, have you taken care to distinguish between cost push inflation and demand pull inflation? Have you considered inflation purely as a currency event and not as an economic event? Have you considered that inflation can occur regardless of economic conditions, driven instead by a crisis of confidence in the USD?

mustbepatient

I am a long-term gold bull and expect a further drop.  I want to start reaccumulating later this year.  Make of that what you will.

What I make of that is that you're okay with the possibility that you may miss the train when it leaves the station. Careful not to get overly cute with market timing.

AnomaLee

I don't know why any of these charts would excite anyone.

First, these charts are exciting because of who drew them. Jim Sinclair was a central player in gold markets before most of us were in diapers. There's a reason why the Hunt brothers selected him to divest their market-making silver position, and there's a very good reason that hundreds of thousands of readers follow his blog today. Those who abruptly discount this analysis because the charts appear overly simplistic or because they have other notions in their heads about how gold will behave are encouraged to think twice. It's not only about the charts themselves, but about the depth of understanding behind those charts. I'm not some blind disciple or anything ... in fact I often find the specificity of his projected dates or targets rather odd (for example he has a specific date in January 2011 before which he expects his $1,650 target to be reached), but he has been uncanny in the past with his ability to call major pivot points in this multi-year run, and I've come to value his analysis immensely.

The charts are exciting because the conclusions run contrary to what many people, including many gold investors, anticipate. Many longtime gold investors are weary from these repeated approaches of the $1,000 mark followed by repeated corrections back into the upper $800s or lower $900s, and opinions vary greatly about when the successful trip through $1,000 will occur. Next Month? In the Fall? Next year? Jim has been clear in his recent posts that the conditions for gold's ascent through $1,000 have been fully established both on a fundamental and a technical level. 

The point of all of this is that we have precious little time remaining to position gold exposure for the next major leg up. If you've been on the sidelines wondering where to get in, that place is here and now. If it goes to $870 in a gut wrenching final drop, who cares? We all know where it's headed: well beyond the $2,000 mark by the time this is said and done. People will soon be kicking themselves for not acquiring gold exposure while it was still in triple digits.

Fool on!

 

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#12) On June 25, 2009 at 11:10 AM, XMFSinchiruna (27.97) wrote:

And returning to the fundamental side in a never-ending dance between TA and FA:

http://www.mineweb.co.za/mineweb/view/mineweb/en/page34?oid=85486&sn=Detail

China should buy gold as falling dollar hedge - China CP research

A senior China Communist Party researcher fears for future of dollar and says the country should buy gold, natural resources, U.S. Land and wants IMF's SDR reformed to give yuan a 20 percent share.

Author: Zhou Xin and Alan Wheatley
Posted:  Thursday , 25 Jun 2009

BEIJING (Reuters)  - 

China should buy more gold because the dollar is poised for a fall and the metal is needed to support the greater international role envisaged for the yuan, a senior researcher with the ruling Communist Party said on Thursday.

Li Lianzhong, who heads the economic department of the Party's policy research office, said China should use more of its $1.95 trillion in foreign exchange reserves to buy energy and natural resource assets.

Speaking at a foreign exchange and gold forum, Li also said that buying land in the United States was a better option for China than buying U.S. Treasury securities.

"Should we buy gold or U.S. Treasuries?" Li asked. "The U.S. is printing dollars on a massive scale, and in view of that trend, according to the laws of economics, there is no doubt that the dollar will fall. So gold should be a better choice."

There is no suggestion that Li, even though he is a senior researcher, was enunciating an agreed party line.

However, a debate is swirling in China about how the country can reduce its exposure to the dollar and to U.S. assets in case America's ultra-loose fiscal and monetary policy rekindles inflation and erodes the value of the dollar and U.S. Treasuries.

To that end, China has said it will buy up to $50 billion worth of bonds denominated in Special Drawing Rights, the International Monetary Fund's unit of account, to be issued by the IMF.

Chinese companies, at Beijing's bidding, are also snapping up energy and commodity supplies around the globe to fuel its fast-growing growing economy.

Sinopec, China's largest oil refiner, agreed on Wednesday to buy Swiss oil explorer Addax Petroleum Corp (AXC.TO: Quote) for $7.24 billion in China's biggest overseas acquisition.

China disclosed on April 24 that it had increased its holdings of gold to 1,054 tonnes from 600 tonnes since 2003.

However, China's foreign exchange reserves have grown so fast over the same period that gold's share of the stockpile, the largest in the world, has shrunk.

Li cited the high share of gold in the foreign exchange reserves of the United States, Italy, Germany and France, to argue that China's gold holdings, which account for about 1.6 percent of its reserves, are too small.

REFORMING THE SDR

China does not disclose the composition of its currency reserves, but bankers assume around 70 percent of it is held in dollar assets.

China is the largest single holder of U.S. Treasuries, with $763.5 billion at the end of April, according to U.S. Treasury data.

Analysts say this data set understates the true number as it does not capture paper bought through dealers in London or elsewhere.

Li said a second reason for buying more gold would be in anticipation of the yuan one day becoming a reserve currency.

The yuan is not convertible on the capital account, meaning it cannot be freely traded for other currencies for financial transactions that are not related to trade.

This rules out the yuan's use as an international reserve currency, for central banks would not be able to convert it quickly if necessary.

But, in a very preliminary step towards that goal, China is paving the way for greater use of the yuan beyond its borders.

The People's Bank of China has arranged currency swap deals with six countries since December totalling 650 billion yuan ($95 billion) so that trade and investment with China can be conducted in yuan, not dollars.

And China will soon allow selected firms in the southern province of Guangdong that trade with Hong Kong to settle their transactions in yuan, or renminbi.

"If the yuan should go international or become a reserve currency, China needs more gold to back that," Li said.

When the yuan does become an international currency, which Li acknowledged was a long way off, he said the composition of the SDR should be reformed to include the Chinese currency.

Ideally, in the long term, the SDR would be made up of the dollar, euro, sterling and yen and yuan, each with a weighting of 20 percent, Li said.

The SDR is currently made up of the dollar (with a weighting of 44 percent), the euro (34 percent), the yen (11 percent) and sterling (11 percent)

The four currencies in the SDR, which must be convertible, are those issued by Fund members with the largest share of global trade. The weights assigned by the IMF are based on the value of exports and the amount of reserves denominated in those currencies.

The composition of the basket is reviewed every five years. the next review is due in 2010.

 

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#13) On June 25, 2009 at 3:36 PM, XMFSinchiruna (27.97) wrote:

http://www.miningweekly.com/article/gfms-still-expects-fresh-gold-peak-in-h2-09-2009-06-25

GFMS still expects fresh gold peak in H2 09

TORONTO (miningweekly.com) – An inflation-driven surge in gold investment around the world will likely boost the yellow metal to new highs in the second half of this year, GFMS chairperson Philip Klapwijk writes in the latest issue of the consultancy's quarterly newsletter.

Investment demand, and especially so-called 'western' elements, like exchange-traded funds, futures and the over-the-counter market, is expected to remain the driving force behind gold price movements over the rest of 2009.

“Given increasing fears over the long-term inflation threat in western countries, we expect world investment to see a massive increase this year, particularly from its implied net investment and official coins components,” Klapwijk commented.

GFMS calculates world investment as the sum of implied net (dis)investment, official coins, bar hoarding, and medals and imitation coins.

In its May quarterly three-year gold forecast, GFMS predicted that world investment this year would actually exceed 1 500 t, or some $47-billion, which would carry the gold price to new peaks by the end of the year.

Growth in investment demand has been the primary driver of the rally that has taken gold from around $250/oz in early 2001 to peaks above or close to the $1 000/oz level in 2008 and 2009

Increased demand has been mainly driven by booming investor interest in gold.

This is “a result of the general decline in the US dollar since 2002; rising commodity prices (at least until mid-2008); concerns over the security of bank deposits following the near meltdown of global financial markets; more recently, the drop in short term interest rates to levels close to zero in the major advanced economies and growing concerns at the potential longer term inflationary consequences of unprecedented monetary and fiscal policy easing,” Klapwijk says.

He suggests that the 'western' investment tends to be what drives gold prices, either higher or lower, while demand in the rest of the world – bar hoarding, medals and coins - generally tends to support a floor – “although as has been seen over 2001-2009 - to date, a floor that is at successively higher price levels”.

In April, GFMS said it expected to see gold prices set new records this year, possibly rising as high as $1 100, on investment demand.

Gold set a three-month high of $989,80/oz earlier this month, but has been weighed down in the last couple of weeks by a stronger US dollar.

The precious metal was trading at around $936/oz on Thursday afternoon.

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#14) On June 25, 2009 at 8:53 PM, portefeuille (99.56) wrote:

#11 As usual, I will let Hugh Hendry make the case against inflation. See the video here and some more stuff here.

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#15) On June 25, 2009 at 9:16 PM, portefeuille (99.56) wrote:

and on gold here.

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#16) On June 25, 2009 at 9:57 PM, portefeuille (99.56) wrote:

and on the dollar starting at 2:33/9:23 here.

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#17) On June 26, 2009 at 5:02 PM, speedybure (< 20) wrote:

Sinch:

I apologize for my tardiness, I actually just moved from california to Sydney for a year or two for a Phd program. I didn't quite understand your comment on my last post ("an adaptation of Ben graham's formula"). Did you want my email-address? I couldn;t decipher what your were asking, maybe its this jet lag. Anyway of that was the question it is marchese.chris@gmail.com.

Wow did I get ridiculed left and right for that post. The only reason graham's formula needs high growth rates in Yamana's case is because its an emergin industry i.e gold miners have rarely been profitable year after year. But wow, I actually came out with relatively similiar numbers when using dcf or other models. I think we ar two crazy gold bugs. 

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