04-23-2008: June Gold: Life Cycle of a Bubble

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Introduction

Commodities have been known to make great swings, from overly-cheap, to overly-expensive. We appear to be somewhere in the cycle of a bubble in precious metals prices for the second time in about thirty years. The last time was during a period of runaway inflation, when Carter's Federal Reserve Chairman Volcker foolishly let interest rates float. Today it seems we have a period of inflation again, caused by somewhat similar circumstances, a mis-managed Federal Government that let the value of the Dollar sink (which is de facto inflation) and let its borrowing get completely out of control. Like the previous bubble, we went from cheap gold to very expensive gold, and the question remains, where are we now in the bubble cycle? Has inflation been accounted for? Or are worse things yet to come that will keep precious metal prices floating ever higher and higher, as crude oil and all things associated with transportation of people and goods become more and more costly? The total absense of an energy policy by our government friendly to the big oil trusts suggests that the latter may be the case. On the other hand, while this present move may not have played itself out entirely, a strengthening U.S. stock market suggests we may be near the tipping point in the bubble and are closer to the ceiling in gold prices than to the bottom. We think we are still on the way up, but the bulk of the move clearly has played itself out, giving no assurance of direction.


Parabolic Chart

June Gold:

Parabolic Chart


Nirvana Chart

June Gold:

Initial Chart


News Analysis

In 2001, the production cost for gold was roughly $160/ounce and
prices dipped to $270.  In 2007, production costs rose to
roughly $450/ounce and prices approached $1,000.  From too much
gloom to too much optimism in the price of gold!  Consolidation
in the mining industry gets much of the credit for gold's rise
with its disciplined production and selling.  Newmont bought
Normandy of Australia and became the world's largest gold
producer.  AngloGold Ltd. bought Ashanti Goldfields and became
the second largest producer.  Barrick Gold bought Placer Dome
and Homestake Mining to become the third largest producer.
Prices of corresponding stocks quintupled.  At the same time
both the U.S. economy and the U.S. Dollar stumbled accelerating
the effect of the consolidation by introducing inflation.

Central Bank sales in Europe were reduced by a five-year
agreement limiting sales by Germany, France, Switzerland, Spain
and Italy to 500 tons per year.  In June, 2007, the Swiss
National Bank said it would sell 250 tons of gold over the next
two years.  In April, 2008, the International Monetary Fund said
it might sell 13 million ounces of gold over the next several
years to raise cash.  

In April, 2008, GMFS Ltd. said it expects the price of gold to
reach new highs in 2008, and that world mine production was down
0.4% in 2007 to the lowest in eleven years.  China exceeded
South  Africa as the world's largest producer for the first
time.  GMFS Ltd. expects the same level of production in 2008.
In November, 2007, the World Gold Council said that world gold
demand was up 19% in the third quarter froma year ago, as a
result of the subprime mortgage lending crisis when investors
were seeking a safe haven.

World gold mine production in 2006 was 79.3 million troy ounces.
This was down from the highest year, 2001, when 84.3 million
troy ounces were produced.

In recent news, analysts' dire predictions for a bearish gold
market have been counteracted by a week of deteriorating U.S.
economic news.  Indian gold market action and India's expected
launch of a new online spot bullion exchange suggests Indian
demand will increase.  The U.S. Dollar's low of April 16th is
sufficiently close to suggest another retest, supportive for
gold.  Gold may be discounting both crude oil prices and U .S.
Dollar action as we await a flood of new U.S. earnings reports
that could rekindle broadbased U.S. recession fears.  Bears will
probably have the edge in gold sales pending a resolution of a
seeming U.S. economic growth and equity market resurgence, that
has not quite become well-enough defined.  If this resurgence
fails, gold will climb again.
 


Point & Figure Chart

1080.0                                                                   R  4/21
     I CMX - Jun-08 Gold, 100 troy oz., $/oz.      Cm.=0.30  Lim.=15.0
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920.0I_______________________________XOXO__XO__________________________________
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880.0I_____________________________XO_____O____________________________________
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840.0I_________________________XOX_X___________________________________________
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800.0I___X_____________________XO_O____________________________________________
     I   XO                    X
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760.0I___XO_O__________________X_______________________________________________
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     I   X  OXO                X
     I   X  OXOX         X X   X
720.0I___X__O_OXO________X_XO__X_______________________________________________
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680.0I___X____OXOXOXO__XOXO_O_OX_______________________________________________
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640.0I___X____OX____OXOX_______________________________________________________
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600.0I----I----I----I----I----I----I----I----I----I----I----I----I----I----I---
                      111       1111
      233355555677899900213357791112112233444
      001211122212100201120212201232120012001
      710757834787558836522800742306644896138
Our computer says a non-conventional reactive interpretation of point-and-figure chart signals works best for Gold. Therefore, the above chart is taken as giving a buy signal.


Cyclical and Seasonal Factors

We are headed toward a cyclical high and a seasonal down period.

Cyclicals Cyclicals Seasonals
Seasonals


Internal Program

Our best-performing internal program is " Pattern." It is giving a sell signal.

Internal Printout 1 Internal Printout 2

Results of "Pattern" for Gold (blue lines = successful trades, red, unsuccessful): (Always in the market.)

Results


Third System Confirmation

Our third system has just triggered a sell signal. (Note, disregard the year date on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)

Third System


Margin

The point value is $100. Initial margin on a single contract is $5,400. Use of options is advised.


Historic Range

Scale trade sellers are entering the market in this price range for the long term.

Historical Chart


Commitment of Traders

Commitment 1

In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Red is small speculators. Green is large speculators. Blue is commercials. Large speculators with the best track record are starting to get increasingly-short except for the last weekly blip.

Commitment 2


Volatility / Probable Range

FB 1 FB 2

The average volatility shown below suggests that the major direction of up remains intact from the last volatility low point.

Range/Volatilitiy Chart


Possible Future Prices

Random Chart


Option Recommendation

Our option trade recommendation is to Sell the Comex Gold December 860 Put @ 32.80 or better.


Other Factors

Multiple Chart Indicators Summary
Multiple Chart Indicators Summary


Here's an intraday chart for the previous day ( 10/22 ).

Intraday Chart


              Risk Versus Opportunity Report
             ________________________________

                  GCM8    June Gold

                      High Price:  1003
                   Current Price:  917
                       Low Price:  875

                            Risk:  0.089
                     Opportunity:  0.183

                    (O/R) Ratio =  2.048
Level Table:
Level Table
The path of least resistance appears to be just slightly up, although this is difficult to call.


Overall Recommendation

Decision Weighting Factors
FactorsWeighted Points
Parabolic Chart + 1
Nirvana Chart + 1
News + 1
Point & Figure + 1
Cyclicals + 1
Seasonals - 1
Internal System 1 - 1
Internal System 2 0
Third System - 1
Commitment of Traders - 1
Historic Range - 1
Range/Volatility + 1
Level Table + 1
Other Factors - 1
Total + 1
Place 2 June Gold on a Buy Watch with stoploss @ -29.60 below the get-in point.
________________________________________________________________________________________________________G.S.