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.
June Gold:
04-23-2008: June Gold: Life Cycle of a Bubble
Introduction
Parabolic Chart
June Gold:
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.
1080.0 R 4/21
I CMX - Jun-08 Gold, 100 troy oz., $/oz. Cm.=0.30 Lim.=15.0
I
I
I
1040.0_________________________________________________________________________
I
I
I
I X
1000.0_________________________________XO______________________________________
I XO
I XO
I XO
I XO
960.0I_________________________________XO______________________________________
I XO
I XOX X
I XOX XO
I X XOX XO
920.0I_______________________________XOXO__XO__________________________________
I X XOX XO
I XOXOX X
I XOXO X
I XOX OX
880.0I_____________________________XO_____O____________________________________
I X
I X
I X X
I XO X
840.0I_________________________XOX_X___________________________________________
I XOX X
I XOX X
I XOX X
I XOX X
800.0I___X_____________________XO_O____________________________________________
I XO X
I XOX X
I XOXO X
I XOXO X
760.0I___XO_O__________________X_______________________________________________
I X O X
I X OX X
I X OXO X
I X OXOX X X X
720.0I___X__O_OXO________X_XO__X_______________________________________________
I X OXOX X XOX X
I X OXOXO X XOXOX
I X OXOXOX X X XOXOX
I X OXOXOXO XOXOXOXOX
680.0I___X____OXOXOXO__XOXO_O_OX_______________________________________________
I X OXO O O XOX O
I X OX O XOX
I X OX OX XO
I X OX OXOX
640.0I___X____OX____OXOX_______________________________________________________
IOX X O O OX
IOXOX OX
IOXOX O
IO O
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.
We are headed toward a cyclical high and a seasonal down period.
Our best-performing internal program is " Pattern." It is giving a sell signal.
Results of "Pattern" for Gold (blue lines = successful trades, red, unsuccessful): (Always in the market.)
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.)
The point value is $100. Initial margin on a single contract is $5,400. Use of options is advised.
Scale trade sellers are entering the market in this price range for the long term.
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.
The average volatility shown below suggests that the major direction of up remains intact from the last volatility low point.
Our option trade recommendation is to Sell the Comex Gold December 860 Put @ 32.80 or better.
Here's an intraday chart for the previous day ( 10/22 ).
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:
| Factors | Weighted 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.
