Before I start, I want to send wishes and prayers to Boston and my many friends there. I went to graduate school in the area, and my wife and I lived seven years at 780 Boylston Street, on the same block as today’s fateful blast. There are no words…
There’s another preliminary point I want to make. It is my view that gold is a deeply flawed investment vehicle that will hurt a lot of retail investors, investors who have listened to the predatory promoters with business models designed to stuff these investors with their products. I very much sympathize with those who have lost and will lose money due to this bad investment. It happens; we all get things wrong–sometimes dramatically. I can only hope the retail trapped longs have a risk management exit strategy and that they don’t override it.
Where I have no sympathy whatsoever is with the charlatans and hucksters. For them I can only wish pain. It’s too bad too many of them have already taken out enough fees and commissions in this gold bubble to set themselves up for life. But they are not going to get any of my sympathy when their businesses crumble, just as Countrywide, New Century and the like crumbled after their bubble popped.
So, with that, where are we now?
Up until last Friday we saw a steady and somewhat orderly decline. Tourist macro with the big positions (Einhorn, Loeb, Klarman, Paulsen, etc..) and commodity funds getting redemptions were the sellers. On the other side, retail investors continued to buy.
I stole the chart below from J.C. Parets’ write up of the MTA 2013 Symposium (h/t Josh Brown). It shows the retail buying as the professionals began to sell. The total ETF gold holdings continued to climb higher as gold prices went sideways. Even a tourist technical analyst like me knows what that means. I also know first-hand that mutual funds have been seeing inflows into gold funds as recently as last week.
All this ended on Friday, when, as I read the psychology and price patterns, we entered the acceleration phase of the decline. Nothing shakes emotions like speed. Those who thought last week they were seeing a buying opportunity suddenly froze: neither buying nor selling. And pros are not going to initiate shorts here. So, all that leaves us with is a handful of intrepid true believers and short coverers on the bid side, versus forced sellers on the offer–either because risk management is forcing them to do so or the margin clerk is. Either way, no one is selling down here because they want to.
I do expect that once the forced sellers at this level are spent, we will see a bounce. I think this starts tonight or tomorrow. Once the bounce plays out it would be a good time, IMO, for trapped longs to exit and those who share my thesis to re-establish shorts.
I think the Great Unwind of the over-accumulation of “real assets”—especially precious metals—has a long, long way to play out. Remember, this was only the first day that retail even had a chance to sell since they stopped buying last week, whereas the accumulation was years in the making.
Let me trot out a couple of charts. I did these charts on Saturday, in the hope of writing something sooner, but today’s price action has only strengthened the case.
Here’s a 10-year chart of the GLD. It looks like a massive top. The hope that it was forming a basing wedge or whatever was dashed by the price action on Friday. This chart looks like the top is in and it could fall a long, long way.
Some of you might be tempted to suggest that this “consolidation” doesn’t look much different than the one you can see in 2008 (above the lavender arc). For argument’s sake, let’s pretend they are similar.
In 2008, gold fell from the blue line down to the support represented by the red line. The red line is the base from which gold broke out in 2007, and hence, support. If a similar consolidation were to happen today, gold would fall back to the base from which it broke out in 2009—the blue line. That level is 100 on the GLD and about 1000 on gold futures. This would not be a comfortable consolidation to try and ride out from here.
But 2012-13 is not 2008. Back then, we were in crisis mode, with no clear bottom to our economy in sight. Inflation emerged as a big fear once the Fed started expanding its balance sheet aggressively in late 2008.
Today, we are on the back side of all that. The economy continues its anemic recovery. Inflation is really only a worry for the tin foil hat crowd. Joblessness is still very high, but it is grinding the right direction and household balance sheets have come a long way. The financial position of our financial and corporate sector is far, far better. In short, there are still fears, but they are fewer and less life threatening. This, plus the positioning and the fresh shift in psychology, will make it hard for gold to find a durable bottom anytime soon.
Again, here’s a clean chart of gold futures going back 14 years. Even my friends who are ideologically predisposed in favor of gold said this chart is a massive top.