Saturday, March 20, 2010

What Will "The Trigger" Be For Gold to Move Higher?

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This is one of those things that doesn't matter as much as people think. Watching the daily financial news, scanning for clues, looking for justification. One of the great secrets of speculating/investing is the fact that the daily news item chosen to "explain" a move higher is not that important.

When it is time for the price to move higher, it will find a justification and news will magically appear. How many times have retail traders been frustrated to see a piece of news come out that supports their investment thesis and yet the price languishes or even moves the opposite direction of what the news would suggest. This is why Elliott Wave Theory and cycle theories are so attractive. And please note: Bob Prechter the Gold hatin' deflationist is not the only Elliott Waver out there even if he is the guru du jour. Ask Alf Field or Tony Caldaro for secular Elliott Wave peak price targets on Gold and you might not hate Elliott Wave so much as a Gold investor.

The point is not that Elliott Wave or the various cycle theories work so well, the point is that we all seek to understand why markets move up and down to gain an "edge" that allows us to profit from these moves. The daily news doesn't cut it, so people turn to cycles, alternative theories and technical analysis to try to understand what is coming next.

I continue to believe a strong upside move in Gold and Gold stocks is coming. This is based on historical patterns/fractals, fundamental analysis, sentiment data, money flows, long-term cycles, seasonal patterns and technical analysis. In other words, a hodge podge of different factors. These factors are all screaming "buy" to me when I look at the data.

Here are a few more data points for the short term. First, a chart I made in Excel based on the data that is available for free from Rydex. This is a chart of the total assets held by the Rydex Precious Metals Fund, a proxy for retail investor interest in the Gold sector (i.e. a type of sentiment data). This chart covers the last 3 years and when the blue linear plot is low, it means decreased total assets in the fund (i.e. decreased interest in the Gold sector):

Notice the last time investor interest dragged along the bottom (like it is doing now) was in the summer of 2009. Just to show how relevant this may be, let me first show you a current 6 month daily chart of the Gold Bugs' Mining index ($HUI):

And here's the action in the summer of 2009:

Or how about the time period I keep harping about - the 2001-2002 time frame? Here's the correction in late 2001 to show the daily candlestick pattern before lift-off:

And you don't have to guess what came next, the historical data is there for those interested. How about we check in on the $HUI 6 weeks later:

Along the lines of current Gold sentiment, Jordan Roy-Byrne over at The Daily Gold does some excellent work with the put to call ratios in the Gold patch. Here is a chart stolen from a piece he posted a few days ago showing the put to call ratio in the GLD Gold ETF:

Now, what news item could set this Gold market off and get it to run higher? Hmmmmmm. What if the U.S. was broke and overtly and covertly counterfeiting money to buy its own bonds and support the bond market (i.e. quantitative easing)? And then, let's say that Congress decided to meet on a Sunday to pass a new health care entitlement that would cost hundreds of billions of dollars that the government doesn't have. Ah, forget it. These scenarios are too far fetched...

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