Be Leery of this Parabolic Move in Gold

by John Galt

December 2, 2009

I am not one to question the reasons behind the move we are seeing in gold but from every logical bone in my body and the history of moves like this, we are in what could be considered a short to intermediate term parabolic blow off which will top and come down hard. I know that the gold bugs will hate me for saying this but this move has all of the indications similar to the head fakes we saw in the late 1970’s before a correction set in then the final parabolic move to all time highs. The problem with this move is that it is unique and could violate all technical reality much like the current U.S. equity markets which are also considerably overdue a move to the downside based on fundamentals and technical reasons.

Here is a chart of the gold futures with the dramatic portion of the action highlighted with the obvious parabolic characteristics and my projected region of support:

Gold12_2parbolicjgfla

I am not saying that we will test the support levels but the lofty moves above the 50 day moving average will eventually come back to earth as the Fed and the world central banks feel that the recent inherent weakness in the U.S. Dollar has gone far enough and artificial moves are attempted to bolster the price and move the U.S. Dollar Index back up over the 78 level. In my opinion that will cause a correction in gold but ultimately fail leading to the big move in gold up over the $1500 price level and hitting Jim Sinclair’s angel above the $1650 area. There are two things that could prevent this technical correction from happening, number one being a war in the Middle East or military action by Israel against Iran and the second would involve an announcement by the Chinese or another major central bank of a major increase in their gold reserve purchase plans which could double the price in very short order.

The GLD ETF, America’s favorite paper phony gold play is also exhibiting similar characteristics, but the gaps in the price moves tells me we have some backing and filling to do that could create a headache for the permabulls and also cause a false sense of optimism for the “gold is a relic” crowd:

GLD6MOjgflaGAPS

If we fill all three gaps, which I think is likely, then the move up from the teset of the lower end will be quite dramatic and remove any doubt that the U.S. Dollar is in its final death throes. I’m not saying what WILL happen gang, but based on the voracity of this move and the dramatic manner and volumes involved, eventually it should burn itself out, retrench and then surge higher from these new higher lows I have outlined and provide a long term healthier bull market in the metal.

Advertisements

15 Comments

Filed under Uncategorized

15 responses to “Be Leery of this Parabolic Move in Gold

  1. Scott

    Agreed. I took profits Monday. It just doesn’t make sense and when things don’t make sense and you just move with the crowd, much of the time you end up over the side of the cliff.

  2. Tim

    Under normal conditions I have faith in technical analysis (and for the “backing and filling” principle you point out that would suggest the gaps will be filled prior to a new upwards move) but it seems that we are facing conditions that are far from normal right now. Can you explain to me why the technical factors of the chart would outwiegh the monster forces at work driving gold right now- i.e. some central banks going from sellers to buyers, massive printing of paper money devaluing currencies across the world, etc? Under these conditions, who in thier right minds would be selling gold, particularly on a scale that would cause such a pullback- what could they possibly put the $ into if they sold? If there is a solid case to be made, I am persuadable, but right now I don’t see it…

    Many thanks for a great blog!

  3. Do you still think this way after the news articles of China buying gold in a big way? I am sitting on the fence waiting for a correction in order to purchase quite a bit more, but the uptick is making me nervous.

    Knowing my luck I’ll buy right before the correction.

  4. Jim ODonnell

    Yes John, a pause would be ok by me but I am not selling anything for a long time.

    According to my first technical teacher Joe Granville, gaps are usually filled in actively traded securities, except ….

    Breakaway gaps to the upside [downside] need not be filled in especially when the gaps up are to new all-time record prices. Also GLD is not continuous in its trading 24/7. I don’t think that there are any gaps on the spot gold prices charts.

    • Administrator

      No gaps are possible in a 24/7 security or commodity. But the chart does indicate some weakness above $1250 which could bring us back down towards the 50 DMA. I shudder to think how high gold will go though if we fill the GLD gaps in and move to $1060-$1080 as the foreign central banks will liquidate their dollar holdings in VERY short order and buy all of the physical gold that they can.

  5. Mark

    Lady, Gents, Administrator and John,

    I really have to smile about the post and comments. John, you especially. Having started the series on the dollar’s death, should be open to your own scenario. Do you really think when the reserve currency of the planet dies that TA is going to matter and gaps will be filled before the death?

    Now I know that the way to bet during most of the bull rise to date has been using TA. And TA can be a fine tool when used with Fundamental Analysis. TA is not the driving force here. Fundamentals are and this is the first test case for a worldwide fiat reserve currency system in its death throes. And as John’s series points out, it will happen suddenly. Sure there will be lead-in events, which in hindsight will look blindingly obvious. But this is a first time and the other currency crises have only affected minor players.

    What’s coming can be described in math terms as a discontinuous event. A fancy way for saying the basic rules change and change in unpredictable ways until the event has completed.

    This currency crisis will be a world wide event. The PTB may or may not think they have a handle on it. I don’t think this event can be “handled”. There WILL be unintended consequences. Violation of TA will be the least of these consequences.

    Just my 2 cents and I would LOVE to be proven wrong or a worrywart or a doom and gloomer. Still, I’m not going to rely on TA to be my shield, at least not my main shield.

    Best to us all,

    Mark

    • Administrator

      Believe me Mark, I wrote a piece this past spring about Useless TA-TA’s regarding the discarding of traditional technical analysis due to the actions of the stock market and the games being played. IF the Fed refuses to defend the dollar, all bets are off regarding prices on equities, commodities and bonds. And that is the danger that lurks in our financial system as if we lose the ability to use TA to consider outcomes then major investors will simply park their money in safety (like they are now) and refuse to participate in the economy. The very actions of manipulating the markets as they have may indeed be the precursor to the 1937 scenario the Fed and administration are so desperate to avoid.

  6. Mark

    Ah serendipity. Take a look at Dan Norcini’s post for Dec 2, 10:22 PM EST. Perhaps one of those, in retrospect, blindingly obvious signs? Or not. Stay tuned 😉

  7. Pingback: The Prophetic View News! – December 3, 2009 « The Prophetic View News!

  8. KEIKO

    Good evening, John. Thank you for your previous reply to my comment.
    As you know, I just invested my money into Gold a few weeks ago. I am still holding it, but I will sell when the price reached around $1250 or below. I don’t know how to read your indices on the website. I will print out and will give to my friend who can understand. I think now it is a totally gold bubble. I hope I won’t regret myself like that I should have sold all my gold at $1225! I checked
    historical gold chart, in the between late 70’s to early 80’s, gold price doubled and went down to half of the price. I beleve most of major historical events always repeat. I think current economy situation is mix of 1970’s, and 1929. I still remember my mother used to took me to the supermarket to buy toilet papers, I had to wait in the line beside of my mother. I was just around 4 years old. But, this time I may not need to buy toilet papers, because …
    My friend also said that he will sell before reaching at $1250. Thank you again. I am always looking for your new articles. I think your analysis is the best and cool!!

  9. herdingcats

    Gold will go to 1226 , 1650 , then on to Alf Fields and Armstrong’s numbers . Don’t you kid yourself . There is no fundamental faith in the government , nor the currency . Bernanke will keep his job and continue printing money like the emperor Nero .So , we will have a hyperinflationary depression . Governments like China and India are buying gold now , and when that happens , the paper shorts get buried .We are in the midst of a 16 yr. bull run for gold . If you sell now , you will have a sore behind , because you will be kicking yourself in the butt for a long time . Check out Jim Sinclair’s website J.S. Mineset .

    • Administrator

      I don’t doubt we will see $2000+ gold soon, that is not the question. I’m simply pointing out that a 10% to 15% correction would be one healthy for the market technically and two indicate the big bull move is about to begin. $900 to $1200 is nothing; I’m looking for $900 to $1800 before the next consolidation. And if you think I’m selling, you don’t know me very well.-:)

  10. Mark

    I’ve been thinking about the Administrator’s last 2 posts. On the TA gaps being present and their potential to be filled, one might interpret that if one or more of the gaps are filled then John’s scenario is still a bit into the future. The “system” is still hanging together, TA still works, and fundamentals are secondary. Since Financial Land lives only for today, this is only a short term indicator. Lots of players are potentially looking to lock in last minute profits to close out the year (that short term thinking again).

    Plus, being Bernanke’s confirmation week, pressure has to be on to paint a better picture in the short term (this week and next). That almost gets the system out of 2009 as the last 10 days tend to be sleepy due to the holidays.

    And that perennial favorite, running out the weak hands that jumped on board for a momentum play, is real tempting. Big buyers (thinking China here) are said to like to buy the dips. Knowing the NY crowd wants the dip, big buyers may step aside a bit and allow a relatively small decrease price (the 10-15% mentioned) before resuming the Beijing Put.

    That said, I’d agree with the Administrator that getting out of position by selling anything to try and capitalize on this scenario is only for the brave (foolish?). Things happen in the electronic age very fast and, currently, easy. Until things just happen fast.

  11. Chief

    On 12/4 Gold dropped nearly $50 as the pendulum swings toward the other side. The dollar went up and stocks were flat. John, are the Feds and Wallstreet reading your blog? Next week should be interesting. However, after Christmas, reality will set in as the November and December retail and services numbers show no support for goods and services. Apparently natural gas use being down already reveals what is going on.

    Keep chugging along. Looking forward to more insight.

    Chief

    • Administrator

      I’m hoping more and more people read my blog. I’m tired of working for a living.-:)

      Seriously though, the CRE crash which is the inevitable result of another disastrous Christmas retail nightmare will result in a sustained effort to push the USD to the 70-72 range and allow the US Government to continue inflating to support the banks. After this month there will be only one Government owned bank, Citigroup, and it has to do something with the $85 billion in its “other assets” category once and for all. I smell the regional banks and insurers being the source of the next down leg of the financial crisis.