"All human activities have three distinctive features: pattern, time and ratio - all of which observe the Fibonacci Summation Series" (R.N. Elliott - "Nature's Law - the Secret of the Universe" - 1946)


Saturday, April 20, 2013

GOLD: deep pullback or Bubble's burst?

In the last week, Gold has experienced a real fall in prices of 13%; the sell-off was fueled by sales of gold reserves of the Central Bank of Cyprus to operate the bailout agreed with the Troika.
Is the Cycle bull market over or is it just a deep pullback?

In terms of the overall context, it was already since last October that the price of Gold appeared under pressure as a result of the liquidation of long positions of many institutional investors who are attracted by the outperformance of the U.S. equity markets, preferreing to invest in NYSE and Nasdaq stocks instead hold futures contracts on gold or physical gold.

In the week before the crash last Friday, four major banks as Société Générale, UBS, Deutsche Bank and Goldman Sachs, had issued reports in which they identify an expected decline in gold prices; in particular Goldman Sachs in a report issued on April 9 provides that in the second half of the year there will be an acceleration of economic growth in the United States that will keep real interest rates at the current level, consequently estimate a decline in the price of gold to 1,450 Dollars per ounce at the end of 2013 and to 1,270 Dollars per ounce by the end of 2014.

In just three days, between Friday 12 and Tuesday 16 April, the market fell to $ 1,322 projecting well below the year-end target identified by GS, so we have to be ready to purchase gold?

The reports of fundamental analysis should always be evaluated with the eye of a medium-long term  investor, and the institutional (excluding hedge funds) are not traders, they build positions that maintain over the time, for them the timing is relatively unimportant, while for a private and small investor, thing is a bit 'more' complex; any trader knows the suffering of hold positions against the trend of the market, the slow and inexorable decline in the value of their investment, with a single but necessary painful action to be done: cut the loss.
So, the timing is very important.

With regard to the main factors of fundamental analysis which influence the trend in Gold prices, we try to understand what is the position of the Bulls and the Bears and then the potential outlook for price developments.

1) U.S. unemployment and inflation and Fed's monetary policy.
The gold buyers believe that, despite improvements in the employment situation, the unemployment rate is still far from the target value of 6.5% that guiding the ultra-expansive monetary policy of the Fed and that this will not end its quantitative easing program; long with all the money put into the market (4,000 billion dollars), inflation will start to rise, so that the gold will become a haven assets. The Bears, on the contrary, note that within the Fed grows a certain discontent with the current QE program with purchases of bonds and believes that by the year it ends; this will be greatly reduced or cooling potential inflationary pressures (which are very dormant).

2) the sovereign debt crisis in the Eurozone.
The gold bulls think that the crisis is not yet over, that after Cyprus there will be Slovenia and then maybe even Italy, which is not even able to elect the President of the Republic, and after more than 50 days before the election has not yet a Government that can ensure the continuation of structural reforms necessary to reduce the public debt (2,000 billion Euro !)
The Bulls also note that in Germany is growing a wave of Eurosceptics, especially those who do not want the money of German taxpayers are intended to countries in difficulty.
Instead the Bears do not see any particular risks of Euro-break because they feel that ECB will provide all the unlimited support that promised and that Germany will remain pro-UE because it can not afford a double European currency with a new Marc very strong would block its exports, the only real engine of economic growth.

3) supporting the growth and austerity contrast.
In Europe it is reviving the debate on the mobilization of the gold reserves to boost growth and counter the austerity measures, which may not necessarily occur with the sale of reserves in the vaults of Central Banks but also using the stock standard for the issuance of Eurobonds guaranteed in gold.
European Central Banks have become accustomed to use gold; from 1999 to 2004 the Bank of England has sold 345 tonnes of gold (not doing, in hindsight, a great bargain since the rise in prices from 250/300 $  also only to current $ 1,350 , not to mention the top at 1,900 $ ...).
Italy is the third country in the world for gold reserves (after the USA and Germany, the fourth considering IMF) and its dynamic use could be a solution to counter the severe economic crisis that afflicts us.
The Bears believe that new Euro crisis and the debt will cause the Central Banks (just the Italian one) to sell gold to avoid using more fiscal leverage and to cut public spending (maybe touching public salaries and pensions); the Bulls think that this can not happen.

4) Currency war with Japan exacerbated by the devaluation of the Yen against the Dollar (-25% in six months), which also puts a strain China and Korea, who see increased competition in exports of Japanese goods by reducing the strength of its own and could be induced to simulate actions of expansionary monetary policy that would support the gold.
Even in Japan traders sell gold despite the sharp easing program put in place by its Central Bank.

5) the supply and demand for physical Gold.

As well written by Ed Liston on Seeking Alpha:
 
"Gold demand mainly comes from the following sectors:
  1. Jewelry sector: This sector consumes around 68% of the total gold supply. Usage of gold is highest in countries in the Middle East and Asia. Seasonal demand, in case of festivals like Chinese New Year and Indian Diwali and wedding season, also affects gold prices.
  2. Manufacturing and Medical sector: This sector constitutes around 14% of the global demand. Gold is used in new technologies like chemical process, nanotechnology and electrical devices.
  3. Investment sector: In countries experiencing rapid economic growth like China and India, governments use their reserve funds to buy gold to reduce their exposure towards US bonds. This also acts as a demand driver of gold.
Gold supply comes from the following sectors:
  1. Production in mines: Mines produce around 60% of the total gold produced each year. South Africa is the world's largest gold producer at 14% followed by the US, Australia, Latin America etc. Supply from mines is crucial to the price determination of gold as lower supply will cause an immediate price rise. Recently companies like Barrick Gold (NYSE: ABX) have faced issues in their Pascua Lama mine which decreases their future estimate of gold production. Limited supply will put an upward pressure on the gold prices.
  2. Recycled gold: When gold prices rise, supply of recycled gold increases and the amount of this gold can affect the limit of price rise.
  3. International Organizations: Organization such as the International Monetary Fund (IMF) hold around 25% of the total gold reserves. Central banks in North America and Europe also hold some of the reserves. If these institutions release gold in the market, automatically that will distort the demand-supply equilibrium triggering a price correction."


6) the international geo-political tensions , such as those that may be generated in oil-producing countries in the Middle - East or rebellious countries like North Korea ; they support the price of gold as a safe haven;

7) the bubble in the bond markets
the prices of Bond and Bund arrived at levels unimaginable just a few years ago; as long as they will be considered a safety, gold bears have the upper hand; when the threat of bursting of the bubble will be more and more concrete, Bulls begin to accumulate resources in physical gold as safe haven and  prices will inevitably rise.

From the point of view of  technical analysis , integrated with the Elliott Wave Principle , the gold is in a long-term uptrend since the end of 1999.

 

Looking at the monthly chart, in 1980 Gold ends the previous Bullish Phase, which began in 1971, with a top to S 873 , qualified with the Elliott Wave Principle as main scenario, top of SuperCycle Wave [III]  (such as Alternative scenario: Alt: [I])
From 1980 to 1999 Gold develops a  SuperCycle Bear Market, the Wave [IV] (or Alt: [II] ) structured as  A-B-C in which wave B takes the form of a triangle pattern , [A]-[B]-[C]-[D]-[E] ; this corrective wave ends with a bottom at $ 251.
In 1999 a new SuperCycle Bull Market begins, the wave [V] (or Alt: [III] ), which in my opinion, according to the main scenario, is still in progress.




The weekly chart's analysis shows in detail the structure of this SuperCycle wave [V] , which according to my preferred count, is being developed as wave I extension of Cycle degree, with top in march 2008 to $ 1.024, close to Fibonacci's extension of 100% compared to the wave V of [III] starting from [IV] , fast correction in wave II until October 2008 to $ 682, new uptrend of wave III ( [3] extended), ending in September 2011 to $ 1.921 close to a Fibonacci price cluster given by: 200% wave V of [III] from [IV] & 1.618% of I from II .
Since autumn 2011, I think it is developing the Cycle Wave IV and the breakdown of the parallel line to the up-line from tops,  which took plase on 02 April,  could mark the final stretch of the wave  [C] of Primary degree, with the first target in $ 1.300 area (50% Fibonacci retracement of wave III), the second target in S 1.150 (61.8% Fibonacci retracement) and final target not below  $ 1.033 ; the breaching of this level would invalidate this preferred scenario for the Alternate one, that considers the top at $ 1.921 the end of wave Alt: [V o III] of SuperCycle degree.



In the short-term (daily chart), I updated the count to the breakdown of parallel up-line occured to April 02; until that time, I thought was possible and imminent the end of the wave [C] of a triangle pattern.
However, it's interesting to note that as the oultlook for the short-medium term was already bearish, working in trend-following approach, traders should not have long positions in their portfolios.
 
The breakdown of the strong static support at  $ 1.527 occured a week ago, support that had held the pressure of the Bears on three occasions (September and December 2011 and May 2012), constitutes an important signal confirming the primary bearish trend in progress.

Conclusions:

Traders who work with "a breakout or a pullback approach", should refrain from opening any long position; only the bravest traders operating in "reversal logic" can think of opening long if the $ 1,300 support hold, still taking a very high risk of loss (personally, I don't use Elliott to find bottoms or tops on which to open new long or short positions, but rather to close the ones (short or long) already open).

"The trend is your friend until the end";
Primary and Intermediate trends are bearish, traders should act cautiously opening short on controlled and well-structured bounces (to 2/4 / b) or with the break-down of congestion phases (flat type , triangle or three), but beware:
the Cycle Bull Market does not seem finished, in the long term is likely to see higher prices to existing and even to historic Tops.
If so, when?
We will see that just living ;-)


ElwaveSurfer

 

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