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The Makings of a Failed Breakout?
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Call me worried, officially worried. It’s weird, this “breakout” different. Any close observer to the gold market over the past eight years has noticed the history of surges once a descending triangle is taken out to the upside, especially the longer term ones. And thus we had it, back in late August almost, but here we are, virtually unchanged from the breakout level of $890 gold, so what’s going on? Let’s think about this.
Going back in time, the first two breakouts in gold were relatively easy to diagnose, and good money was made by those who paid attention. This one was similar in every respect, except the immediate price action following the technical achievement. Is 3X the charm or the curse? It certainly seems as though speculators were well schooled in gold’s prior technicals, and I say this on account of their recent addition of roughly 70,000 long futures contracts, or as Jon Nadler posted today, 800 tons worth of gold. I had been waiting myself, but noticed a key difference in the nature of the COT report from major rallies past. Gold’s prior September-March/April drives saw a net spec long positionclose to a mere 50,000 contacts in the Augusts preceding them. This year, we were nowhere close. It made me cautious. Fundamentally, I understand the inflationary/dollar devaluation argument as much as I continue to respect the deflation/credit contraction case. As I watch gold struggle with speculators abound, I cannot help be concerned, though I fully understand that gold theory states explicitly that the shorts will ultimately end up covering into the final blitz horrarah. Anyhow, since the big shorts have never lost at the sinister game they play, I find at least room for pause here in witnessing their paper short interest climb in what seems to be dramatic, intentional, and unwavering fashion.
My angst could be misplaced. We could all look back and say, dicey breakout, but breakout no less. Sure, we could. I never like to argue with history. But then there’s that lingering thought, of the agonizing kind. What would happen to gold if, contrary to breakouts past, spec interest exploded into a stagnant price, ultimately retreating, and nightmarishly, breaking key uptrend support around $950. I will be honest here—I don’t know that will happen. But if gold were to materially break that level, without an immediate bounce back above it, look out below. When the people get tricked, or history fails, the people sell, especially because this will immediately become known as the first failed technical breakout. Maybe I’m just too worried. After all, gold’s technical chart could be interpreted as extremely beautiful, supermodel almost. But it’s interesting. I remember during the credit crisis that gold never hit its major uptrend line on the way down to $680. A return trip to$ 700+/- would hit it now. I don’t know.
Yes, it’s all very confusing. I am concerned about the S&P. No, I am not buying any stocks. That mindset, the one that frets the powers that be cut the liquidity from here keeps me honest, no position too large, commodities included. I agree that it’s confusing out there, and I will tell you why, specifically. Answering the Inflation/Deflation question is the most difficult on the table. All answers have smart rebuttals. Unfortunately, in that balance, the future lies.
PS. Yes, gold can ultimately, theoretically, perform well during deflation, but not at its outset, I would think not. It’s not a time for life altering bets.
John Cassimatis
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John Cassimatis has been managing his own capital for 14 years in various markets.
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