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A Must-See Gold Chart For Serious Investors And Traders, Part 2 - When Will Gold Bottom?

Why is this gold chart a must-see chart for serious investors and traders?  The answer is simple.  Those who have followed along have profited handsomely by buying a large core position aggressively in $600s, selling half of the core position at $1904 and selling the remaining half at $1757, undertaking a large number of profitable short-term trades from the long side during the gold bull market, and undertaking a large number of short-term trades from the short side to profit from the gold bear market. 

At The Arora Report, we rely heavily on adaptive algorithms that take into account many, many factors.  In our research, the four most important factors at this time are technicals, quality of ownership, inflation expectation momentum, and sentiment momentum.  All of the four important factors are shown on the chart of popular SPDR Gold Shares ETF (GLD).

This article is Part 2 of this series and will explore quality of ownership.  Part 1 explored technicals and can be found here.  The chart has been updated since Part 1.

Please click here for a large chart.

Broadly speaking, owners of gold can be divided into the following categories:

  • Central banks
  • Institutional investors holding gold as portfolio insurance
  • Individual investors holding gold as portfolio insurance
  • Gold bugs
  • Indians holding gold as part of an age old tradition
  • Newly rich Chinese
  • Smart money
  • Momo crowd

Gold Is A Small Market

When analyzing gold, based on quality of ownership, it is important to note that in terms of trading, gold is a very small market compared to equities, currencies, or oil.  For this reason, gold can move aggressively both to the upside and downside with comparatively little buying or selling. 

Marginal Buyers And Sellers

Out of the eight groups of gold holders, at this time only two groups are the major determinates of the price of gold.  These two groups are the smart money and the momo crowd.   

Due to gold being a comparatively small market, the actions of these two groups at the margin primarily move the gold price these days.  The remaining six groups at this time are in a steady state and thus not materially affecting the price of gold.

The momo crowd is quite distinct and different from gold bugs.  The momo crowd is a relatively new category of gold holders that came into being only recently in response to the Fed policy.   The gold momo crowd bought gold and silver simply because everyone else in their social circle was buying gold and silver, they thought it would go up, and they were scared of monetary policy pursued by the Federal Reserve.

The chart shows the zone with a white rectangle in the middle where a majority of the gold buying was by the momo crowd.  The momo crowd is now sitting on huge losses. 

The gold momo crowd keeps up the ruse that they understand inflation and history, but in reality, my experience is that unlike gold bugs, their knowledge is superficial. After the momo crowd drank the cool-aid of gold and got invested in gold, according to our algorithms at The Arora Report, this group has continued to buy gold every time gold spikes up, they do not want to miss a big rally. This behavior has increased the unrealized losses that the momo crowd is sitting on.  

The Momo Crowd Running Out Of Money

The momo crowd has shifted to GDXJ; this is indicative of the momo crowd running out of money.

The red rectangle on the chart near the bottom left side shows the zone where the momo crowd has been aggressively adding to gold positions.  As the losses become bigger, the momo crowd is still not selling gold but trying to find ways to generate leverage with the money they are still willing to invest in gold.  A favorite vehicle of the momo crowd these days is Junior Gold Miner ETF (GDXJ). 

Please click here for a large chart.

The chart compares recent price action of GDXJ with Gold ETF (GLD).  On September 9th morning, the social media was full of a conclusion among the momo crowd that gold had bottomed.  There were all sorts of explanations, mainly based on conventional technical analysis.  Apparently, the momo crowd does not understand that conventional technical analysis no longer works as well as it used to.  The momo crowd’s logic behind GDXJ is that GDXJ will go up a lot more than gold and this will provide them with the leverage.

As the chart shows, in about six days GDXJ ran up more than 7% compared to gold price movement.

According to algorithms at The Arora Report on September 16th, the smart money aggressively sold GDXJ.  On September 17th on a spike in gold, the smart money aggressively sold gold.  The rest is history as shown on the chart; one more time the momo crowd lost more money and the smart money was happy to take the money from the momo crowd.

When Will Gold Bottom?

Gold will bottom only when the pattern stops repeating of the momo crowd putting money into gold or gold related positions on up-spikes and the smart money short selling on up-spikes.  The smart money has consistently been generating significant profits by short selling gold on up-spikes and their coffers have filled up with more ammunition to short sell.  On the other side, the momo crowd sitting on huge unrealized losses will run out of money and will not be able to keep on buying gold.  The proof is already beginning to emerge in that the momo crowd is now focusing more on GDXJ and other junior gold equities compared to gold because they have less money and they want leverage.

When the momo crowd panics and sells, that will be a gold bottom and a generational opportunity for astute investors to back up the truck and buy will occur.

Current Ratings On Gold And Silver

The background colors on the first chart in this article are partially representative of our ratings.  The background colors on the chart are automatically generated by a combination of some of our algorithms; green is bullish, maroon is bearish, and blue is neutral. The chart analyzed here is a daily chart.  Similar signals are automatically generated on yearly, quarterly, monthly, weekly, hourly, and 15 minute charts.  Combination of these signals is then input into another algorithms that has many additional inputs such as relationship between currencies, interest rates, sentiment, money supply, global geopolitical picture, global GDP growth, inflation in key countries, leading indicators of inflation, risk appetite, etc. 

Some of the inputs are adaptive, i.e., their weight changes based on conditions and co-relations. The adaptive nature of the algorithm has been the most important reason behind consistently accurate calls on gold and silver by The Arora Report over the years.  Experience has shown that algorithms that are static stop working after a while because market conditions change.   For this reason, investors and traders should avoid algorithms that are fixed.

Of course, our timing models on gold and silver are much more sophisticated and take into account many more factors.  Here are our current ratings.

  • Negative in the very, very short-term.
  • Negative in the very short-term.
  • Negative in the short-term.
  • Neutral in the medium-term.
  • Mild Positive in the long-term.
  • Positive in the very long-term.

These ratings are reviewed daily and changed frequently to help both long-term investors and short-term traders.  These ratings are used by bullion dealers, jewelers and investors across the globe.  For definition of time frames, please click here.

By Nigam Arora
Chief Investment Officer
Courtesy of www.TheAroraReport.com



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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