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The Moment of Revelation is Approaching
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After churning in a typical mid-January holding pattern, tightly range bound, gold and silver seem poised to break out to the upside. I continue to expect that the wave beginning with gold’s Deccember 1075 bottom should peak around the very end of January, or very early February. That only gives us approximately 10 trading days left so it would make sense that gold get’s its engine running by the middle of this week at the latest. I am prepared to buy more on a break of 1145-1152 depending on how gold’s downtrend moves extend. I am speaking of gold’s recent downtrend line from 1163 and it’s bigger one from 1225. Currently, it seems as though a break of 1152 would clear both. As those of you that regularly read me know, these diagonal lines are of the most importance. They typically provide the signal, the entry point when risk and momentum seem to favor the buyer.
Other factors leading to this call include the current RSI. By pulling back from 1163 last week, the RSI was able to avoid going into overbought levels, and its pattern is now consistent with longer, more deliberate, steady advances. Again, a strong two-week drive from here would most likely put it in sell territory. More than the RSI, however, was this week’s COT report. Many months ago, I wrote that we would probably not get Total Speculator long contracts back to traditional buy levels anytime soon, and that remains the case. I even argued that we would not see Net Speculative long contracts approach any sort of magical level of the past. Investment demand, as we all know, has been rising steadily, and continues to serve as a major factor behind this drive. The major COT clue I believed we might see again was in the Total Non-Commercial Short category. In the past, 50,000 Speculator short contracts ushered in a gold market that was prone to spikes following selloffs—an almost frustratingly inability for gold to go and STAY down. This week’s report showed such short positions climbing to 43,000, a jump of over 6,500 contracts. While this level is not quite 50,000 it should lend some support to the market. The surge, in my opinion, represents an incorrect bet by certain funds that do not truly understand gold and its dynamics. This bet, fine, I will just say it, is premature. Notoriously quick to cover, I believe it will be those short funds precisely that initiate gold’s assent during the final two-weeks of January. Once the covering runs its course, RSI’s climb, money gets posted, risk grows, distance from 1000 increases, and January ticks towards an end, I may very well join the remain few that are short. But for now, I consider the bet premature. The fun part is that the market will tell us who is right this week.
In general, I like the action here. I can readily admit that I thought the range we settled into was going to be one-rung higher, namely 1145-1175 gold. I was wrong on that, but a range we did find. The action is highly reminiscent of gold’s first, its premier, breakout drive of significance. To my semi photographic/phonographic memory, the parallels are intriguing. So much so, that I cannot help but bet on their continued rhythm. If I go down, it will be on gold’s first aberration from a tightly followed script. I can handle that—though clearly my bets that we are in Act 2 of a 3 Act play.
As for silver, it is simply impressive. Having been called Long John Silver by my friends for 8 years now, this is not the time to give up on this bet. I have never witnessed such a lack of volatility during down moves as now. Gold is the one that seems to be flipping and flopping unsteadily in comparison to its “kissing cousin� as Peter Grandich calls it. Mark these words, this metals/equity/reflation trade ends in April or May (probably cracks in April, rebounds, and sets a marginal new high in May). The second half plus of the year should contain widespread bloodshed, inclusive of the metals. I will be looking for silver to outperform gold during this “final� stretch of time. Its action is hardly encouraging for those that recently shorted gold.
Lofty expectations, I don’t think so. The difference in gold bull commentators is in their ability to admit a short-term sell. Gold commentators perpetually negative have been detrimental to read, as their caution has not enveloped in the marketplace. The perma, long-term bulls that can only envision selling their gold to obtain food after fiat currencies collapse have also been, albeit it slightly less (as they got the direction right), detrimental to some. I am a commentator that will tell you when to sell. In fact, I’ll tell you this. This move in gold is not the beginnings of the “neutron bomb� as one of my best friends puts it (and believes it so, just like in 2008 and 2006). The initial rise in bond yields coming shall serve gold negative at first, much like the credit crisis “liquidation� pressure. It will be following that selloff, that massive selloff, that gold could possibly be primed for a neutron bomb type of move. Yes, folks, humor my digression, but it is in bond yields that the future will be decided. Undoubtedly, their initial assent will be misinterpreted by many markets, none more than gold. However, a persistent, bigger than expected rise, longer than expected rise, scarier than expected rise shall then lead to many, many 100-point days for gold. We’re just not there yet. And probably won’t be when gold comes up for its regular breakout drive sell in April and May—so it’s a cycle that awaits.  Keep this in mind as you evaluate your own levels of risk and potential reward in the short-term.
John Cassimatis
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John Cassimatis has been managing his own capital for 14 years in various markets.
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