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John Cassimatis


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Gold Making History...But Which One?

By John Cassimatis      Printer Friendly Version Bookmark and Share
May 18 2010 2:31PM

www.kitco.com

There is no secret that gold has been a force, something like a rocket, as it has carved out new, fresh highs for itself. The sovereign debt crisis in Europe has lit the booster and gold has displayed in the marketplace its flight to safety characteristics routinely cited on paper. Gold, as the most precious, least industrial of the metals, has led the charge. Silver, more industrial, has gone back and forth as the economic effect of such crises has been evaluated by investors. Its “dollar up days? were likely attributed to stronger equity action, general catch-up from more value oriented investors seeing the “preciousness? in silver, and the news of criminal and civil charges against JPMorgan’s silver trading desk. With gold at $1248 to start the week, the question is whether the metals will continue this historic price charge.

The Euro

The most interesting dynamic in the gold market right now is its price in Euros. Anyone cautious on gold a few months back, myself included sometimes, was tricked. Those correctly expecting a sharp decline in the Euro (typically gold unfriendly) scrambled as the specific sovereign debt nature of the Euro’s decline scared people into hard currencies. This dynamic was opposed to the beginning of the credit crisis when gold suffered with everything else in a worldwide race for liquidity and margin requirement satisfaction. Yes, we have seen the dollar rise, and the price of gold in dollars rise in conjunction. This is classic mature bull market behavior, very unlike 2002-2005 when gold was in its initial bull phase and its price movements were far more closely linked to movements in the value of the US dollar. This relationship is still valid and will reassert itself again, but gold clearly expresses the right to table it for long periods of time. 

Getting back to the point, the price of gold in Euros has been on a parabolic rise, more so than in dollars, and has even recently eclipsed the psychological barrier of 1000 Euro per ounce before pulling back. The problem, of course, with parabolic charts, is that the more parabolic they become (increasing slope) the greater the pressure on the other side of the rainbow. With two nights of hard selling in Euros, I will be keenly watching the movements in London during the night. For the past two weeks London nearly bid gold up substantially without pause and I am concerned that a definitive top in the Gold in Euros chart could lead to very pronounced, intermediate term pressure.  For the next week I will be strictly focusing on action there in order to better judge the risks of owning this international asset.

Seasonality

My experience with gold during breakout phases of which there have been 3 so far (including this one) is that the move features two peaks—a preliminary peak and the final intermediate term peak. The preliminary peak usually hits in late November early December as it did in late 2009, and the final peak comes in the spring. Late May and June have typically been rotten times to be very long, July usually sees a relief rally that ends with an early August punishment. From where we are sitting right now, the charts clearly tell us that such a scenario is highly possible this year. This is yet another reason to be very cautious at these lofty levels. Taking a quick inventory we know a couple of things.

  1.  Gold is over-owned by speculators by historical COT numbers. However, mature gold bull markets should feature a far wider net of participation than in its infancy so some of this is here to stay.

  2. Big banks are still shorting gold. There has been no difference in their method. They are putting it out.

  3. Smaller commercial interests have been buyers. This clearly has helped the price and their unwind does not have such a historical blueprint as the large speculators, who accumulate on the way up and sell on the way down.

  4. Gold’s uptrend is well entrenched. A break of $1180 would be a further warning sign that an intermediate top is in.

  5. Gold’s RSI is high but not terminal. It is above 70 and that is a yellow flag, but it has not soared to 80+ which is an all out red flag. 

  6. May’s clock is ticking and if the move can last into June, than that will be a first for breakout drives. Some people have claimed that the more mature the stage of gold’s bull, the longer the upward drives, so I will be paying additional attention to this. Perhaps the top is already in, I certainly wouldn’t be surprised, but if it is not, I will be most curious if it can hang on through May.

  7. Gold had a preliminary top in December and has now made fresh highs. A top here, though much closer to its preliminary peak than in moves past, would still fit the historical mold of a higher second high during the breakout move. Not getting exact, gold’s first drive saw peaks of $580 onto $730. Gold’s second drive saw peaks of $850 and $1030. Gold’s third drive, this one, saw a fist peak of $1225.  Perhaps this is one main reason to continue to be optimistic despite all of the caution flags as the recent $1248ish peak seems rather close to its preliminary.

All in all, there is clearly reason to be cautious here. Breakout drives that we have had—gold’s history—have ended around now, and such endings have ushered in 18 months of sideways to down trading before running anew.  Perhaps the lag will not be as long this time. Much will depend on fundamental factors. I am playing it tight to the belt. I will certainly take a stab to add to longs at $1180, but I have been a seller over the past two days. My position is very light for me as I watch some of these clues play out.

Silver

The JPMorgan news should have shocked nobody.  I have long felt the manipulation in this specific market. What’s most interesting is that while gold’s COT report showed the big banks selling, silver’s COT saw the opposite. Going back a bit, there was much talk swirling about Bear Sterns’ massive short position in metals at the time of their government led bailout. Some believe that’s specifically why the government made the deal so appealing—namely that JPMorgan was taking on a ton of risk not only in metals, but in other areas where Bear Sterns took on highly leveraged, greedy, and reckless positions. I do believe it is a fact that JPMorgan then hired certain key figures from the Bear Sterns desk to lead their metals operation. We then hear rumors over the past two years in many instances that JPMorgan was “the big short.?  Now, the SEC levels its investigation. Let’s just say I will be closely watching the commercial short position on upcoming COT reports to determine if the outside pressure has caused JPMorgan to unwind some of that largess. This past week saw commercial short covering of over 4000 contracts. This figure in the weeks to come might shed some light at least on the degree of the pressure on JPM, the size of its short, their intentions to remedy this situation, and ultimately some degree of just how much of this short may be of the “uncovered? nature. I have hung onto more silver than gold on account of this dynamic, though I understand that continued pressure in equities as I expect, may be less kind to silver than to gold.

Pehaps the most important point I can leave you with is this. I have long said, and will continue to say, that prices of 3,000 and 5,000 dollars an ounce, the neutron bomb, are simply not possible as long as US debt markets are well bid. On big market down days, I always check the bonds, and so far, they are still serving as a flight to quality vehicle. It is impossible to imagine such a scare that would send gold to those valuations that would not include a massive push by Us bond vigilantes long dormant.  Such a move in gold would require it to be the only flight to safety game in town, and right now, as I’ve stated, that simply not the case. This is surely something to follow in the years to come. As we just saw with my native land, when the credit markets dry up, you’re done, and all the whining and protesting isn’t going to change a darned thing.  In 2008, capitalism got its great test, and now two years later, socialism is getting its in Europe. The common thread in both crises, put plainly, is that every government, corporation, and individual cannot have everything that it wants. There is a thing called a budget. Just to be clear, its spelled B-U-D-G-E-T. Unless the forces of power in this world come to understand the unsustainably of frontloading growth, bonds are going to be tougher and tougher to sell, and more hands are going to be bidding for hard currencies. That is why I will always keep my base position, my insurance policy, and look to add when the price has been going down, and sell my additions into moves like the one we just had. Its history tells me I should get that chance again.

John Cassimatis

 

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John Cassimatis has been managing his own capital for 14 years in various markets.