Hamilton’s E-Wave Analysis

GLD is now within a point or two of a perfect a-b-c, time to get reverse? See HGD.

GLD

Watching BNN,  I have noticed that there are now quite a number of commentators that are pretty well certain that gold will now go to $2000 and a lot further. Before you embrace this concept keep in mind that even if the 1-2, 1-2 scenario that I proposed a little while ago did not work out ( it has not yet been entirely negated!), there are still other very bearish counts. The one above is the most prominent.  The wave 2 here is a “running” flat. The RSI seems to support a turn very soon.

GLD

We were lucky having gotten the $1900+ and the $1500 levels pretty well right on. In the mean time we have bounced back up roughly $160 up from the low. This is the point where the light is neither red or green. It is amber so it is best to step aside. The bulls  will be salivating from the mouth for this clean and clear a-b-c correction, expecting a new high down the road. The bears will be doing the exact same thing as they see a clean and clear 1-2, 1-2. A series of 1-2’s is the start of a very bearish downturn, typically the 1-2’s are  similar in shape and retrace roughly equal amounts, in this case about 60%+ each. There are other possibilities as well. The sidelines is the place to be.

GLD

Despite a drop of roughly $400 for the stuff itself, from a little over $1900 to almost $1500 (the charts do not necessarily show this, as they are weekly), the direction of gold from here remains unclear. In the short-term chart there is an A-B-C pattern that could stop right here on the lower channel line. If it does we go up, if it does not we will go a lot lower, it is that simple. The trend line is just under $150.

GLD

This chart is precisely a year old. It shows the A-triangle B – C pattern indicating that this index was coming to the end of its ride. The high point was around 224 at the time. The index, of course, contains 13 or 16 of the major gold producers, ABX, G, K, NEM Agnico etc.etc. and represents the body of senior gold miners well. Here is where we are today;

The start of this chart corresponds with the end of the one above. It covers an entire year and has three tops, the first approximately at the level where THE top was expected a year ago. The next two tops are lower!, so we end up with lower highs and lower lows which excludes the possibility of an expanding triangle (megaphone) or any other known pattern. The first down leg leaves something to be desired but nevertheless is most likely a 5-wave affaire. The next two down legs are both definitely 5 waves. The counter legs are all 3-waves and most clearly so. Ergo this is most likely a series of three1-2 that are invariable followed by a virtual collapse,which might look as follows;

In the big picture it is not clear if we are looking at a 5th wave or a B-wave into the latest top. Fortunately as far as the immediate outcome is concerned it does not matter. A realistic target is in the order of about 60 or lower. Note that if you look at the thin red line in this chart, that the XAU just two or three weeks ago was trading at levels where it had first been 6 years ago! The spread between the stuff and the miners has widened with each passing year.

The blue is the stuff and the yellow is the XAU. You missed out on a 200% relative gain by owning the miners. If the stuff comes down as it must as there is not a single investor left that is not long, one can only wonder at what might happen to the miners.

GLD, XAU

The Central Fund is a closed end quasi mutual  offshore fund incorporated under Dutch law. It has been around for a long time and is worth close to $7 bln. It is all about gold. Which is shown below by way of GLD;

The charts are over a comparable period but since the GLD has not been around that long it starts in ‘05. From that time gold is up about 4 to 5 times and so is the Central Fund. The GLD is worth about 76 bln, 10X larger. The correlation is obvious.

Both charts have triangles in them, presumable 4th waves as that is the only possibility, the question is just of what degree. Given the size, one or one and one half years in duration, I suspect that they are of the highest degree, which would imply that sometime in the not too distant future the stock/unit price should drop back to that level!!  This should happen once the 5th wave or “thrust” is complete, i.e. after again 5 waves (or 9, 13 etc). On the Central Fund 5 waves can easily be counted, and wave 5 is now precisely equal to waves 1 and 3 combined: on the GLD 9 (after the triangle) so both could be topping now.

One , according to Greenspan, cannot tell if there is a bubble and when it will end. That is the wrong question. All bubbles, once they burst invariable drop to below their respective starting points ergo by selling at any time during their existence you will be better off than holding forever. Furthermore there actually is a very easy way to tell if you are in bubble territory, when the angle of ascend reaches the vertical you are there. From the looks of GLD that is NOW. For reference purposes I have added the Nasdaq “tech” bubble below, notice that the proportions are about the same!;

PS. Today the GLD ETF surpassed the SPY, which un till now has always been the largest and most active ETF as it represents the S&P 500. If bubbles are caused by the concentration of investable funds in a , usually, narrow asset class, this is it.

CEF.A, GLD

The “conundrum” continues. Above we have NEM, Newmont, one of the lager or at least mid tier gold producer.  Below that , the stuff, by way of the GLD which represents 1/10th of the gold per ounce price, and below that silver by way of SLV, all in US$ terms.

These are 5 year charts. Newmont has gone nowhere, the stuff has roughly doubled over the last 3 years and tripled over 5. Silver out-performed the other two by a wide margin, more than quadrupling in just 3 years. But there is no harmony between the 3. Clearly there is a complete and total disconnect between the miners and the stuff, and then there is a disconnect between gold and silver. Silver looks like it has already peaked and is completing a corrective retracement. Gold has just broken out of its channel.

I suspect that the cause of these non-confirmations lies in the massive growth of the various ETF’s. The simplicity and liquidity of these investment products diverts capital in a disproportionate way into what happens to be in vogue at a certain point in time, without the limitations with regard to individual participants and volumes such as apply to commodity futures. Raw capitalism at its best, someone will be in tears before it is over.

GLD, NEM, SLV

Greenspan was flummoxed by the fact that bond yields did not drop after he started up the printing presses. He referred to this phenomenon as a conundrum. Being an ardent advocate of gold, at least in his youth, he must be even more baffled by the disconnect between the major gold miners and the “stuff” . This is true for almost all large producers, ABX, G, AEM, K and a few others but we will use Newmont as an example. Here is the chart, above that of GLD, the gold ETF that represents the stuff;

Both are in US$$ and lined up as best as I can get it. Newmont just reported and like all of them complained about rising operating costs. But how is this possible?  All the big guys still operate at a cost of under $500 an ounce, some a lot lower, so if you look at Newmont in early 2007 it would receive $650 an ounce (the GLD is 1/10th of the spot gold value) for a “profit” of $150 in our example. Today they would receive $1600 for a “profit” of $1100 or 7 times as much, (Even if we assume much lower cost, say $300 an ounce which may be more correct in Newmont’s case, it still works out to more than 3 times as much), yet the stock is now trading  below the level it was at then. Go figure. Production is not down in most cases and the cost of earth moving equipment certainly did not inflate by that much. This is the mystery!

It will, over time, be resolved by the stocks going up or the stuff going down. Unfortunately, looking at the stock there is literally no believable or plausible count that would have this go up. Like AXP years ago,(a sell by the way) this stock has a perfect wedge 5th wave, either the whole thing or just the 5th of the 5th. Does not matter much, it should go down, and not a little either.

The Economist blames the arrival of the ETFs (such as GLD) but also calls the stuff as useless as tulips. And when you think about it, humanity spends fortunes digging the stuff up, and then hides most of it in the underground vaults of Fort Knox and other such places. It is truly a mystery how humanity at large benefits from this. Greenspan ,who argued for the gold-standard , may even agree that that system worked, at the time, mostly because of the conventions and agreements that existed, and not by virtue of the value of the stuff itself, in other words it was also a fiduciary currency. There was a time that cigarettes worked equally well, with so many non-smokers that too may be hard to revive.

GLD, NEM