Last time I asked the big question: Gold is hot – is it time to buy?. And hot on the heels of my blog came this article last Tuesday on seekingalpha.com: Is it time to add gold and silver to your portfolio?.
This follows the universal pattern of everyone jumping on a bandwagon after a very long trend has been in place for weeks. On Monday 20 August – a mere two weeks ago, gold traded around $1,160. Last week it rocketed up to the $1,535 level – a stunning gain of $375 (32%).
Why do people do this so late in the trend? Obviously, buying a market after such a strong advance runs very great risks of an immediate pull-back. Strong advances are always met with strong pull-backs. In fact on Tuesday, the pull-back was a stunning $53 to the day’s low.
But for many, the urge to not miss out (FOMO) is irresistible. We call that herding. You rarely read an article making a sell case near tops. And that is because that would mean sticking your neck out above the parapet – and having it blown off by the massed army of convinced bulls.
Of course, all of the usual ‘bullish’ rationale is repeated ad nauseam at such times, more in an effort to convince yourself that you are on the right side that an effort to examine the opposite side to assess the odds of further gains. This is how a story becomes widely accepted – and is the trap the market sets for the late-comers.
Latest DSI readings confirm the extreme bullish fervour shown by specs. It remains well over 90% for days on end – and COT data backs this up.
This is the weekly chart I showed last time from the 2011 ATH – precisely eight years ago:
and here are my Elliott waves:
The entire rally off the 2015 $1.050 low is a complex B wave. B waves are often quite difficult to track in real time since they can fail to conform to the usual simple A-B-C three-wave affair – and this is a good example.
Trading gold since that 2015 low has certainly been full of challenges! However, I have managed to catch a few of the swings for gains of over $100 per wave.
But now, I am flat and waiting for signs my B wave has terminated. I have given it up to a max print in the $1590 area. However, with bullish mania at an extreme, odds favour a decent pull-back near current levels. Momentum is extreme (black arrow), just as it was at the 2011 ATH (and also at the wave 2 high in 2012.
And when my C wave gets going, I project it to terminate in triple digits below the A wave low at $1.050. A gold bust is coming. And I have my first clue that the turn may be at hand – Here is latest chart
We are in the final wave C of B – and on a momentum divergence to boot. That places last week’s high at $1535 as a possible top.
Many will find my bearish forecast peculiar in light of my long-standing forecast for a collapse in shares. Surely, gold will be a safe haven in this scenario – and will shoot up beyond the old $2,000 high! That is the story being peddled currently. But not so in the deflationary collapse I see coming.
Old relationships and old certainties are being broken down in this era of negative interest rates. Fresh thinking is needed in today’s environment!
Just as old political relationships are being torn apart, so are financial ones. I have written before of the madness of negative rates and the perverted markets that have been created. Gladly for us, they are still conforming to my Tramline system of analysis with some great swings!
Will stocks collapse next week?
Just as I monitor the MSM for contrarian clues in gold, I do the same for stocks. And the ground is pretty fertile! You just cannot avoid reading about the ‘Recession Alert’ being flagged by the current yield inversion. It is getting star billing – along with the universal chart that shows that every recent recession was preceded by such a yield peculiarity.
The inference is, of course, that stocks are poised for a collapse in a repeat of history. While that is probably correct, their timing may be way off. Already, the internals for the S&P show that investors are buying puts options as portfolio protection in vast numbers. And the VIX fear index is shooting up to confirm that fear of big losses is very real.
And that fear is translating into selling pressure. But has the fear gone a little too far? – here is the S&P short tern 1-hr chart
From the July ATH, the market plunged to my wave 1 low and then staged the relief rally in a typical A-B-C to the standard Fibonacci 62% retrace to the wave 2 high. It then fell hard to break an internal small blue trendline in a continuation of the downtrend.
And last week’s rally to the kissing area of the blue line is surely a recognition that the fear has indeed been overdone. But now the market must make up its mind. If we do get a genuine kiss next week, we shall have a Scalded Cat Bounce down in wave 3 of 3 (the strongest wave in the book).
Failing that, a strong move above the blue line next week would suggest more upside is need to relieve the extreme gloom currently pervading the market.
Has Silver topped?
Again, the MSM is very helpful in offering me some contrarian clues. Just about every article I read points to the ‘undervalued’ status of silver compared with the rampant gold market. They point to the very high gold/silver ratio and suggest it must decline as it has met a valuation from where previous declines were started.
That may be true, but a decline from the current high reading could also be accomplished by a faster decline in gold than in silver!
One clue I have is in the wave pattern – here is the daily
I have a lovely tramline pair (blue) and from the late May low at 14.35, the market has advanced in a clear five wave impulsive pattern that should be complete. Not only that, but at the 17.50 high made on Tuesday, it hit a significant Fibonacci 50% resistance level!
Finally, the final rally to the wave 5 high at 17.50 occurred on a strong momentum divergence – a sure sign buying pressure was waning.
Odds are good we have seen at least a temporary high (it may not be the final high!) and a significant pull-back is due.