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The Time Has Come



-- Posted Monday, 7 January 2008 | Digg This ArticleDigg It! | Source: GoldSeek.com

by Howard S. Katz, 1-7-08

www.thegoldbug.net

howardkatz@hotmail.com

 

          The time has come, the walrus said,

          To talk of many things:

          Of ships and shoes and sealing wax

          And whether gold has wings.

 

                             with apologies to Lewis Carroll

 

          Yes, the time has come dear gold bug.  The time has come which is the fulfillment of our most intense wishes.  This is the explosive, dynamic gold move we have imagined in our secret dreams but have never dared mention aloud.  Let us discuss first the technical and then the fundamental arguments.

 

TECHNICALS

 

          The first clue to the bull move was given in July 2007 when the gold indexes moved up smartly for 3 successive weeks.  I do not believe in using candlestick charts for stock indexes.  Nevertheless, even the bar charts of the XAU, the HUI and the GOX showed power.  And candlestick charts (such as ABX below) of many individual stocks showed powerful, long, white candles, many of them bozu patterns (see below).

 

 

 

          Candlestick charts, for those who are not familiar with them, were invented in Japan in the 17th century.  They differ from western bar charts by taking account of the opening price (in addition to high, low and close).  The day’s action (or in this case the week’s action) is represented by a (vertical) rectangle called a candle.  A white candle means the close is higher than the open; a black candle means the open is higher than the close.  Two thin vertical lines (called shadows) go up from the candle to the high for the day (week) and down to the low.

 

          (The problem with candlestick analysis of an index is that computers give the wrong opening price for an index, and since the opening price is important in candlestick analysis, this leads to errors.  Computers calculate the opening price of an index by averaging the first individual stock opening with the previous day’s closing prices of all the other stocks and thus get a number hardly different from the previous day’s close.  The accurate opening for an index would average the opening prices of each stock.)

 

          Candlestick analysis consists of recognizing certain patterns (some of which were later rediscovered by American chartists in the early 20th century).  Candle patterns are not perfect; so they should only be used with supporting evidence, but they do work more often than not and are a useful tool in analysis.

 

          The very promising development in gold stocks in July was immediately contradicted by a sharp sell-off into mid-August, the product of the sub-prime crisis.  But as badly as the newspapers tried to scare us, there were several very bullish technical signs.

 

  1. First, the gold stock indexes had all been suggesting a narrowing of the price range, which would give us a triangle formation.  The breakout of this triangle, upside or downside, would then predict the future direction of gold stocks.  The intense pressure of the media indeed did produce a sizable decline for the 3rd week of August, but all indexes held, and there was no downside breakout.
  2. Indeed, August 16, 2007 produced hammers in many individual stock charts, and a hammer is a very bullish candlestick signal.  (A hammer is a candlestick pattern which occurs after a significant decline; then after a further interday or interweek decline, the stock rallies and closes not too far from its opening.  A bozu day or week is one where the stock either opens on its low or closes on its high; that is, there is no upper or lower shadow.  See ABX.)
  3. For the next 2 weeks, the gold stocks acted like a boxer who has been stunned by his opponent’s lucky punch.  But on Sept. 6, gold broke out of a giant triangle formation to the upside, and two weeks later the stock indexes followed along.

          This rally continued through October and into early November carrying the conservative members of the group into new high ground.

 

          It is important to remember that gold (and the gold stocks) is (are) well-behaved technically.  The gold bottom of 1998-2002 took the form of a giant (4½ year) saucer pattern.  When a 4½ year pattern gives a signal, you pay attention because that pattern will determine action for many years to come.

 

          To step back a bit in time, in September 2005, gold started to accelerate to the upside.  Sept. ’05 to May ’06 was a beautiful run.  And the reaction after it was over was quite modest considering the profits which had built up (and were to some degree being taken).  But as noted, the swings of this reaction gradually narrowed forming a classic triangle.  Below is the monthly basis chart of gold itself (near future).

 

 

 

          A triangle is a technical pattern which tips its hand in advance and tells you that it will break out in the same direction it was moving prior to the pattern (in this case up).  And as noted, this came to pass on Sept. 6, 2007.  It was a strong affirmation of the bullish trend.

 

          It is normal for a triangle, once broken out, to make one final return to the apex before the real advance begins.  I thought I had this return to apex called with a special bulletin I sent out to subscribers to The One-handed Economist on Nov. 8, 2007.  Any gold bug knows that this current up move in the metal is very closely correlated with a similar down move in the dollar.

 

          The Commitment of Trader large speculator numbers showed an enormous amount of shorting in the dollar.  (When interpreting the COT figures, I prefer to watch the large speculators and go opposite to them on the short term rather than watch the commercials and follow them.  It comes to the same thing in practice, but the large specs are active and move the market whereas the commercials are passive.) When Bernanke cut rates in September (and then continued to cut), these people raked in the profits, and it was not difficult to predict that these profits would be taken.  That is what happened.  Large trader dollar shorts fell from 31,860 on Sept. 25 to 4,995 on Dec. 24, and this is what sparked the 4 week dollar rally which started around Thanksgiving.  Oh, sweet it was.  And indeed, this dollar rally did correlate with a decline in gold and the gold stocks

 

          But this decline in gold was not exactly the stuff of bear markets.  Indeed, it was more of a sideways move in the metal and took the form of a small triangle.  It was a bit more substantial in the stocks, but considering the nice profits that were made from late August to early November, we got away cheap in November and December.

 

          Then on Dec. 26, this triangle broke out to the upside, and that was the signal.  You have heard that they do not ring a bell on Wall Street.  This is not true.  They rang a bell for gold on Dec. 26, but perhaps you did not hear it.  Perhaps you were sleeping off too much Christmas grog (like the Hessian commander defeated by George Washington on Dec. 26, 1776).

 

          So just in case you didn’t hear the first bell, they rang a second bell on Jan. 2, 2008 as gold broke above its Nov. 8 high.  And unless I miss my guess, they will ring a third bell very soon when the gold stock indexes break above their Nov. 7 highs.  So please, do not ever tell me that they don’t ring a bell on Wall Street.

 

FUNDAMENTALS

 

          But the unsatisfying thing about technical analysis is that no matter how many bells and candles and triangles there are, it does not tell you why people are buying or selling.  In the present case, that is not hard to determine.  Gold is going up because the dollar is going down.  And the dollar is going down because on top of a very bearish case for the dollar which existed prior to August 2007, Ben Bernanke made the decision to throw the dollar out the window sometime between Aug. 16 and Sept. 18, 2007.

 

          We all know what happened in the financial world in 2007.  The sub-prime crisis hit Wall Street (although as we will see, it should be called the sub-prime “crisis”).  Banks had made bad loans to borrowers who could not make their mortgage payments.  The banks were thinking that houses always went up in value and in the worst case they could foreclose.  In 2007, housing prices fell, and mortgage holders started to walk away from their loans. 

 

          However, from 1997 to 2007 there had been an enormous rise in housing prices.  During this time the OFHEO House Price Index doubled in real terms.  For an average working man to buy the average priced house cost him 4.5 years earnings in 1997.  But it cost him 7.3 years earnings in 2007.  In this short period of time, the American dream has become impossible for a large part of the population.

 

          A crisis is something bad.  I define the fact that housing has become unaffordable for the average American as a crisis.  But Ben Bernanke defines the fact that the banks are going to get stuck with unsellable houses as a crisis.  In my view, for the economic good of the nation housing prices must come down.  In Bernanke’s view, for the economic good of the banks housing prices must go up.

 

          My indicators on the bond market tell me that T-bond near futures are heading up to 125, their peak level of 2003.  This will mean that mortgage rates will fall to the lows of the bubble period.  That is, Bernanke intends to recreate the conditions which led to all of these bad loans.  Instead of punishing the bankers who made those bad loans he is determined to punish the average American who can no longer afford a house.  This is a policy which will destroy the U.S. dollar.  Already it is likely that China is selling her holdings of U.S. dollars, and there is a real threat that other nations will join in.

 

          Supporting my analysis of long rates, the Fed funds March futures are predicting a half point cut in short rates, and the June futures are predicting another quarter point beyond that.  Instead of an economy which rewards the wealth producers, who make good and responsible decisions, our leaders are giving us an economy which rewards the wealth-destroyers, who make irresponsible decisions.

 

          Of course, as the U.S. dollar is destroyed in the foreign exchange markets, people will flood into gold.  That is the policy decision which represents the fundamental factor behind the giant symmetrical triangle in gold.

 

SUMMARY

 

          Both technicals and fundamentals are saying that 2008 will be a very bullish period for gold.  The policies being followed are very bad for the country but very good for us gold bugs.  Now is the time to be heavily in gold/gold stocks so that, as the country becomes poorer, you can retain your personal wealth.  I invite readers to visit my web site, www.thegoldbug.net, and if you are interested in my specific gold stock recommendations, you may wish to subscribe to my fortnightly newsletter, The One-handed Economist (see web site for information).

 

# # #


-- Posted Monday, 7 January 2008 | Digg This Article | Source: GoldSeek.com




 



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