Charts created using Omega TradeStation 2000i.Chart data supplied by Dial Data
After peaking at just over $1,300, back on January 22, 2015 gold has been on a bit of a slide. The prime reason appears to be the fear that the Fed is about to hike interest rates. Is the fear rational? Probably not. Memories are no doubt short. They probably forgot that in the late 1970’s gold was rising as interest rates were also rising. Studies have shown that gold does not have a strong correlation overall with interest rates. If gold does have a strong correlation with anything it is the US$. The US$ has been rising so gold is falling. At least that what conventional wisdom says.
Since the beginning of the year gold is up 1.4% in US$ terms. But gold is up 8.4% in Cdn$, 1.7% in British Pounds, 8.2% in Euros, and, 0.6% in Japanese Yen. Gold is actually down 3.2% in Swiss Francs thanks to the Swiss unpegging the Franc against the Euro. Despite all the talk about how Russia is sinking into the abyss because of sanctions, gold is only up 1.4% so far in 2015 in Russian Rubles even as gold is up 75% in Russian Rubles since June 2014.
Gold is often treated as an alternative currency and it can act as a hedge against falling currency values. Gold is a hedge against uncertainty and the corruption of governments. Gold has no counter party risk unlike stocks and bonds.
Still gold has fallen roughly $100 from that peak in January. Many find it baffling. Many claim that gold is being manipulated lower but a reminder that manipulation works both ways and not just in down markets. Whether it is or not is beside the point. The trend has been down. For the western economies interest rates are at record lows and some countries have even moved to negative interest rates. Some shorter-term German government bunds recently went negative. In the US, one has to go out beyond three years just to find government bonds or notes with yields over 1%. Can one imagine having to pay the bank to hold your money? In Switzerland and the Scandinavian countries, that is now the norm. In countries like India and China where there is an inherent distrust of banks, one holds their savings in gold. Low to negative interest rates should be a magnet for gold but it has not proven to be the case especially in the Western economies of the EU and North America.
While 2014 did see a drop in physical gold demand, central banks bought the largest amount of gold in 50 years. At one time central banks were sellers of gold. Now they are buyers of gold. And one of the largest buyers was the Russian central bank. Gold imports from Hong Kong into China jumped sharply in January. The ECB’s Mario Draghi declared that gold is a monetary “reserve of safety”. Former Fed Chair Alan Greenspan has suggested that the price of gold “will” be sharply higher in a few years. The Department of Justice of the US and the CFTC have launched an investigation into “rigging of gold prices” against 10 major banks including Barclays PLC, Deutsche Bank, Credit Suisse, UBS, Societe Generale, and J.P. Morgan Chase and Goldman Sachs. Whether it goes anywhere is probably not relevant but a reminder that major banks have already paid huge fines for “rigging” in the LIBOR market, currency markets, some commodities and energy. Previously there was an investigation into the London daily gold setting and banks paid fines there as well.
None of this seems to matter as gold sits barely $70 above its multi-year low. The recent rally took gold up to a downtrend line traced from the highs of August 2013 that joined up with the highs of March 2014. That line also stopped the rally seen in July 2014. On the weekly chart gold tested the 65 week exponential MA (EMA) a level that has been seen on a few occasions over the past two years. At the other end, the low of June 2013 was equalled in December 2013 and a lower low was made in November 2014. All of this is a classic definition of a downtrend in motion.
The rally from the November 2014 low appears to have unfolded in an ABC fashion. This is not what was expected following what may have been a three-year cycle low. The July 2014 top appeared to finish an ABCDE type consolidation pattern that evolved after the huge breakdown from October 2012. Some Elliot Wave analysts including Elliot Wave International labelled the corrective wave that unfolded from June 2013 to July 2014 as wave 4. It was felt that the five-wave decline from July 2014 to the November 2014 low was a culminating wave 5 down from the top of September 2011.
But if the ABC move from November 2014 is correct than that could suggest it was a corrective wave only. The November 2014 low would now be a 1 or A wave down with the run-up to the January 2015 high a 2 or B wave. The current down move would be the start of wave 3 down or the C wave down.
Charts created using Omega TradeStation 2000i.Chart data supplied by Dial Data
In previous write-ups on gold, I had noted that the November 2014 low might have been a 3-year cycle low or more correctly a 34-month cycle low. As a refresher, according to Ray Merriman www.mmacycles.comgold’s long-term cycle is 25 years (1976-2001 – cycles are always measured from low to low). Cycles divide into two’s or three’s so the 25-year cycle would sub-divide into 3 cycles of 8.3 years or 2 cycles of 12.5 years. It was felt that the collapse into October 2008 was the trough of the 8.3 cycle low. The next 8.3-year cycle low would be due in February 2017 +/- 17 months or a range from September 2015 to July 2018. The range is interesting as the earliest for the 8.3-year cycle low is later this year.
The 8.3-year cycle sub-divides into either 2 cycles of 4.25 years or 3 cycles of 34 months. There was an important low in December 2011or 38 months following the October 2008 low. The 34-month cycle has a range of +/- 6 months according to Merriman. There was then the low of November 2014 or 35 months following the December 2011 low. That may have qualified as the current 34-month cycle low.
In many respects, the possible 34-month cycle low in November 2014 has not been confirmed. New highs above the July 2014 high of $1,340 would have gone a long way to confirming the 34-month cycle low. What may be unfolding now is instead the collapse into the next 8.3-year cycle low. And if that is correct the down wave could unfold in 5 waves to the downside. Here is how it could unfold.
Wave 1 down was the low of November 2014; wave 2 up was the recent top in January just above $1,300. Wave 3 down could unfold in five waves to the downside and could bottom anywhere from May 2015 to July 2015. The period starting in March is a weak seasonal period for gold so a down move during that time would fit. Following a low anywhere from May to July 2015 another good rebound could unfold. That would be wave 4. That wave could top in July to September 2015 a period that does demonstrate seasonal strength for gold. The final wave down would bottom anywhere from September to November 2015. The period would coincide with the earliest possible period for the 8.3-year cycle low.
How low could gold fall? Well worst-case scenarios have gold falling to the 1980 top near $850/$875.Best case scenarios see gold falling to levels between $1,000 to $1,100. A range for the final low could be $850 to $1,100. All of this could take several months to unfold. And this scenario is not a layup as the decline to the next 8.3 year cycle could actually take longer and not find its final low until sometime in 2016. However, it is a possible road map for the next several months.
As the title notes. Gold is at a crossroad. The decline from the January 2015 top has been deeper than one would expect for a 4th wave correction. Grant you gold could still redeem itself and this scenario would need to be re-written. A reminder that the scenario described above is just one amongst others. If alternatives arise I will write about them. A move back above $1,280 would suggest that the recent high near $1,303 could be taken out. Resistance levels are seen at $1,225, $1,240/$1,250 then $1,280. A breakdown under $1,170 would suggest that the bearish scenario is most likely unfolding.
Gold is also at crosscurrents as there are numerous bullish reasons as to why gold should rise. The bullish reasons should more than offset the irrational fear of higher interest rates in the US. However much one would like to blame the long decline on manipulators the reality is that gold has been in a downtrend irrespective how one wishes to view it. And the downtrend is not over. But it will end eventually and a new bull market should get underway to follow the long bear market.
It has been a long difficult road for gold following the top of September 2011. The action since then appears to be a huge correction to the long rise from 2001 to 2011. Once the next 8.3-year cycle low is found a powerful rally could get underway as the next 8.3-year cycle gets underway. It is in this cycle that one could see a massive blow off. Now that would warm the hearts of the “gold bugs”.
Copyright 2015 All rights reserved David Chapman
The information and opinions contained in this report were prepared by Industrial Alliance Securities Inc. (‘IA Securities’). IA Securities is subsidiary of Industrial Alliance Insurance and Financial Services Inc. (‘Industrial Alliance’). Industrial Alliance is a TSX Exchange listed company and as such, IA Securities is an affiliate of Industrial Alliance. The opinions, estimates and projections contained in this report are those of IA Securities as of the date of this report and are subject to change without notice. IA Securities endeavours to ensure that the contents have been compiled or derived from sources that we believe to be reliable and contain information and opinions that are accurate and complete. However, IA Securities makes no representations or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this report or its contents. Information may be available to IA Securities that is not reflected in this report. This report is not to be construed as an offer or solicitation to buy or sell any security. The reader should not rely solely on this report in evaluating whether or not to buy or sell securities of the subject company.
“Technical Strategist” means any partner, director, officer, employee or agent of IA Securities who is held out to the public as a strategist or whose responsibilities to IA Securities include the preparation of any written technical market report for distribution to clients or prospective clients of IA Securities which does not include a recommendation with respect to a security.
“Technical Market Report” means any written or electronic communication that IA Securities has distributed or will distribute to its clients or the general public, which contains an strategist’s comments concerning current market technical indicators.
Conflicts of Interest
The technical strategist and or associates who prepared this report are compensated based upon (among other factors) the overall profitability of IA Securities, which may include the profitability of investment banking and related services. In the normal course of its business, IA Securities may provide financial advisory services for issuers. IA Securities will include any further issuer related disclosures as needed.
Technical Strategists Certification
Each IA Securities technical strategist whose name appears on the front page of this technical market report hereby certifies that (i) the opinions expressed in the technical market report accurately reflect the technical strategist’s personal views about the marketplace and are the subject of this report and all strategies mentioned in this report that are covered by such technical strategist and (ii) no part of the technical strategist’s compensation was, is, or will be directly or indirectly, related to the specific views expressed by such technical strategies in this report.
Technical Strategists Trading
IA Securities permits technical strategists to own and trade in the securities and or the derivatives of the sectors discussed herein.
Dissemination of Reports
IA Securities uses its best efforts to disseminate its technical market reports to all clients who are entitled to receive the firm’s technical market reports, contemporaneously on a timely and effective basis in electronic form, via fax or mail. Selected technical market reports may also be posted on the IA Securities website and davidchapman.com.
For Canadian Residents: This report has been approved by IA Securities, which accepts responsibility for this report and its dissemination in Canada. Canadian clients wishing to effect transactions should do so through a qualified salesperson of IA Securities in their particular jurisdiction where their IA is licensed.
For US Residents: This report is not intended for distribution in the United States.
Intellectual Property Notice
The materials contained herein are protected by copyright, trademark and other forms of proprietary rights and are owned or controlled by IA Securities or the party credited as the provider of the information.
IA Securities is a member of the Canadian Investor Protection Fund (‘CIPF’) and the Investment Industry Regulatory Organization of Canada (‘IIROC’).
All rights reserved. All material presented in this document may not be reproduced in whole or in part, or further published or distributed or referred to in any manner whatsoever, nor may the information, opinions or conclusions contained in it be referred to without in each case the prior express written consent of IA Securities Inc.
The content on this site is protected
by U.S. and international copyright laws and is the property of GoldSeek.com
and/or the providers of the content under license. By "content" we mean any
information, mode of expression, or other materials and services found on GoldSeek.com.
This includes editorials, news, our writings, graphics, and any and all other
features found on the site. Please contact
us for any further information.
Live GoldSeek Visitor Map | Disclaimer
The views contained here may not represent the views of GoldSeek.com, its affiliates or advertisers. GoldSeek.com makes no representation, warranty or guarantee as to the accuracy
or completeness of the information (including news, editorials, prices, statistics,
analyses and the like) provided through its service. Any copying, reproduction
and/or redistribution of any of the documents, data, content or materials contained
on or within this website, without the express written consent of GoldSeek.com,
is strictly prohibited. In no event shall GoldSeek.com or its affiliates be
liable to any person for any decision made or action taken in reliance upon
the information provided herein.