MINI-GOLD FUTURES Best Buy Signal in 33 Years!

Dr. Scott Brown

By Dr. Scott Brown

Gold futures peaked in August of 2011.  Thus began the 11 month lingering suck-whistle of a downslide.

Gold flew out over the Bahamas ocean expanse.  A strange force scrambled electronics.

Communication was lost.  The compass spun wildly.

Gold drifted far to the south towards Venezuela.  But a socialist stench drove it back.

North it drifted.  Then a little bit lazier to the south.  Each longitudinal meander lost steam as the little lost wanderer drifted in the fog.

Over time the FUBAR that became of the decade gold futures market etched a triangular wedge on a weekly price chart.

The Gold Ship That Never Came In Breaks The Docks!

My grandfather was a mean sort.  He drove truck for Beatrice Foods.  He was an ice cream delivery man.

He was an angry man.  He started dating my grandmother in high school.

He became jealous of an Italian exchange student.  He had eyes for my grandmother.

That was grandpa’s girlfriend.

So one day he threw her on the couch.  He started strangling her.  He said that if she ever looked at a man again he would kill her with his bare hands!

He was a drunk.  He was mean.    He hated everybody.

Most of all himself.

He was a real Archie Bunker.  Not the “funny ha-ha” kind.

That fear and anger created a constant emotional cloud cover anytime we visited their house.  You never knew what was going to happen.

He was mean.

Anyway, my brother Todd and I invited him out for Goose hunting one day.  He said, “Why am I going to sit in a blind in the freezing cold with ‘blue-balls’ waiting for damn geese that never come?

We were young and thought that the term “blue-balls” was funny.  We are from a ranching area.  We knew what steak fried rocky mountain oysters were.

We loved those.

Blue-balls reminded us of Dr. Seuss.  It sounded like “green eggs and ham.”

Mom scolded us.  We didn’t know that it had another meaning.

When we explained the way grandpa used it.  She eventually said it was OK.

Trend on Investment Demand Is Up For Gold!

Today it is a mild term compared to things you see people say on TV.

The 2011-2012 devils triangle technical formation made a lot of gold bugs feel like grandpa Gus hunting geese.  Well the geese have landed.

The sun has come out and the bog is warm.

Gold is on its way back up.  Or is it?

The Walking Dead

Sherrif Rick Grimes awakes from a coma in the hospital.  The power is out.

So begins the popular TV series.

He unhooks himself from life support.  He staggers into the hall.

All hell has broken loose.  There is a strange banging on a barred door that has “do not open” on it.

Sherrif Rick staggers to the exit at the back of the hospital.  There are hundreds of body bags.

A zombie hears him and staggers up the road to the loading dock.  The only thing that powers its half rotting body is a deranged brain stem.

The Zombie does not know that it is dead.

Sherrif Grimes blows its head off with a shotgun.  Blood and gore spatter the wall behind.

We Buy Houses

I saw a We Buy Houses sign the other day.  I hadn’t seen one in a very long time.

This one was huge.  It was billboard sized.  Somebody had propped it up on telephone poles about 20 feet off the ground.

It looked like the decapitated head of a giant.  Tropical vines had overgrown the grotesque remnant of American predatory finance.  The print material was faded and peeling.

It now read “ e Bu H use !”

I had driven buy it numerous times.  I hadn’t seen it.

It was parallel to the road.  It was not well placed.

It looked the way I expect signs will look in season 3 of The “Walking Dead.”

The fence posts facing stopped traffic of T-intersections are now plastered with “We Buy Gold” signs and banners.

The Fundamental Numbers

Doc Brown’s Trading University Trade of The Week
Futures Market

Mini Gold

Symbol

AU

Type (Commodity / Financial)

Commodity

Symbol

ZYGZ2

Base Symbol

ZYG

Type

Electronic

Contract Size

33.20

Contract Units

Troy Oz

Tic Units

Oz

Minimum Move

0.1

Exhange

NLI

Expiration Date

12/27/2012

First Notice Date

11/29/2012

Initial Margin

$2,835.00

Maintenance Margin

$2,250.00

Daily Margin

$1,417.50

Open Time:

7:16:00 PM

Close Time:

5:00:00 PM

Gold does not oxidize.  It does not rot.  It is one of the most durable things on this planet.

And it is prized.  The vast majority of gold ever mined has been accounted for.

But so many different households and organizations own it that it is difficult to account for the exact location of big chunks of the world supply of gold.  One strategy to track gold supply and demand has been to analyze levels of gold reserves by governments and non-governmental organizations (NGOs).

The primary industrial use for this metal is jewelry.  The price of gold rises when investment demand rises.

But jewelry demand falls when the price of gold rises.   Changes in Jewelry demand are worthwhile to track.

On August 16th, 2012 Anthony DeMarco reports that,

“Worldwide gold jewelry demand fell 15 percent, year-over-year, to 418.3 tons for the second quarter of 2012, largely due to a sharp decline in Indian jewelry demand, according to the World Gold Council. Gold jewelry accounted for 42 percent of global gold demand during the second quarter.”

See Forbes.com.

The World Gold Council reports…

Second quarter gold demand of 990 tonnes was worth an estimated US51.2bn.  Demand in the jewelry, investment and technology sectors weakened from year-earlier levels, declines that were partly offset by an acceleration in buying by central banks.

Read report on this fantastic site for fundamental news Gold.org.

Between the lines the World Bank is saying that the total demand for gold has fallen.  This lends evidence to my “dead-cat-bounce” hypothesis with regard to forecasting the future price of gold into 2013.

What conclusions can we draw from this?  Duke University Finance Professor Campbell Harvey says,

Gold objects have existed for thousands of years but gold has only been an actively traded object since 1975. Gold has often been described as an inflation hedge. If gold is an inflation hedge then on average its real return should be zero. Yet over 1, 5, 10, 15 and 20 year investment horizons the variation in the nominal and real returns of gold has not been driven by realized inflation. The real price of gold is currently high compared to history. In the past, when the real price of gold was above average, subsequent real gold returns have been below average. As a result investors in gold face a daunting dilemma: 1) ignore the past and seek inflation protection by paying a high real gold price that almost guarantees a decline in the future inflation adjusted purchasing power of gold or 2) embrace the past, avoid gold and run the risk of a greater decline in the future purchasing power of other assets relative to gold if inflation surges. Given this situation is it time to explore “this time is different” rationalizations? We show that new mined supply is surprisingly unresponsive to prices. In addition, authoritative estimates suggest that about three quarters of the achievable world supply of gold has already been mined. On the demand side, we focus on the official gold holdings of many countries. If prominent emerging markets increase their gold holdings to average per capita or per GDP holdings of developed countries, the real price of gold may rise even further from today’s elevated levels.”

See Harvey, C., and Claude Erb, (2012) The Golden Dilemma, Working Paper

Many interesting theories have come forth in the recent bull market in gold according to Harvey and Erb (2012):

  • 1. Gold is a Hedge against Inflation.
  • 2. Gold is a Hedge against Currency Volatility.
  • 3.  Gold has Higher Real Returns than Treasury Bonds (Low Real Return Assets).
  • 4.  Gold is a Safe Haven when Household is under threat of Hyperinflation.
  • 5.  We are returning to a De-facto World Gold Standard So You Should Own it.
  • 6.  Gold is “Under-owned.”

These two finance professors continue to unravel the mystery concerning the gold market.

They find that:

  • 1.  Gold is not an inflation hedge.
  • 2.  Gold is not a currency hedge.
  • 3.  There is a spurious negative correlation between gold and Treasury bond yields.
  • 4.  Threat of Hyperinflation has a Large Impact on the Price of Gold.
  • 5.  We are not returning to a gold standard.  Countries that left the gold standard first fared best during the Great Depression.
  • 6.  Too much demand in the form of central bank gold buying chasing too little supply has driven up the price.  That momentum based investors have dog piled long riding the back of central bank buying.  Momentum buying has created an upward sloped demand for gold (rather than being an example of a Giffen or Veblen good).

From Harvey and Erb (2012) I can construct a series of arguments.  Some are bullish.  Some are bearish.

Where Will Gold Go In 2013?

Bullish Bearish
Central bank excess demand will persist for years. Momentum demand drops after L-T trend breaks.
BRIC Countries target 1st World gold/GDP holdings. Central Bank demand drops after L-T trend breaks.
Folks Shift to 53%/45%/2% stock/bond/gold plan. GLD Owns More Gold Than China.
GLD Owns More Gold Than China.
USGS Says Only 20 Years of Gold Supply Left.

Here is the supply and demand scenario for gold.

Gold Supply and Demand (Metric Tons)

Year Supply Demand Change Gold Price
2001        3,729        3,729  $           279
2002        3,363        3,363 -11%  $           348
2003        3,206        3,206 -5%  $           416
2004        3,515        3,515 9%  $           438
2005        3,752        3,752 6%  $           519
2006        3,436        3,436 -9%  $           638
2007        3,570        3,570 4%  $           838
2008        3,812        3,812 6%  $           884
2009        3,493        3,493 -9%  $       1,096
2010        3,813        3,813 8%  $       1,421
2011        4,068        4,068 6%  $       1,567
Source:  Harvey and Erb (2012).

 

See the chart of Jewelry and Investment demand for gold in the slideshow…

GoldDemand

Source Harvey and Erb (2012)

ZYGZ2 - Gold, mini 2012Z - Dec. - Weekly

ZYGZ2 - Gold, mini 2012Z - Dec. - Weekly

ZYGZ2 - Gold, mini 2012Z - Dec. - Monthly

ZYGZ2 - Gold, mini 2012Z - Dec. - Monthly

ZYGZ2 - Gold, mini 2012Z - Dec. - Daily

ZYGZ2 - Gold, mini 2012Z - Dec. - Daily

ZYGZ2 - Gold, mini 2012Z - Dec. - 60 Minute

ZYGZ2 - Gold, mini 2012Z - Dec. - 60 Minute

ZYGZ2 - Gold, mini 2012Z - Dec. - 30 Minute

ZYGZ2 - Gold, mini 2012Z - Dec. - 30 Minute

ZYGZ2 - Gold, mini 2012Z - Dec. - 5 Minute

ZYGZ2 - Gold, mini 2012Z - Dec. - 5 Minute

skd284013sdc

Trend on Investment Demand Is Up For Gold!

GoldDemand thumbnail
ZYGZ2 - Gold, mini 2012Z - Dec. - Weekly thumbnail
ZYGZ2 - Gold, mini 2012Z - Dec. - Monthly thumbnail
ZYGZ2 - Gold, mini 2012Z - Dec. - Daily thumbnail
ZYGZ2 - Gold, mini 2012Z - Dec. - 60 Minute thumbnail
ZYGZ2 - Gold, mini 2012Z - Dec. - 30 Minute thumbnail
ZYGZ2 - Gold, mini 2012Z - Dec. - 5 Minute thumbnail
skd284013sdc thumbnail

Gold prices rose each year from 2001 to 2011.  But in four different years total demand dropped.  In each case there was a drop in demand for jewelry.  Supply and demand have increased little despite the 461.6% increase in the price of gold.

Investment demand for gold has increased dramatically.  Investments in gold comprised 9.57% of total demand in 2001.  By 2011 investors controlled 40.34% of all gold purchased or 1,641 metric tons.

Here is a chart of investment demand using data that generated the table above.

Clearly prices of gold in 2013 hinge on the willingness of investors to continue buy gold and hold.  These investors are most heavily represented by momentum traders then central banks.

Momentum traders buy as when prices break upward through key technical resistance price levels.  They sell as prices break downward through key technical support price levels.

Central banks are like large mutual funds.  They gradually build or unwind large positions.

They cannot move as fast.  They do not control nearly as much of the demand as do momentum traders in gold futures and ETFs.

The ETF GLD does indeed control more gold than the central bank of India!

The Technical Picture

MONTHLY CHART: On a monthly price chart of December Mini Gold a coil has formed.  Gold has broken upward from that coil.  The burning question is where the gold market is likely to go.

There are a number of price levels that are of interest.

The first is the $278.3 bottom and $1,888.90 top of the prior 10 year price structure that has formed.  I am watching to see if gold will penetrate all time resistance of $1,888.90.  That would be a very bullish event.

It could also stall out at any time and form a head and shoulders top.

WEEKLY CHART:  The near perfect downtrend from August of last year was broken just this July.  A strongly bullish technical signal emerged 7 weeks later.

DAILY CHART:  Consolidations have widened with the strong rising trend.  This most recent consolidation has been the widest and has endured for more than twice as long as the next longest.

4:00 HOUR CHART:  A buy signal will occur on a break above $1,797.3.  A sell signal will occur on a break bellow channel support of $1,736.8.

The Opportunity

The reason people are attracted into these markets is because of the possibility of fast profits.

If the market rises from here to resistance a profit of $3,144.04 is generated.  If the market falls to the support of the 11 month coil a profit of $8,512.48 would be generated to shorts.

That would be a [($8,512.48 – $1.417.50) ÷ $8,512.48] x 100 = 500.5% gain on half of initial margin if RIGHT.  It is a 500.5% loss to the trader if WRONG and trading with no stop-loss.

Always trade futures (and forex) with a stop-loss.

The Danger

The greatest danger is getting on the wrong side of the market.  Futures are highly levered and money will quickly wash out of your account.  Another danger is getting whipsawed if your entry point is not at or near an intermediate low (if long) or high (if short).

Money Management

Mini-gold has an initial margin of $2,835.00. Maintenance margin is $2,250.00.

Limit losses to ½ of initial margin.  This is $2,835.00 x 0.50 =  $1,417.50.  So realistically an investor needs $2,250.00  + $1,417.50 = $3,667.50 to safely trade one contract of December Mini Gold.

Stops and Mental Stops

BEARS:  A logical place for a bearish stop is $1781.20.  That represents a $1,417.5 drawdown on a market break below support of the most recent consolidation at $1,738.50.

BULLS:  A logical place for a bullish stop is $1,762.1.  This is a $1,417.5 drawdown on a market break above resistance of the most recent consolidation at $1,738.50.

If gold breaks $1,888.90 it will be higher in real terms than any time in 33 years.  This would be a strong confirmation that the upward demand driving price gains in gold remains unabated.  Bullish central banks and momentum traders will have won over the bears.

And it would be the best buy signal in 33 years.

If the market violates support at $1,762.1 per ounce downward momentum would have initiated.  This current move will have been a “dead-cat bounce!”  This would be the best sell signal in 33 years…  LOL!  🙂

I’ll give you alternative ways to play gold in upcoming posts.

-Dr. Scott Brown

PS. If you don’t play you can’t win.  If you lose everything you can’t play.  🙂

PPS. Please open a ticket through the support tab above if there are any errors on my part.  Ditto for any broken links, etcetera.

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