Gold Update

Typically Gold is bought on inflation expectations, meaning even before inflation actually rears its head.

The F_E_D has been dead wrong on inflation expectations and each F_O_M_C meeting they walk back their "transitory" deflationary effect of low oil prices a little bit more, from almost a negligible occurrence to "Well maybe it will be with us a little longer than expected" over the last several meetings.

For my part, I blasted the F_E_D's Bullard for suggesting inflation expectations had changed over 1 month (his early October statements vs. November, saying that you cannot possibly predict the inflationary trend or changes in it on a month's worth of data. So to be consistent, I won't claim that yesterday's Initial Claims with hourly earnings increasing 1.3% month o. month and yesterday's Consumer Price Index and its CORE CPI advance in inflation in every day goods and services when excluding Energy and Food as the F_E_D excludes them as "volatile" represents a change in the inflationary outlook.

While this may sound tin-foil hat conspiracy theory, you probably know my general opinion that the F_E_D has been on track to remove accommodation since the press conference that unleashed QE3 ironically, they made the first steps away from "Whatever it takes, we have more tools" to talking about changing guidance from quantitative to qualitative, at which time I theorized that this was the first step in removing accommodation. Here we are a couple of years later and the F_E_D has removed policy accommodation, QE is gone and while the F_E_D maintains a facade of impartiality and data dependency based on the word, "Patient", it is my opinion (with no fact to back it up beyond what has already happened since the theory had first arisen in September of 2012) that the F_E_D has an alternative reason for NEEDING to move off ZIRP. I can't claim any knowledge as to why I believe this to be true, I just do and I believe macro data be damned, they'll twist, use subterfuge and plausible deniability to get to their goal which I believe is rate hikes, but not because the economy is strong enough as the current narrative goes despite all data.

As for Gold, again, perception is everything in the market, value counts for next to nothing if not actually inversely correlated. Thus in January we had called for a pullback in GLD, we had a put position on, I can't find the exact date we first called for this pullback, but I found a post in roughly the area from Friday January 23rd, Gold Update. from which GLD has moved over 7% lower (pullback we expected".

Here are a few of our expectations at that time when GLD was 1-day off it's 2015 highs...

"It's no secret that we have been expecting a decent pullback in gold with a recently added GLD put position, Feb 20th 121.... However, if you've been following our analysis of gold and gold miners over the last year or so, we've also been seeing hints of a larger primary trend developing, a new trend since the 2011 top we called. Price action and 3C charts seemed to take a break for a bit and things cooled off, but it looks like those same longer term expectations that we had been seeing develop, are on the grid again... First though, we are looking at a pullback, we may find a good buying opportunity in a pullback, but we'll let the charts tell us whether a pullback looks constructive or not (whether there's accumulation of the pullback)."

I think that explains the analysis as of January, pullback and a probability of that pullback offering a new long position for a larger Gold trend higher. The recent GLD updates have been along the same idea posted in January.

Here's an overview of where we stand...

 This is an overview of the Gold trend that we have broadly called nearly to a "T" or a "Tee".

The 2009-2011 trend was the gold-bug phase, input costs were rising due to commodities being bid up because of QE (as commodities are traditionally a risk asset), this is something the F_E_D has to do something about as manufacturers were paying increasingly higher input costs and they did do something. At the time it was sacrilege to say anything other than "Gold is awesome". This was pretty much a bubble move as my neighborhood barometer was off the scale with friends who had no investment experience were buying up gold and silver coins on the internet. You may recall my experience of having to break the bad news to a friend (not an investor who caught the gold bug) that the coins he bought off the internet were in fact not real as coins are struck in whole, there's no seam on the edge where a front and back had been fused together. You may also recall my experience with a well known money manager who I had been in touch with, a solid gold bug who had summarily dismissed my bearish gold analysis in late 2011 as essentially being bunk (cantankerous fellow) .

By late 2011 as the rate of change in gold has risen and broken away from the steady trend at #1 (seemingly bullish, but as we have seen so many times, it's a red flag that the trend is about to change), we not only refused the gold long trade, but forecast Gold to move down in either an intermediate or primary downtrend, both very serious and that's exactly what Gold did off the 2011 highs at #2.  At #3, GLD classified as a downtrend.

However at #4 we saw some unusual activity and speculated that gold may be putting in a bottom and then things went quiet for a while, it wasn't until recently that signs of a positive longer term gold trend had emerged, thus the January analysis,

"It's no secret that we have been expecting a decent pullback in gold with a recently added GLD put position, Feb 20th 121.... However, if you've been following our analysis of gold and gold miners over the last year or so, we've also been seeing hints of a larger primary trend developing, a new trend since the 2011 top we called. Price action and 3C charts seemed to take a break for a bit and things cooled off, but it looks like those same longer term expectations that we had been seeing develop, are on the grid again... "

 If you look at the longer term chart above this one, you'll recognize this area as looking like a bearish descending triangle, however the actual consolidation of a descending triangle is no where this large, so it's something else.

Out custom DeMark inspired buy/sell indicator has given several long and short signals that have been essentially, right on cue including the last pullback.

 Over a longer period, a 9-day chart (each bar represent 9-days) we have numerous signals with pullback areas called as well as two but areas that curiously didn't show up in Gold's uptrend, one, the most recent just happens to be a break of support that saw 3C accumulation, otherwise known as a head fake/stop run which led to the bounce higher that we eventually called as a pullback in January.

 On a daily chart the red rectangle is the area of our last pullback call along with a GLD put position and a bullish hammer candlestick at the lows on increased volume, making it about 3x more effective as a reversal candle, although they give no target other than to say, "The current trend is about to change"{ as it did. However in t the recent bounce, volume has been FAR from ideal and today we have a Doji Star or indecision candle that "may" end up being a short term pullback which would suit me just fine if it ended up building a larger local base like a "W" base along with the hammer (white arrow), this would be a more stable platform to rally from.

 Interestingly recently GLD's trend has been called by 3C with a pretty high degree of accuracy (30 min), the first positive divergence is at the stop-run/head fake below support at the yellow arrow and more interesting to me is the sharp leading positive divergence since.

 This 15 min chart shows good reason for us to call a pullback in January at the highs and also now shows good reason to suggest our forecast of the pullback potentially offering a nice long entry is correct.

The top trendline (white) shows the approximate location of the first identification of the positive divergence and out 3C concept is that price will almost always surpass the first area a divergence is noticed, so an upside move should easily take out at least the $120 area.

 The 10 min chart shows the same confirmation of both the pullback call and the probability of accumulation in to the pullback, creating a higher probability long entry at a discount and lower risk.

However as we get more in to detail, the 5 min chart which doesn't contradict anything above, just adds to it, seems to suggest that the near term pop in GLD over the last several days should pullback, along the lines of the wider "W" base I suggested above which would gvie us a stronger foundation to rally from and a higher probability trade.

I've confirmed the same in Gold futures (/YG), this is a 5 min chart suggesting a very near term pullback, but does not damage the positive divergence in to the pullback lows.

I'll be setting some alerts for a small pullback, likely in the area of $114, I'll be watching otherwise, but I;d like to see that occur in to a stronger positive divergence and this may give us a fantastic trade that comes to us at a discount and of course lower risk with a stronger base for a stronger upside move.

I can't necessarily argue with the idea of phasing in to or building a position if it's a trade idea you like, although I'd do it with the above forecast in mind, especially if you might be looking for a larger trending trade which I believe there's some decent evidence to support the idea. 

The bottom line is the F_E_D needs either inflation or the perception of inflation, gold should benefit from that.