Tuesday, January 5, 2010

Gold and Dow on Track So Far...

We posted the following chart in our last article:

So far, the Dow has indeed made a small move higher, followed by a shallow correction.  Here is the updated chart, following roughly our projected timing:

Another final push in the Dow should mark the top of this bear-market rally's strength.  Once the next major leg down in the market resumes, expect it to be strong and swift as all of the positive sentiment built since March 2009 quickly unwinds and becomes negative.

As per gold, the downtrend correction could take it as high as $1180 before a resumption of the major downtrend should eventually carry gold to around the $650/oz mark.  Silver should also continue its downtrend within the next several trading days.  The rapid near-$.40 spike intraday today could have marked the top for this correction.  The major trend is down and we suggest trading with the trend - treat corrections as opportunities for entry points.  We are not short any silver but are excited for the market low to accumulate the metal on the cheap and pick up some top producers at depressed price levels.  We will keep you posted on our top pics as their price becomes attractive.

Gold's recent price action is a reversal of a 14-month uptrend:

Silver is exhibiting similar price action, with the compellingly-bearish non-confirmation of a higher-high on the recent price action relative to gold.  Silver's high for the decade still stands at just under the $21.50 peg, its most recent high at just under $19.50.

The Bottom Line:

  • The USD should finish its correction at our near the 77.00 level and resume its predominant uptrend
  • Silver should finish its correction around the $18.00 - $18.50 mark and resume its predominant downtrend
  • Gold should correct to $1,150 at most and resume its predominant downtrend
  • The Dow should make its final high for this bear market rally sometime in January.  We are anticipating another upward surge on a final wave of renewed optimism before a resumption of the long-term bear market.  The secondary US markets should follow the Dow down to new lows for the bear market.
The trading potential here is fantastic, being at the forefront of major trends in almost every asset in North America.  One must have nerves of steel to trade against the predominant optimism out there these days - but to possess those nerves and discipline can produce the utmost profits.  Remember trade WITH the trend that has been established and look for corrections as a means of re-evaluating and possibly adding to positions, or making a later entry.

Look for exhaustive signals (similar to recent USD and Gold sentiments) to indicate an expiring trend, and get out while the getting is good.

Have a fantastic 2010, and may you be rewarded all that you deserve.

Derek Blain.


  1. Derek,
    You see gold going down eventually to $650, and you write, "The major trend is down and we suggest trading with the trend - treat corrections as opportunities for entry points."

    Does that mean you want to trade the volatility up and down? If so, at what price would you consider entering this gold market?

  2. I'm sorry Derek BUT WHAT ARE YOU SMOKIN. I could not disagree with you more!!!!!!!!!!

  3. Primarily we suggest trading with the trend. Usually long term trends develop prevalent trend-lines which one can use as a means of locating ideal entry and exit points. Gold breached far above its trend line channel with greatly over-extended optimism as indicated by C.O.T. numbers, ETF inflows, fund purchases, central bank purchases, producer de-hedging all coinciding nicely within that time frame.

    Most of these things are counter-productive to a continuation of price increase for gold. Central banks are extensions of government (however independently run and profited by private parties they are), and government is generally the last one to the party. De-hedging is historically a good indicator of future price movements in precious metals, as management of mining and production companies are part of the psychological crowd. Barrick's closing out of its hedge book is anything but bullish, just as when they loaded up on their hedges it was an excellent bullish indicator.

    Not to mention all those pesky emails about selling gold, and the fact that pretty much every conservative talk show host out there is plugging gold companies that mark up over 30% over spot :)

    Again I will re-iterate - we are not short any PM futures and instead are accumulating cash to make long purchases at or around the market bottom. If one were so inclined, however, the shorting opportunities can be potentially lucrative. A downtrend channel is usually a good indicator for at least two full moves once the parameters of the trend have been established.

    Once the market turns I will be shorting some financial stocks and others, and will put up charting examples of entry points that I use as I pick them - currently gold is not treated as money by most, but as a financial asset, and thus in a bear market situation one must keep this in mind or be subject to severe losses.

    As to Anonymous, I have been known to enjoy the odd cigar and sometimes cherry flavored pipe-tobacco. I have not stumbled across any studies that suggest these products influence investment decisions one way or the other :)

  4. Derek, Mr.Fed is going to print and print, we have a 0% Fed funds rate, thus a negative real interest rate. I dare you to short names such as HL, CDE, VGZ, SVM, becasue you will pay dearly, bottom line, the uptrend for the silver miners has just started, before it is all said and done, this will make the dot.com bubble seem like a tea party.

  5. Derek, Maybe you haven't heard the new rumor but the Chinese are about to let their currency rise against the dollar 10% That will insure metals to rise and the stock market until the feds move up interest rates.Also just maybe their will be a Military strike soon.Their are to many possible varibles now to predit the way you are prediting.What effect do think that will Have?

  6. Derek,
    Your gutsy analysis and forecast is wondeful to hear, esp. since I stayed largely in cash and passed on the opportunity to load up on physical this New Year. Guess you're saying there will be many more below $1000 opportunities in the near future....again very gutsy and you should be highly rewarded for calling a trend reversal if it really happens...with all the monney printing that is a gutsy call, and what is a good investemnt IYO then? Best,

  7. Anonymous # 3 - The Chinese may our may not change the peg of their currency versus the dollar - actually I highly doubt they will in the near future as they are still desperate for exports and expanding credit rapidly.

    There is a good possibility the peg will be removed completely in the next 5 - 10 years as America and China's economy are literally heading in polar opposite directions.

    However in the near term that would go completely against the current Chinese Central Bank's mantra - to flood the market with credit. We have already seen a massive spike in every asset within China as well as a flood of buying the world over by the Chinese.

    As far as military strikes, they are unlikely at this given point considering where overall social mood is seated. After a few years of strong bearish moves in the major indices, however, the likelihood of a military strike somewhere is very high. These things tend to happen towards the end of bear markets as they are orchestrated by government (who are always last to the party) and are the product of years of negative social mood.

    Most likely, by the time any military action were to be taken, we would have already resumed a new bull market in stocks and inflation will be our worry at that point in the game.


    We are short via LEAPS about 20% of our portfolio against the weakest/most overvalued financial institutions, and the rest is in cash and its nearest equivalents.

    If you want to see our price predictions on gold please refer back to older posts - late September and early October especially hold the majority of the data. I certainly believe in owning PM's as a savings vehicle, however I believe that using market timing can net you twice as much metal and therefore twice as much retained purchasing power.

    Especially since, coming out of this escapade, inflation will most likely pick up very quickly.

    Derek Blain

  8. Thanks Derek.
    I will research this site more for relevant info as I am seeking good long-term advice. Some conflicting info about owning gold, you think it's a goo didea, but you did say you are expecting $650 gold so how can it be a good idea to buy then, at least not for a while?
    Thank again!

  9. This article (and the previous one linked inside of it) are good places to start.


  10. I seriously thought as I read through your article that I was going to get to the punch line of your joke about gold and silver falling dramatically in the near future. You are absolutely insane. There is no chance of Gold, Silver on any other commodity for that matter will go down by anywhere near the percentage amounts you indicate. You must be marooned on an island somewhere so as not to see the that massive borrowing and crazy debt that the US and and other G7 countries are running up can only have one conclusion. Inflation, and an increase in prices of hard assets and other commodities. The $ value of gold and silver will go way up. In reality, gold and silver will not being going up, but the dollar and other fiat currencies will be worth less. Far less, like fraction of their current values. Yes, there is a supply and demand dynamic also, but that will not be the driver of price of gold and silver expressed in dollars going way up.
    You may want to start thinking about another line of work. May a fiction writer.

  11. If you think this $1225 mark was an exhaustion breakout, you ain't see nothing yet! Wait to see what it does in the spring...$1225 will look cheap!!!!!!! You are going to miss the boat BIG time.

  12. Derek, your opinion seems to coincide with the mainstream analysis that gold is in a bubble which is soon to go bust. Yet you do not call it a bubble but a "correction" and a correction that will make the 18 month gold fizzle that we had before this latest rise look small. Your reasoning is that your opinion is contrarian and, therefore, it is right. You do have a good point about Barrick, their dehedging does make one believe the trend may change. Yet you state "trade with the trend" and the trend so far (since 2001) is nothing but up... Also the dollar trend, aside from the “Crash” rally, has been nothing but down. So… what do you mean really? I am intrigued by the prospect of gold going to $650 but I don’t understand what it is you mean when you say “trade with trend”.

  13. Anonymous #8

    Certainly, the data points to sentiment towards gold being at very overextended highs (along with an over-extended price movement I might add). I wouldn't label gold as in an actual "bubble" - more like every other asset has lost money so people are moving into gold to try to "make some".

    This is the type of psychology that needs to be corrected and shaken out before a real bull market can resume. I think that gold is at least going to move to the bottom of the uptrend channel established from the 2001 start of this bull market, which puts it at around $700 - I also think it is going to overshoot because people are going to be disenchanted with gold (for the right reasons, finally) at the time.

    However, it is most likely that gold is going to experience a much smaller correction relative to other assets as paper assets have technically been in a bear market for a decade which was obscured by inflation. The bear market in US stocks and paper assets should continue for several more years at least. Gold is only going to experience a small bear market that will end much sooner than the larger bear market in other assets - this will be the ideal time to long-purchase gold as it should resume a major multi-year bullish run in price.

    When I say "trade with the trend" you can take it either way - the very long-term trend in gold is up, but the price is still way off its low in the channel - once it breaches the lower part of the channel established from the start of this bull market, that is the time to consider buying. If you are so inclined to trade, then establish the trend of this move inside of the major multi-decade bullish trend and short down to the lower trend line then close out your short and buy long.

    If you are not inclined to trade actual gold short (I only purchase physical long myself and accumulate cash during down-periods) then simply accrue cash and purchase much more when the correction is finished.

  14. The point is Derek, most think that the correction is already finished (New Years's correction) and the train is leaving the last station now. If we wait for the $700 you mention, the risk is we may not see it and the train will have left, while you are stuck with cash that's quickly becominh worthless due to the printing pressess.....

  15. Radik,

    Your words demonstrate a key point in why this is a major reversal instead of a small correction - "most people think"... exactly! If you follow the numbers of people who are committed bullish, this is the case. That is why this is such a dangerous time to enter long into gold with the expectation of hitting $1300, $1400, $1500 when in fact prices should move very quickly in the opposite direction.

    As per the "printing presses", most people don't understand the mechanics of how money is printed and how it really relies on a normally functioning market of willing borrowers and lenders. Today there is neither, and in fact there is far faster deflation of total money (credit) than new debt being issued to make up for it. This trend should continue and accelerate much more over the next several years.

  16. So would you say deflationary forces are stronger than inflationary for the moment? Does this extend to other commodities other than metals?

  17. Derek,
    Thanks again. I do hope you are right and again, your words will be tested by the markets soon...I value your opinions and hope you are right...this is a fantastic resource

  18. Derek, what gold stocks do you like and silver for that matter, I enjoy your article. thank you

  19. by the way Derek, i went back and read some of your articles, you have been expecting a correction for months now, and according to you blog you've been in cash for months as well, what makes you think you are right this time? you have been wrong many times and missed this bull/bear market.

  20. Debbie,

    Over the past 3 months:

    The Dow and S&P500 have gone up by rougly 6% and 4.5% (The S&P being a much broader indicator of overal stock movement) respectively.

    The USD has turned and actually INCREASED in value from where we called a buy, even including the subsequent decline of 3.5%.

    Gold is down from where we definitively called a top in late November, (also of note is the fact that its downward initial-wave was over double that of the USD, showing that gold's move is not strictly treated as an inverse correlative one and is based on investor psychology).

    Before that we were warning NOT to invest in gold (honestly, how many really sold at the top? Not many as indicated by the number of NEW open long contracts being opened - open contracts up almost 100% off the low in '08), and talking about the low probability of a sustained rally. The next leg down in gold should be fairly quick and erase the gains from September and take it below $1000.00 / oz

    As per calling exact turns I tend to base my studies on actual quantifiable data and am constantly amazed (although I should be by now) at how irrational market behavior can carry on for much longer than I would dare suspect.

    However once such a build up of sentiment reverses it is generally erased quickly - I expect the small gains (versus the giant gains when we were long many stocks including gold and silver companies to the tune of 200% + on many) under 10% will be erased in similar form. History is on our side on this one.

    Thanks for the comment. As per specifically recommending gold or silver stocks I plan on putting up some of the ones I like as their prices get cheap. I will also be covering stocks in other countries (specifically Japan, whose deflationary period seems within a couple of years of ending) and specific sectors who should be very profitable and high-yielding.

  21. How do your charts measure the growing trend of those who are buying gold because they simply have lost all confidence in the governments ability to manage the economy? Charts, trendlines, and graphs are a tool to measure the economy, but they seldom consistently dictate it - for those dollar cost averaging, what is the harm in buying some now or later? If you truly believe in leveraging metals as a means of saving would dollar cost averaging over time be the best way to do this?

    Jig - www.thefinancialpanner.com

  22. The last line in the previous comment should be: "If you truly believe in leveraging metals as a means of savings, wouldn't dollar cost averaging over time be the best way to do this?"

    In this particular sitation, it seems more diligent to take this approach for the general investor as it takes market timing out of the equation...

    Jig - www.thefinancialpanner.com

  23. Those charts do not measure such psychological indicators, however those are entirely secondary when it comes to asset purchases if you look at the rawness of the market.

    People tote out "efficient market thoery" and such nonsense however they simultaneously fail to acknowledge that the majority of markets are inextricably linked and therefore there is no medium towards which value gravitates, it only gravitates towards dynamic extremes based on the pessimism or optimism of market participants.

    The price of gold reflects optimism and positive sentiment. The reasons for such are secondary, the primary focus is the sentiment itself, how much of it exists (quantifiable by measures such as the DSI and COT etc etc). When there is too much, you know a correction is imminent and should thus adjust.

    No market, anywhere, anytime can hold positive sentiment indefinitely. In fact, the longer that sentiment remains, generally, the correction that ensues in the opposite direction is that much deeper (or higher, depending on the optimism/pessimism) and longer.

    Gold is not going into a multi-year bear market or anything - in fact relative to almost any other potential asset it will probably hold up better. If the Dow goes to 3,000 and housing loses another 50% and commercial property loses 60% etc, but gold bottoms at $600 - $650 an ounce it is still "up" in purchasing power terms.

    The kicker is the USD, which will be in serious demand for debt settlement in a violent wave as defaults ensue. This will be a large deflationary period as total money shrinks rapidly, feeding upon itself as demand grows and less dollars are available to feed it.

    However, once these issues are settled, as I have written, "the piper will have to be paid" and if/when credit markets are restore (even partially) very high inflation is a serious risk.

    dollar-cost-averaging would indeed "smooth out" the downside risk. I certainly wouldn't recommend it at these price levels and if I were going to recommend it to someone who just HAD to have gold, I would recommend to start at the $1000 level at highest and increase purchase amounts on dips.

    Eventually a strong downtrend channel should form which would exhibit good mid-term buy-in opportunities and tops would tell you to avoid or greatly decrease purchase amounts.

    I, however, do believe very much in market timing - it will be very "en vogue" by the end of this bear market as there is a long term cycle going back about as far as there are news records which track stocks and investment houses that during bull markets you "buy for the long term" and near the end of bear markets, every fund manager is all about "timing the market".

    About the time when the average fund manager is talking about using technical indicators to time bottoms and how we have "a long ways to go" in the bear market, I will be looking for my longs and will have sold my shorts :)

    Hope this comment was helpful. Thanks for the intelligent question, Jig.