Gold falls – to last week’s price

I’ve been following the gold price on MacroBusiness for sometime now, with my most recent piece a few weeks ago (and other comprehensive posts here and here) I placed the context of the move in the gold price in a weekly chart. Here is a better and larger view of that chart (click to enlarge to full size):

And here is the recent action, but using a daily chart:

Lastly, note that the current price is still only a weekly low. This correction is not yet over. From the weekly charts, we can determine that the average correction is on the order of 8-10%, although curiously, each subsequent correction is reducing in magnitude.

Another issue that makes this current two day correction (rightly called a “dip” for now) different to the past is that gold shot out above its weekly trend channel, even adjusted using a semi-log chart:

This happened in November 2009 as the first “Botox Boom” (h/t Satyajit Das) wore off and risk took time off over the Northern hemisphere winter. A return to the trend channel resumed thereafter with QE2, as much as it tried, failing to reach above the upper trend channel.

What caused the correction? The usual suspects – too much short term speculation and the subsequent reigning in of margin (both initial and maintenance) by large metals exchanges, notably the Shanghai Gold Exchange – 22% increase – and Chicago Mercantile Exchange, a 27% increase.

So the question remains, is this too much exuberance part of a normal correction amongst a typical bull market, or something else?

From a historical viewpoint, the gold bull market has now passed the 700% stage (a low of $250 in 2001) which compares with approx. October 1978 when gold first took out that level in its bull market (which then transformed into a bubble).

As The Bullion Baron said recently on his blog:

From 700% onwards is where Gold went parabolic in the 1970s bull market. If we are to see a similar move this time over a similar time frame then we have roughly 16 months left until the peak, I would say that puts us squarely in the early stages of phase 3 which is where I believe we are (media attention phase, but for different reasons).

He created this chart, which compares both markets, showing the percentage gain made over the period 1971 to mid 1980 (blue) vs the period 2001 to mid 2011 (red) (although it only has current data to the start of August, or $300 ago!)

The Phase 3 he alludes to is the “mania” phase of a bubble, shown here in a chart seen often, by Dr Jean-Paul Rodriguez:

I’ve posted on gold’s possible position in this “bubble” before and contended we’ve been on the cusp of the “public” phase, with the GFC the first major sell off, causing a bear trap (gold corrected almost 25%). Given the queries I’ve taken from friends and acquaintances recently on “how to buy gold” as a backdrop to this current price activity I would suggest we truly are moving into the “enthusiasm” area.

In my mid July post, I considered a target of $1700 USD an ounce by the end of year.

Gold in USD weekly prices extended to end of 2011 - posted 19th July

This could still occur as gold corrects 8-10% from $1900 to approx. $1700 over the next few months, whilst resuming its secular bull market trend. As I said:

Of course, what we are talking about here is the broad assumption that gold will inexorably continue its bull market, flittering from one economic and monetary crisis to the next, with no end game in sight.

However, there is a now a stronger chance than ever that an end game is here with a deficit in leadership, effective monetary and fiscal policy, balanced by the surplus of in-fighting, in-action and ineptitude in solving a 4 year old crisis.

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  1. Great post Prince.
    I agree there is a chance that the end game is here, but it’s too early to be sure.
    That semi log weekly chart trend channel you’ve shown will be a valuable guide going forward. If gold goes back inside the channel, then we’ll be in for a period fo consolidation, at the least. If gold breaks downwards through the bottom line of the channel we’ll be in for a bigger correction.
    Central Banks are buying gold, which makes me think its run is almost finished. Remember that they all sold out over a decade ago, near the bottom.

    • “Remember that they all sold out over a decade ago, near the bottom.”

      indeed. I found an old interview with Marc Faber some years ago in the early 2000’s i beleive when gold was in the $300’s, and the SNB had just sold a sizable chunk of it’s gold reserves. Faber commented that he took it as a very bullish signal to buy gold.

    • One thing that I find interesting is that when we had the first financial scare in 2008, Gold went down approx 30% in USD and USD strengthened as people put their money in US govt debt. People’s confidence in the public sphere (US govt debt) was still strong.

      This time around with the debt ceiling scare, we still had a flight to US govt debt, but gold also went up. To me this reflects the start of the shift away from the public sphere with gold being perhaps the ultimate private sphere asset.

      The current correction in gold appears healthy to me given the run up it has had this month. I’m hoping it it falls back just above or in line with the long term channel and keeps going for a few years more, but given all the public debt problems we have worldwide, I’m wondering whether it won’t just take off again on the next scare.

      It may be too simplistic, but I look at gold as the inverse of debt. If we believe at some point that debt must deflate, whoever is the holder of that debt (banks depositors, bank shareholders, bond holders) must take a loss. Yes they can change the accounting rules (FASB mark to model in 2009) and print money to forestall this process, but eventually a loss has to be written off.

      When govts starts to suggest this as a course of action to resolve the huge public debt problems, I think that’s when we will see the “bubble”. Even if the retail public gets involved beforehand to buy gold, in my mind it’s when the huge amount of capital that is parked in bond markets starts to look for a home in any other tangible asset, that’s when we would see big moves in prices of precious metals, stocks, commodities, who knows maybe even real estate.

      In between then and now, maybe gold could crash significantly, but I don’t see how we can avoid a reset of global financial assets and maybe even currencies within the next 1-7 years. As we get closer to that date, I think gold will keep climbing.

      Finally, a big thanks to all you guys at Macro Business. I read and learn from you guys everyday and appreciate the diversity of opinions which just never seem to get voiced in the mainstream media.

  2. Nice post.

    This correction was always going to happen when CME reported the margin requirements would raise 27%, and they hiked it 20 odd percent a few weeks ago. The same process used on silver a while ago. Also, the market is rallying due to what the FED might do/say tonight as well.

    Lots of profit taking going on.

    Bear in mind that the FED won’t actually fix anything, and the debt, unemployment, decreasing GDP ….. Then we have a European banking crisis so this is all going to blow up again very soon IMO.

    I won’t make any predictions, but nothing has changed economically for the better, and got worse IMO.

  3. This is waaay off topic, but where’s DFM? On holiday?
    With stocks trending down and precious metals correcting (at the least), it’s looking like 2008 all over again, except that so far the USD index hasn’t been able to get off the mat. Got a gitchy feelin’ that might be close to changing. There’s a case to be made that the USD has bottomed against AUD, CAD, GBP, maybe even the Yen. As bizarre as it may seem, the EUR/USD is the only thing holding the USD index up.

  4. love the bubble phase chart Prince, great graphic for an average pleb like me who’s biggest education in economics has been finding MB. Would be really interesting to hear all the MB bloggers opinion on where the Oz Housing situation is located on that chart.

    Cheers BT

    • Fear.

      I reckon the FHB grant was the bull trap. I know prices made new highs after that, which they don’t on that chart, but from a sentiment point of view I reckon the FHB was the bull trap, and the subsequent price rise was the return to normal.

      Now that prices have rolled over again, we’re heading in to fear.

      That said, I don’t know if it is correct to apply such free market models to the Aussie housing market, is it is definitely not a free market.

        • I’m just putting an I.P. on the market now. Being an avid MB reader it’s been interesting to talk to several agents about the market. All have reluctantly admitted that there is excess volume, and one admitted some fearful selling especially from overseas investors who had heard bad things about the Aussie market. Some sales to Chinese who do minimal due dilegance (gotta put that cash somewhere). But one predicted “no change until March” as in there is some rule that what we see know is set in stone until then. But then he also admitted there will be some motivated sellers dragging list prices down – a somewhat inconsistent position as I guess we’d expect. So fear in some quarters at least. For me, I won’t admit fear. A de-risking / profit taking exercise, perhaps a few months late you might claim, but going into spring prospects are still good in my local market. Next year will be a different story I would wager.

      • You’re in denial.

        We have been going through denial – “Just a scratch, blip, good buying opportunity, nothing to see, move along” etc etc

        When denial is shown to be wrong, fear sets in. By then it is too late (for the oblivious ones).

        • Im all good Nick, just trying to see the bigger picture… I live in a small country town of 30, house prices here do nothing.

    • Agree AC, although it wasn’t so much a bull trap as an abatoir. But then again what a great way for the government to take a young mobile workforce and tie them down so they fit the taxation mould.

    • Thanx guys…. i should update the page before i repost next time lol.
      I wonder if the RBA buckles on all these growing calls for rate cuts from the REI, Manufacturing etc if it will change sentiment much?

  5. My guess is Bernanke fails to announce any new QE tomorrow and gold takes another leg down. But with a major Euro crisis inevitable in the next 6-12 months, you’d have to think gold has further to run.

    • I think that’s about on the money Lorax – I’ll be up late watching his speech.

      Another 10-15% down leg on gold is conceivable, but is likely to be bid up by dip buyers.

    • I reckon everything will tank after his speech, no matter what he says.

      If he offers a glimmer of QE, the rationalisation will be “oh no things must be as bad as we feared, sell sell sell”.

      If there’s no glimmer of QE, that itself will be the rationalisation.

      • In a crash all asset classes tank I guess, and gold along with it looking back in history. What can Ben really do if you look at this situation. Do you know why the market would wait for this speech given they are probably planning that sell off anyway?

      • Dunno. I’m just basing my guess on what I remember from 2008, which is, rally in to most Fed related meetings or speeches, and then within a day or two at most, begin a sell off to below the previous lows.