Chart of the Day: Cop(per) this, gold

Today’s chart starts with Colin Twigg’s trading diary, analysing the technical breakdown of copper:

Colin Twiggs daily chart with momentum indicator below

Colin estimates a target of 7000, which puts the base metal at or slightly above its pre-QE2 price, taking the “froth” off the top. In the case of a Western recession, however, the price target is more likely far far below – just above 4000, the adjusted bottom of the GFC crash.

As for gold, here is my weekly chart with my original guideline for a correction to the long running trend:

Original chart showing possibly correction path. Gold is behaving more like silver...

Note how I’ve underestimated the power of meta-money to get the hell out of dodge, with gold correcting swiftly below $1700 USD an ounce and on track to possibly break the trendline. As shown by the daily chart below, the next support range is $1450-1550 USD an ounce which corresponds with support using the long term moving average (blue line).

Daily chart showing breakdown and possible targets

Remember, gold corrected 28% during 2008 and took 18 months (and the application of QE 1.5) to regain its previous high at $1000 USD an ounce. A similar correction, alongside other metals and commodities as meta-money seeks shelter and a recession is fully priced in, sans further stimulus, could take gold down to $1375 USD an ounce.

Gold crumbled during the GFC, abrogating its "crisis" status.

Aussie, Aussie, Aussie?
As for gold holders in Aussie dollars (AUD), the long term chart shows quite a different pattern. First, in AUD terms, gold corrected approx. 15% druing the GFC, before bubbling almost 50% thereafter as gold went up and AUD went down. Following this was a significant 23% correction mainly due to the AUD appreciating against USD, even though gold in USD was rising. Eventually AUD gold formed an ascending triangle, surpassing the post-GFC bubble high in mid-July and broke out alongside other currencies denominated in gold.

Weekly chart of gold in AUD - correction during GFC was smaller than USD

The short term pattern is very bearish – a symmetrical triangle with a breakout below. It is most likely, even as the AUD itself falls, that gold priced in AUD will follow down to pre-blowoff levels, approx. $1380 to $1460 AUD an ounce.

Daily chart of gold in AUD

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Comments

  1. Forget Gold—What Matters Is Copper

    People are freaking out that gold has fallen to $1,650, from its lofty highs above $1,800—they are freaking out something awful. “Gold has fallen 10%! The world is coming to an end!!!” I myself took a shellacking in gold—

    —but copper is what has me worried.

    Copper fell from $4.20 to $3.25—close to 25%—in about three weeks. Most of that tumble has happened in the last ten days, and what’s worrisome is that, as I write these words over the weekend, there is every indication that copper will continue its free fall come Monday.

    From the numbers that I’m seeing—and from the historical fact that copper tends to fall roughly 40% from peak to trough during an American recession—there is every indication that copper could reach $2.67 in short order. And even bottom out below that—say at $2.20—before stabilizing around the $2.67 level.

    But we’ll see. The price of copper is not the point of this discussion. The point of this discussion is what the price of copper means.

    What it means for monetary policy.

    We all know the old saying: “Copper is the only commodity with a Ph.D. in economics”, or words to the effect.

    The ongoing price collapse of copper signals that the markets have collectively decided that there is going to be no resurgence of the global economies—at least not for the next 9 to 18 months. Up until now, the economic data that has been coming out over the last couple of weeks seemed to indicate that there’s going to be a double-dip—but in my mind, this fall in the price of copper confirms this notion that the general economy is going down.

    http://www.zerohedge.com/news/guest-post-forget-gold%E2%80%94what-matters-copper

    • What it means is that you can naked short base metals so when people head for the exits you get these big price swings.

      But the copper price never correlated to underlying economic supply/demand balances despite an ongoing gaggle of pundits falling over themselves to declare supply deficits “just around the corner” over the last 2 years.

      A price somewhere between $2.50 – $3.00 would be a good indication of current industrial demand.

      The “Dr Copper” crap comes mostly from economists who believe prices reflect industrial demand 100% (i.e. speculators don’t move markets). Hence they tend to follow prices only, and totally ignore industrial usage and output data which shows the true picture of underlying industrial demand (e.g. US consumption has fallen for a decade).

  2. Prince I would not bet on the movement of gold given the volatility, and any political, or economic condition can send it either way.

    I expected the 28% gold CME margin hike to drag it down today, and initially it did, but as of now in USD it’s just gone +ve for the day. However, at NY open today that might change.

    The bottom line is that nothing has been fixed, and even of the G20 stabalise the EU, the situation in the US is in Op Twist territory. Credit is going to contract further IMO as bond holders are likely to take a big haircut in Greece for a start.

    My macro view for gold is up, but I never discount what the politicians, and CB’s are prepared to do to keep the ponzi monetary system going.

    If you have a few hours to spare this is worth a watch (four parts) you may have seen it before, but there is some interesting nuggets of info in there:

    http://www.ritholtz.com/blog/category/video/

    • Thx Adrian – quick question: if credit (ie: money supply) contracts further as you suggest, will this push the USD higher? And hence gold lower?

      • I would expect that money supply contraction would send gold lower, yes – as it is improving the credibility of the USD as a currency –> it’s a statement of quality, and of the currency issuers (US govt/Fed) faith and valuation (qualitative, philosophical sense) in its own currency.

        However, that would be quite a move in today’s economy – contracting money supply would increase the relative magnitude of debt…of which there is gazillions…and would crush oh-so-many debt holders….hence, why, if anything, expansion of the money supply is what is most likely to happen, not contraction (read: “save the status quo and vested interests!”).

        What is more likely, however, if increasing interest rates, which, IMHO, are another statement of quality and faith from the currency issuer, and would also put a dent in the gold price (according to its alternative currency function).

        Personally, I see TPTB increasing interest rates long before I see them contracting the money supply.

        My 2c

      • Hi China Watcher,

        Looking at the FRED data from 1920 to date the money supply only dropped twice (bear in mind the FED does not calculate M3 any more), and discounting the time up to 1971 when Nixon went completely off the gold standard … in 1975/1976 the money supply went up, but gold went down, and the same happened from about 1981 to 2002 gold dropped, but the money supply rose.

        My feeling is that gold can move independently of the money supply, and I can’t say which way it will move due to speculation, emotion, fear, huge personal/sovereign debt world wide, and political uncertainty.

        Personally, I’m expecting gold to rise due to loss of faith in the economic and political process. But, no one know for sure what’s going to happen IMO.

  3. Thanks for the charts Prince.
    That ascending triangle on Gold in AUD is a huge pattern. Target is well over $2000. Only a move back inside the triangle (ie. below $1500) would call that target in to question.
    As for Gold in USD, if last week’s lows are broken I agree, we’re in for a much larger correction, below $1600 at least. If last week’s lows hold, it’ll be over $2000 before you know it. The latter sounds crazy, I know, and is unlikely, I think, but with the markets, anything can happen.
    http://www.avidchartist.com/2011/09/gold-tests-mid-channel-line.html

    • I agree Avid as the market is running on fear so any small concern can drive the price either way. I definitely will not be surprised at any outcome.

      • Yes, i, too, have been quite surprised at how fear is driving the gold price in both directions….seems there are currently different types of fear: 1) risk off (move some more capital to PMs), and 2) REALLY risk off (just sell everything as quickly as possible and liquidate to USD)

        !!

    • Thanks for your thoughts, Avid – I do value them.

      it really is about how th market trusts the powers that be, isn’t it??

      I mean, I personally half-expected such a fall, but was wondering if an increasing loss-of-faith in the pwoers that be / the system, was going to keep the price much more comfortably above $1650, rather than even dipping below $1650, and looking somewhat like it could go to $1600….perhaps I have, for the time being, udnerestimated the following:

      1) just how much speculative trade is still in PMs (esp silver!!)

      2) how much faith habit the market still has in the USD (ie. i’m still baffled at just how much money has run back to the USD, despite how much it sucks fundamentally…)

      3) how much “habit” seems to still be dictating the moves of the market – ie. “risk on” = go non-USD; “risk off” means go to USD … derr … I can see the USD-safe-haveners freaking out when the next piece of bad news comes from the USA, hearing “what the heck should I do with my capital then? where should I run to?!?!?!?” (truth is, i’ve been hearing that anyway, just didn’t think so many would flock back to the USD with the speed and magnitude that they have!)

      My 2c

      • Thanks BurbWatcher.
        I think the reason behind the USD action is quite simple.
        In times of panic, banks and funds want cash on their books.
        Cash means USD.
        So other stuff (stocks, currencies, commods) is exchanged (sold!) for USD to get that cash.
        Therefore USD trends up, and everything else trends down.
        The best way to play that is via the EUR/USD I think. But I’m still taking sideways glances at Gold, out of interest…. still have a nagging feeling that it might buck the undollar down trend. I don’t buy on the basis of nagging feelings, but I do start planning the levels that I would buy at.

        • Avid, I, too, have a feeling that gold will do “a little less badly” than many other assets, from the “alternative currency POV”.

          ie., as you imply, buying the dips from PM safe-haveners (the chorus of which i think is growing) will give the price a bit of juice every now and again, and floors higher than they otherwise would be.

          As for which currency to “play” in, i’m sticking with AUD, partly because it’s something I know (i’m not a trader and don’t really want to be – would get hooked!), and because I’m actually looking for a significant Forex play WRT PMs over the next 2 years or so (ie. AUD down bs UDS means more AUD for the PM holder…)

          Hence, i’m actually buying dips now in PMs – as, for me, once the AUD really starts to tank (i’m picking AUD < 60c in the medium term), PMs will simply be "too expensive".

          It will be interesting to see how the faith and fear memes develop from here, WRT PMs.

          My 2c

      • Burb, and there is this upcoming gold product on the Swiss stock exchange, so there is lots of gold dynamics going on.

        Agree that there is little trust now on the markets in both the system, and the politicians.

        So, both lack of trust, and fear are driving some of what we’re seeing. Furthermore, speculation has grown given the global monetary system is basically unstable regardless of any dismal efforts of the CB’s and politicians to deal with debt, spending, and resolving fundamental economic needs.

        http://www.swissinfo.ch/eng/specials/swiss_franc/Swiss_stock_exchange_bets_on_gold.html?cid=31202904

      • Yes, i’ve noticed, too, that gold seems to be trading according to the technicals – almost exactly (ie. from what some have said, anecdotes, not my own in-depth info!).

        Seems that the traders are obeying their charts quite fervently??

        • The school of fish or the herd of wildebeeste? 😉

          Anecdotally, if the blogosphere is to be believed the big “dumpers” recently were hedge funds and banks seeking ‘cash’ to prop other failed investments (margin!!).

          So, being technicians/chartists I presume the key targets are the same for them all.

        • 1569 just now, below my potential support range, and Raptor’s 1580, and fast approaching the top end of Prince’s 1450 to 1550 range.

          As bearish as I have been on the global situation (especially stocks and currencies XYZ/USD), looks like I should’ve been even more bearish (Gold, Silver).

  4. As in the GFC when confidence vaporises, purchasing managers destock while they wait to see where the economy is going. A restocking rebound in price is as likely as a downturn in the copper price. Watch this space. No Financial Crisis …. Yet.

  5. This price movement in gold and silver is for two very important reasons:

    1) that the bullion banks have very large short positions in the market, around 6 months production. They realise that gold is only going up and they need to clear these positions.

    2) These same people want the talking heads and soundbiters to associate the recent strength in metals with the term bubble. They want to promote the bubble reasoning for the recent increase in prices so that the retail investors stay the hell out of their market.

    This is scare tactics, nothing more, nothing less, by those with the power to make this sort of thing happen. It’s orchestrated, it’s deliberate, it’s premeditated, and if you pay close attention you can see it coming, like i did.

    Gold is going to the moon. the best thing to do is to step aside, wait for the bottom and buy like hell when she starts to go up. AUD movements are only likely to amplify any gains if we are able to get back in before the AUD returns to it’s true value.

  6. What are people’s thoughts on silver? Down 30% in no time.

    Is it worth considering as a play or do the JP Morgan price fixing rumors/truths (who knows) make it a completely unpredictable powder keg. Basically, is Max Keiser talking out his *rse?

  7. I have nearly $2M in gold and silver. I observes these shenanigans (JPM manipulations, margin increases, panicky buying of the USD) with mild interest and a little amusement. Precious metals are a 20yr+ investment for me. YMMV.

  8. Spot gold is about to cross below its long term moving average and support level and V-Raptors Fibonacci retracement at $1580.

    The last time it dropped below the 260WMA was August 2008 – but I caution that it looks way oversold.

    • What a day for gold. Starting to think I wasn’t bearish enough, though 2/3 ain’t bad (stocks, currencies XYZ/USD, but not gold).
      Oh well. Best not to dwell on the ones that got away, and just start planning the next move.
      There’ll be plenty opportunities. I think the Fat Lady is only starting to warm up, and 2012 will be the gala performance. Or should that be, the bear is only just sharpening his claws, and 2012 is when he starts sinking his teeth in too.

  9. Out of curiosity for the technical analysis lay-person, what’s a “symmetric triangle” imply? Is it just the obvious – a narrowing band of trading that implies a break one way or the other soon?