1. The million dollar question on everyone's mind in the gold community is: has the correction to the $900 area in gold run its course? Or at least running its course. Or is any rally now going to be followed by another hit? Let's review the basics:
2. This is the weak season for gold jewellery in India. The Indian currency has surged, making gold expensive. While it was already surging in US dollars. The Indians buy weakness in gold. Not super strength.
3. The strong season for gold jewellery begins around the end of August, as preparations begin for the wedding season. Gold is the gift given at Indian weddings, and the season peaks around Christmas.
4. Some analysts argue that "seasonality in gold is over" for now, because gold is now trading as a currency much more than as a commodity.
5. Recently there have been a lot of changes in established rules of thumb that have confused traders. Examples are: The US dollar has rallied while gold has rallied. The Canadian dollar and Australian dollar, commodity currencies, were hammered while gold soared. Oil fell while gold rose.
6. I've not referring to the reasons for these changes, I'm focusing on the fact that the changes are happening faster and faster. The volatility of change itself is increasing. Many very good analysts are now mentioning that "today" the US dollar is moving with the gold price, but "yesterday" it was not.
7. The "rules of thumb" are seen as working for shorter and shorter time frames. For amateur investors, who generally need time to get a handle on the sometimes complicated concepts involved in explaining why one asset class is or is not linked to another, you barely have understood one trend, when it is replaced by another.
8. Just as the US dollar is surely topping, we read that the euro "may begin a huge correction". It just had one! The article seems to carry some "weight", which only adds to the confusion.
9. At such times the charts should be watched carefully. While charts give many many false signals, you can at least create a picture for yourself of reasonable clarity.
10. The mind and emotional state of the investor at any point in time has a tremendous effect on the decision making process. What I like to do is face the fears head on, face the nightmare possibilities, and do that first. That is the risk component of investing, pure and simple. Then I focus on the reward side. The upside.
11. Let's see if I can read your mind right now in the gold market, and then I'll take a look at whether the gold chart is in agreement with the same fears and greed we all share. Here we go:
12. At $1000, you were probably pretty sure gold was going to break out higher. Some bought in the 950-990 area, anticipating a breakout. Because a real breakout, if it came, could leave you behind. Prediction of 1060 and 1200 were and now were on the table. Merrill Lynch announced "our wealthy clients are buying gold" as gold soared towards $1000.
13. Goldman Sachs was specifically talking $1000 gold call options. And those calls did make a profit as gold jumped to $1000. But investors didn't buy those options to make 30%. They bought them to make 500%. If gold went to 1200, they would have. Maybe more.
14. The April call options have a time limit. Time is running out. Even if gold rises to 1000 by the expiry, they expire worthless. These options simply give the holder the right to buy gold at 1000. If gold is at 1000 when they expire, why pay anything to buy gold at the current market price? And nobody is going to pay any fee to buy gold at a higher price than the current market price on the day those options expire.
15. Another item I want you to get a handle on is what I call the "news managers". Whether you believe as I do that the financial news is managed by the bankers or not, there is no question that a lot of good gold news appears when prices are rising, and bad gold news appears when prices fall.
16. One news item of great concern to me is the very recent news release by UBS Bank that gold could go to $2500. I got some emails from excited investors on that one. Which immediately makes me think of this possible scenario, and it's only a possibility: Gold has come down from $1000 to $900. An approximately 10% correction. If you bought gold at higher prices, now could be a time to add to your position in a big way, since gold is going to $2500. This is the mind of many investors right now.
17. When Merrill announced with glee that their "wealthy clients are buying gold now!", they forgot to mention one minor detail: WHO sold these people the gold they were buying? For every buyer there is a seller.
18. When the Goldman Sachs clients bought all the $1000 calls, where did they come from, out of the sky? No. Goldman was a seller of gold into the rally to $1000. Bigtime.
19. So my fear is that any rally in gold will be met with a bigger selloff. Let's face that fear now: How big a selloff? It's important to separate the different buyers of gold into groups. And analyze why those groups buy or sell. It is not the same for all the groups.
20. The gold community, aka the "gold bugs" think very big. That is you. Most are looking at gold rising to thousands of dollars an ounce. You bought because of the following reasons: The end of the American Empire. The $700 trillion derivatives garbage dump. Coming hyperinflation. The destruction of the US dollar. There are other reasons, but they are all mega big picture moves.
21. The bankers are another group. I believe they hold the largest physical position of gold. So does Jim Sinclair. No buyer of all the taxpayer gold unloaded via LBMA by the central banks has ever been revealed. I believe it was the major bank families. Many claim to have the "inside track" on what the bankers are doing. I don't know any gold writers other than Jim Sinclair who ARE part of the families, so it's highly doubtful that any of these "sources" are reliable. If accurate, it's probably more by accident than real information. "Just like in the 1970's, it will be the banks that make all the money in gold this time." -Jim Sinclair. World's Largest Gold Trader.
22. So we have the gold community trying to hold their gold positions, and the much larger bankers definitely holding their positions. Together forming a sort of gold core.
23. The risk aversion trade is another group. This trade arguably fuelled the rise from $680 in October to $1000 recently. As money managers and "wealthy individuals" began to bail on the stock markets, they moved to US Treasury Bonds, but as real risks of total system failure were announced, some money moved into gold as well.
24. Bear with me as I go though this. I view my role in the gold community, other than "chief comedian," to be to guide the community as a whole into acting with a calmness that does not exist now. To build the new, the old must be broken. If you have felt pain in the gold markets up to now, that pain WILL increase a hundred fold, and maybe a thousand fold, as gold moves thousands of dollars higher. All the way up, the bankers will attempt to play with your minds, luring you in with managed news. Then scaring the life out of you, so you bail on terrifying weakness.
25. The higher the price of gold goes, the higher the gold "cliff" becomes. When you look down at gold $1800, that's 1800 "feet" of cliff. The bankers WILL make you FEEL that. My job, I feel, is to prepare you to handle the endless bankers' schemes that WILL be used to lure you in and out of gold like a yo yo, all the way to the end of the gold bull market.
26. One thing I'm going to tell you is that most of you are likely trading WAY TOO BIG. Not a little too big. WAY TOO BIG. In too heavy at too few price points. You don't need to be "all in" to make a pile of money in gold. Trade smaller and you will make MORE money, not less. I have worked with a web application guy that I call superman, who has a serious portfolio himself, to create the pyramid generator. This systematically generates buy points on weakness with parameters customizable by you. And sell points into strength.
27. I used to try to answer subscriber questions and post them on the site.
28. Now I answer them all directly by email. Saves a lot of time for me and lets me handle questions promptly. I work 12-16 hours a day, so I can handle a lot of volume. At the bottom of this report, you'll see why I mention this.
29. I'm going to post this write up on the free reports section of my website, and you can click on the charts I include here and expand them into a separate window, even for viewing on a separate monitor if you wish.
30. Now that we've had a "fear break," let's face it again: If gold breaks $880, it could fall to $800. The risk aversion trade is a big amount of money. And most of it came in as gold soared. IF the stock market were to begin a major rally, and I think it will, both the US dollar and gold could decline as the risk aversion trade would be unwound.
31. Arguably, that is what has already happened from $1000 to $900. Because the entire rally from $680 to $1000 was a risk aversion rally, it is possible (and yes, now it's time to look over the cliff and feel some fear, sorry), that gold retraces the entire move back down to $680.
32. Looking further out, if gold were to break $680, all out panic selling could occur, particularly in the ETFs.
33. This would represent a huge changing of the guard. Putting the bulk of the gold held by investors now, into the hands of the bankers.
34. For every seller there is a buyer. The only group capable of absorbing all that gold is the bankers.
35. I mention this "nightmare scenario" so you are prepared. Don't sell your gold to these scumbags if the above occurs. If you do, you could be just in time to watch the emergence of inflation, which would quickly turn into hyperinflation. Sending gold from $500-$700 to $1200 in a very short period of time. And again enriching the bankers while investors charge in trying to get on board before missing out.
36. Let's look at the daily and weekly gold charts to see if such a scenario is possible. Don't predict whether it will happen, just be prepared to buy more gold, or at least hold what you have, if it does occur.
37. Here's the daily gold chart:
38. I want to draw your attention to the daily stochastics. Which are in oversold territory. There is a potential hook up on the shorter term 6,12,9 MACD series. We have descended towards the demand line of the keltner bands. These are hints of a coming nice rally. Again, the big question is whether this is the bottom before we go back over $1000, or is there more pain to come?
39. To answer that, I draw your attention to the weekly chart. Always let the weekly chart "rule" the daily. Unless you are a very short term trader. Even then, the best trades come when the short term and long term charts are telling the exact same story. When indicators and chart patterns are flashing "buy now" on all charts, you have high odds of buying at a near perfect moment.
40. Here's the weekly chart:
41. I don't like what I'm seeing on the weekly chart, but keep in mind that I buy weakness. I've bought gold and gold stock all the way down, and if gold goes to 800, 700, 600, I'll be a systematic buyer all the way down there. So should you. Because if you think the gold cliff looks high now, I URGE you to understand how high that cliff will look as we move forward to much higher gold prices. The bankers know you inside out. They have been picking your pocket for hundreds of years. Your only defence is to be a buyer when they buy. To prepare for that now. Regardless of how remote the possibility is. Do NOT repeat May 2006, spring/summer 2008. Those bank games will look like molehills compared to the mountains of pain they have planned for you as gold roars higher.
42. The stochastics on the weekly chart has rolled over, and the shorter time frame MACD series has crossed into a sell signal. The uptrend line has is creaking, some would say cracked.
43. Adding it all up, we have the daily chart saying buy, the UBS bank report saying buy, and the weekly charts saying, no, not "look out below". The weekly chart is saying: Begin buying. This is your last chance to learn to buy weakness in gold. Once gold leaves the $1000 launch pad, a new era of volatility will be ushered in.
44. Jim Sinclair has stated that gold will become "untradeable" for all but the top pros and many of them will be destroyed. He believes the Comex will become a cash market for gold. Those of you playing leveraged futures trader are making a huge error if you think you will be holding a big bag of Comex profits at the end of this bull market. You are more likely to lose your house as the market gaps through your stops on the day they are even rumoured to be ending margins. End your use of big margins now with small profits. Not with bankruptcy or wrist slashing later.
45. I want to leave you with this: The gold market is giving you free leverage in gold. That leverage is called: Hyperinflation. You don't need to borrow money to leverage gold. Hyperinflation will leverage your gold for you.
46. As gold does a potential ten bagger to $10,000 an ounce, the junior gold stocks could rise a hundred fold. I'm serious. Those who say, "Making 10-fold in physical gold, the world's lowest risk investment, is not enough for me, I need more with leverage, with borrowed money," are living a fantasy that will blow up. Those who are borrowing money to buy junior stocks will see their rates of interest skyrocket as the bankers tank the stocks in one of their hits down the road. "A hundred bagger is not enough for me. I need more!" Does that sound rational? No.
47. It's time to face the mirror. Buy this weakness and keep buying if gold falls further. Or never buy again. Do it in small stages, smaller than you think is rational.
48. For subscribers, I'm now answering all emails directly and personally rather than trying to post on the website. If you need help, I'm here.
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Stewart Thomson is a retired Merrill Lynch broker. Stewart writes the Graceland Updates daily between 4am-7am. They are sent out around 8am. The newsletter is attractively priced and the format is a unique numbered point form; giving clarity to each point and saving valuable reading time.
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