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What Is Wrong With Gold? A Cyclical Overview

Commodities / Gold and Silver 2010 Dec 22, 2010 - 10:14 AM GMT

By: Bob_Clark

Commodities Best Financial Markets Analysis ArticleWhy are metals stocks falling? When at the end of the year, the mining companies will or should be reporting solid earnings? Maybe even blow out earnings.  Is it a sign that the price of gold and silver are about to fall? Is it a chance to get into the metals and metals stocks cheap?


The wall of worry is steep
There is no question that the metals are over loved right now. The bullish consensus for the metals is in the 98% area but it has been there for a long time.  China is getting to the point that they have to start reining in some of their excesses.  They can't keep building ghost cities in the middle of nowhere.  High long term interest rates are sure to start to damage any recovery in the US housing market.  Spain is on the radar now and talk is that the Euro will not be able to stand too much more stretching, before it rips in two. 

There are a great number of fundamental reasons why the metals may be sagging.
 
Could it be the Fat Boys?
Then again, it could be as simple as the Fat Boys lining their pockets. 
When the public is hungry to buy call options, somebody has to fill that need.  The FBs are usually happy to take the other side of the hedge funds and the public. They have and are now loaded short call options and they don't like to lose money.
 
A quick look at the put/call ratio shows that there were a huge number of call options sold, going into the expiry that just occurred on Friday. It also shows that there is still an imbalance of calls over puts, that has yet to be resolved. 

The Fat Boys sell naked calls and the public buys them.  When they push the price down on the underlying metals, the calls written against the silver and gold ETFs (gld and slv) lose value as well.  So do the calls written against the miners (gold stocks) that actually dig the gold and silver out of the ground. Time runs out and the calls either expire worthless, or the FBs can buy them back much cheaper than they sold them.
 
(The chart below is for all options related to the S&P 500, but I would imagine, that with the huge run we have seen in the metals.  There were a ton of calls held on various precious metals trading vehicles, as traders bet on the bull run in the metals continuing.  If anything the metals put/call ratio was probably even more biased to the bull side.)
 
 
Not so fast
With huge profits to be reported by gold miners and world wide chaos in the currency markets.  It seems like any sell down in the gold stocks and their ETFs is a buying opportunity.
There is one fly in the ointment however. Actually two flies.
 
The first can be seen on the chart above.  There are still a lot of calls being held.  We are at levels that are normally seen at the top of market rallies, not bottoms.  I think we can assume that there are still many calls being held on the various precious metals trading vehicles and their derivatives.

When you combine that, with the cyclical pattern that we see in the metals (lower chart). We may have to do some more consolidating in the new year,  before the bull can run again.
 

Push me, pull me
I have drawn the 3 month cycle (orange arc)  and the 6 month cycle (blue arc), on a one year chart of GLD, which is a gold ETF.  As you can see, both cycles are due to bottom in January.  They should exert a downward pull (red arrow) as they will both be going hard down when we bring in the new year.  That most likely explains why we are trendless now. 

There is one cycle that should give us some lift over the next couple of weeks, it is a 1 month cycle and is represented by the blue dots.

On the bull side, we have to remember that the bigger one year cycle, is still up and that once we make the 6 month (half year cycle) low, we should start the next moon launch.
 
Fuzzy bottoms
There is one other thing.  Notice that the last time we made a 6 month low. (Which was also the 1 year low.)  It was a little fuzzy, time wise.  The market actually bottomed early and the same thing can happen here.  The low we are making now or will make shortly, can turn out to be something more than a one month cycle low.  That is the trouble with cycles, they are just one tool in a good traders belt.
 
I am looking for another quick swing toward the highs, that may reach above 1400.  Then I expect a swipe down toward the October lows (128ish). That is where I will be backing up the truck. I also have a strategy to make sure that I don't get left behind, if the markets start the new up leg early.
 
Conventional technical analysis using indicators, doesn't work. If it did, making money trading would be easy. Instead the Fat Boys prey on traders that use indicators.

I offer one on one, learn to trade courses. There is also a powerful video set.  Both will get you on the right track in the new year. It is the same track the Fat Boys are on.  They control the markets and if you are not with them, then you are a victim.
 
Thank you for your support throughout 2010, it is deeply appreciated.

Wishing you Happy Holidays and a healthy and prosperous New Year.  

    Bob Clark is a professional trader with over twenty years experience, he also provides real time online trading instruction, publishes a daily email trading advisory and maintains a web blog at www.winningtradingtactics.blogspot.com  his email is linesbot@gmail.com.

    © 2010 Copyright Bob Clark - All Rights Reserved
    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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