market folly

Adam from MarketClub recently penned an in-depth article with his thoughts on gold. He also put out an accompanying video analysis of gold so you can follow along there. Basically, before gold makes its next large move (in either direction), he argues it needs to consolidate and form an 'energy field.' Click the graphic for his video and then the rest of his thoughts follow below:



MarketClub: "Gold has had some dramatic moves in the last eighteen months and we expect it will have some equally dramatic moves in the future, but not right now. While I recognize that gold is one of the few commodity markets that people are really passionate about, the purpose of this article is not to take sides either with the gold bugs or those who reject the argument that gold is forever. Rather, I want to discuss my interpretation of the markets cycle.

After spot gold made an all-time high against the dollar on December 2 at $1,226.37, gold has been in retreat mode. For the for the past several months gold has been in a broad trading range, seemingly unable to move one way or another. This process has created frustration from bulls and bears alike. Here is the dirty little secret about the gold market... it can be a horrible investment and here's why: Gold first started trading in the 80's while I was on the floor of the Chicago Mercantile Exchange in Chicago as a member of the International Monetary Market, (IMM) which was at that time a division of the CME (now the CME Group). When gold opened up the public clamored to buy into the gold futures market and guess who sold it to them? That's right it was the pros- the guys who made their living trading. As a result, gold hit an all-time high of around $850 an ounce back then and it took almost 25 years for gold to move over that level, at least in dollar terms. I don't know what your timeline is, but 25 to 30 years is an awful long time to get even again.

So what is really happening in this market? Everyone is aware of the problems in Europe with Greece, Portugal and a host of yet to be named countries. We all know that the huge amount of money being printed, coupled with the bank failures abroad contribute to the dollars declining value. These events, in conjunction with the American governments actions, also contribute to the devaluation of the dollar. The government claims that this is beneficial to exports, but the bottom line is that the purchasing power of the American dollar continues to erode in world markets.

Based on the declining value of world currency against gold you might ask- why isn't gold trading at $2,000 or even $3,000 an ounce? What is wrong with this market? This is because a great deal of what goes into the gold market is psychological and reacts to cyclic trends driven by both psychological and economic factors. Here is what I've been able to observe in the last several years in gold and seems to be holding true. It is something that you should pay attention to if you're interested in the next big move in the gold market.

Before gold can move higher it needs to create what I call an "energy field". The most recent energy fields in gold were between May 12, 2006 and September 20, 2007. This 17 month energy field saw gold prices oscillate between a broad trading range bound by $730.08 (upside) and $541.80 (downside). That energy field produced enough power to propel gold to the new high of $1,012.40 on March 17, 2008. This marked the first time gold exceeded, in dollar terms, the highs set in the early 80's mentioned earlier. The energy fields I have observed for gold are taking somewhere between 17 and 18 months to complete. If the energy field holds, then the December 3rd 2009 high of $1,226.37 should remain in place for quite some time. If the same cycle remains true then the recent lows that we witnessed, at $1,050, should also remain intact as they represent the 15 to 16 month cycle low.

With the lows in place the next question becomes when is the next cyclical high in gold? Based on the existing cycle, we can expect the next major gold high in 2011. To summarize: I expect gold to be locked in a broad trading range for the next 12 months bounded by the December 09 highs of 1,226.37 and the lows of $1,050.00. If the gold cycle holds true, we expect that gold tops the $1,226.37 marker by April or May of 2011. On the upside we will also be looking for gold to make a nature cyclic high in October or November of 2011. It's impossible to predict the future with any degree of accuracy; however when we look at the cycles in gold this reads as a pretty good bet. No matter what happens we expect gold will offer some great trading opportunities that investors and traders should be able to take advantage of." You can view the rest of Adam's thoughts in his video on gold here.

While this covers the technical look at gold, keep in mind that we've posted various fundamental research on gold as well, including:

- Societe Generale's research: gold as an insurance policy (& when to sell it)
- An in-depth look at John Paulson's new gold fund
- The dynamic between gold, the dollar & gold equities
- Global macro hedge fund Woodbine Capital's thoughts on gold
- John Burbank & hedge fund Passport Capital's rationale for owning physical gold