Back in my days as a trader, I would peruse the lists of 52 week lows looking for reversal candidates. The key was finding an intelligent entry that had a very tight stop, so it presented a good risk reward. I am happy to risk one dollar to make three. Slowly build the position over that line in the sand, so any losses were manageable.

If you are a trader — and I no longer consider myself one — then you have to be wondering when Gold is going to bounce. It has plummeted on little inflation, a strong dollar and an improving economy. When the breathless narrative of hyper-inflation, collapsing fiat currency and end of the world failed to come about, Gold’s spectacular rise ended.

Now, it has free-fallen so far that a counter-trend rally is over due.

How do the typical counter-trend rallies work? Well, the forced selling by margin clerks and futures traders becomes exhausted. A distraction may capture the investing community’s collective attention, allowing some stabilization to occur. As prices stop falling, the fear falling asset holders have been living with dissipates. A little bit of good news, a small reversal in price, and the prior (now discredited) narrative reasserts itself.

Note this scenario is non specific — we see it in stocks, bonds, commodities, real estate and yes, Gold. Apple will run this one day, AIG is already enjoying its turnaround, as all former high flyers do. And if the underlying business model improves, the turnaround could be for real, and the bounce morphs into a new sustainable uptrend.

Here comes the bad news: The bounce in a commodity like Gold — or its primary trading vehicle, GLD — is less likely to achieve that sort of happy ending. The bull market is broken, the prior narrative has utterly failed, and is no longer taken seriously, except by yellow metal jihadists and other assorted suckers.

I was constructive on Gold last decade, but this decade (2011 – ) has not seen the circumstances that are supportive of Gold’s ongoing rise. Despite what some goldbugs have laughably said about me, I am agnostic about the metal, except when it is losing people lots of money. I do detest the narrative driven sales pitch that has caught so many suckers at prices appreciably higher than this.

So what about that bounce?

The charts below show two different ranges where gold can find a footing and rally. That is likely to present your next and perhaps last best exit. Barring some new developments — like all the gold in Fort Knox becoming irradiated — I do not expect to see a resumption of the 2001-11 uptrend.

I don’t have a crystal ball, so I do not make predictions as to where Gold will or will not go. But the weekly and monthly charts lay out two possibly scenarios below.

YMMV.

 

 

Gold Chart Weekly
click for larger chart
GLD weekly

Gold Chart Monthly
GLD monthly

 

Previously:
What Are Gold’s Fundamentals ? (April 15th, 2013)

12 Rules of Goldbuggery (April 16th, 2013)

Sell Out: “The Other Side” (April 22nd, 2013)

Are You an Investor or a Story Teller? (April 25th, 2013)

Category: Currency, Gold & Precious Metals, Technical Analysis, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

28 Responses to “Is Gold Overdue for a Bounce?”

  1. [...] Ritholtz on counter-trend rallies and the prospects for a gold bounce here.  (TBP) [...]

  2. PeterR says:

    YMMV = Your mileage may vary — indeed.

    One wonders how the 2011 action at the top has played into Didier Sornette’s thinking of late? Is GOLD one of the “seismometers” he monitors for exponential market fluctuations? Since he stopped making his predictions public, when might we expect the next report?

    http://www.ritholtz.com/blog/2013/06/how-we-can-predict-the-next-financial-crisis/

    The Crash Risk Index (CRI) in the first chart below peaked in about March 2011, slightly before the peak in GOLD above. Is GOLD part of the CRI?

    http://blog.ted.com/2013/06/17/turbulent-times-ahead-qa-with-economist-didier-sornette/

    Have scientific alchemists created a new gold substitute, which has affected the price of GOLD?

    https://www.ethlife.ethz.ch/archive_articles/130618_goldfolie_per/index_EN

    See generally:

    http://www.er.ethz.ch/

  3. wally says:

    Back in the late 70′s, early 80′s it went down 50% before it bounced.

    • Thats why I posed this as a question, rather than Declaring “Goldwill bounce HERE and go THIS HIGH efore REVERSING HERE and fallingto HERE” cuase I dont know!

  4. Joe Taxpayer explains the dangers of bad gold buying:

    The gold bugs are an interesting breed. They use misleading rhetoric such as “a storehouse of value” and other argumentum ad passiones to convince you to buy. Those who caught any good part of the recent run-up from ’05 to ’12 sure are happy, but only if they sold. Buying gold at the wrong time can leave you with a bad investment for the rest of your life. Gold’s record high was in January 1980, at $875. Inflation alone would put the price at $2400 today. What storehouse of wealth? We are exactly at half that price. If you buy gold in the form of small bars or coins, you pay a dealer premium, and the buy/sell spread can be 5% or more. For those who wish to buy gold, I’ve mentioned GLD, the gold ETF. It started out as trading as .1oz of gold per share, but as with any ETF, there’s an annual expense, .40%, so the 10 GLD shares that represented a full ounce in 2005, now, eight years later, is closer to .97 ounces. The prospectus for GLD states this clearly.

    http://www.joetaxpayer.com/golden-troubles/

  5. maxplastic says:

    I have always been puzzled by the vast numbers of experts who are presumably in the business of making money from their arcane knowledge of the financial scene, yet freely give away their trade secrets to all and sundry. I surely have no wish to be cynical, but I have yet to encounter a game of poker where the players altruistically advise each other on their winning strategies, unless that advice is for the purpose of deception. Given the nature of the game, one would assume the latter. A friend told me many years ago that he used to work at the race track handing out race cards. On each card he sold, he ticked a different horse as a sure fire tip and by the end of the day he was amply rewarded by those that had followed his advice and won. Naturally the majority who backed losers did not bother to come and complain! It seems to me that, like the racing tipsters, the smart ones know that more money is to be reliably made by giving advice rather than acting upon it!

    • Thats because you:

      a) Dont understand investing, and seemingly confuse it with poker, where you must play both the cards AND the man across the table from you;
      b) Believe sharing insight and wisdom makes the one who “gives it away” poorer for the experience, rather than richer;
      c) Are impressed with an old scam that was common decades ago.

      All told, your comment is shite. You have nothing of value to add, I suggest you hit the bricks.

  6. [...] very encouraging charts from Barry Ritholz: Is Gold Overdue for a Bounce? | The Big Picture “Here comes the bad news: The bounce in a commodity like Gold — or its primary trading [...]

  7. leopardtrader says:

    Hi Barry, Do you now manage/maintain clients tangible assets rather than take position in the market place? Just wondering what you mean you no longer take bets.

    For Gold there was >90% probability of the bounce at 1200/1190 as here http://allstarcharts.com/if-this-is-the-gold-bottom-its-totally-random/#comment-942883197 as my broad play on money flow after Bernanke recent comments here http://leopardtrader.com/?page_id=1714

    This bounce is likely to hit 1550/1600 area

  8. Willy2 says:

    The bull market in gold is far from over. But the hardcore, hyper-Inflationary, dollar bears & gold bugs focus on the nominal price of gold. They should focus on the REAL price of gold. And yes, the REAL price of gold has fallen as well, since november 2012. But I expect that in the future the REAL price of gold will go “through the roof”. Actually, it seems the REAL price of gold is “oversold” as well and due for a bounce, sharp upturn as well.

    • SumDumGuy says:

      Could you please explain to me what you mean by “real”? This sounds remarkably like a gold bug friend of mine that keeps saying that physical gold is selling out everywhere and that “the crash” only reflects “paper gold” like the ETF’s, etc.

      It seems like a bunch of hoohaa snake oil stuff to me, but I wanna know what the theory/story is behind it all. (I mean, I have my suspicions, but…)

    • Willy2 says:

      I was a hardcore gold bull as well. But as time went by I learned that in the 2nd half of 2008 the nominal price of gold went down but the REAL price of gold went higher because then inflation was much lower (it went negative = deflation) and gold went down less (as a result of “investment demand”). Hence the rise in the REAL price.

  9. Bam_Man says:

    Bond markets flooded with paper issued by bankrupt governments (becoming more bankrupt each day) at negative real interest rates are two good reasons why gold will not drop much further – even after its “bounce”. People are going to have to find out the hard way what default and counter-party failure can do to paper asset prices.

    • perpetual_neophyte says:

      Bam_Man – Your post could be a great example of how a misunderstanding of modern monetary systems and buying or selling based on narratives alone (especially fear-based narratives) can be detrimental to your portfolio. I see this kind of stuff (and the impact on portfolios) and it makes me sad for the savers and angry at the peddlers.

      What governments are bankrupt (i.e. unable to service their debt) and flooding the bond markets?

      • Bam_Man says:

        I have two words for you – and they apply to virtually every government on the planet – “Unfunded Liabilities”.

        And as far as “modern monetary systems” go, yes you are probably right – It is different this time. Since the insane money-printing and CB balance sheet expansion is being done “scientifically” by geniuses with PhD’s from Princeton and MIT it won’t end in tears like it has EVERY other time before. LOL……

      • Angryman1 says:

        unfunded liabilities are a myth.

      • Bam_Man says:

        And “Modern Monetary Theory” is a fairy tale.

      • flakester says:

        Excessive optimists must have their day, as excessive pessimists did.

  10. [...] The precious metals washout came earlier (and faster0 than previously thought.  (Market Anthropology also Big Picture) [...]

  11. bonzo says:

    Take as an assumption that other people will always want gold (no more unreasonable than the assumption that other people will always be willing to pay extra for Coca-Cola versus the store brand). Then gold can be used as proxy for energy, since energy costs are what underpin the cost of mining new gold. In fact, energy costs drives most commodity prices. Gold and other commodities skyrocketed in price between 2000 and 2008, but then so did oil. Unlike oil and most other commodities, gold is easy to store. That .40% annual cost someone mentioned for GLD is trivial compared to the cost of storing oil, copper, iron ore, grain, etc.

    So if gold is a proxy for commodities in general, then the question becomes, when are commodities a good investment? Consider the combination of Inflationary pressures, interest rate repression, fiscal policy (rising taxes, cuts in spending) to control the inflation rather than monetary policy. Interest rate repression implies nominal bonds would fail to keep up with inflation, but without big capital losses, just a steady bleed. Austere fiscal policy would crush corporate profits, which would spell doom for stocks. That leaves commodities, TIPS and real-estate as the safe havens.

    The 1970′s has the combination listed above, though the fiscal austerity wasn’t apparent at the time, but it was there in the form of rising oil prices, which act as a tax. Elimination of that tax in the early 1980′s is partly responsible for the economic recovery under Reagan (massive budget deficits under Reagan added further fiscal loosening). And indeed, commodities and real-estate boomed in the late 1970′s, while stocks collapsed and nominal bonds failed to keep up inflation at the short end and suffered big capital losses at the long end. (TIPS weren’t around then.)

    I expect a repeat of the 1970′s at some point, because central banks in the developed world will be forced to engage in interest rate repression to prevent a runaway debt spiral, given how much sovereign debt is short-term and hence would have to be rolled over at higher rates, thereby causing budget deficits to explode. So the burden for controlling inflation will fall to fiscal policy, which means raising taxes and cutting spending. But it is precisely big budget deficits plus low household savings rates (savings will go up at some point) which is driving the current high corporate profits, via the Kalecki equation.

    So it makes sense to me to be buying gold and real-estate and other hard assets in anticipation of the stagflation scenario I anticipate 5 to 15 years from now, plus TIPS. But you can’t just buy regardless of price. Some residential real-estate is cheap for active investors, but I can’t be involved actively in real-estate because I travel much of the year. Passive real-estate (REITs especially) is not cheap and the really interesting stuff (farm land, timberland, land with valuable water or mineral rights) is expensive. So that leaves gold and TIPS, both of which were frightfully expensive until just recently and they still aren’t cheap.

    If you want to use real-estate, gold and TIPS as a small part of your portfolio, to hedge the remainder in stocks and nominal bonds, then you need this hedge to be highly levered. Otherwise it will have only a dampening effect, like cash. That means you want heavily mortgaged real-estate, gold miners (preferably deeply indebted) rather than gold itself, and TIPS futures or other derivatives. The only people selling TIPS derivatives are probably way smarter than me, and I don’t like to play a zero-sum games of skill with smarter opponents.

    Bottom line, I’m keeping my eyes on heavily levered real-estate (many REITs are like this) and gold miners, as hedge, but I want them cheap. The gold miners are approaching cheap, but not cheap enough for me yet. I have zero interest in gold or gold-miners as a short-term trade.

  12. Willy2 says:

    “You need to be more specific than “Doctored” — they are models, and as we recently discussed, All models are wrong, but some are useful.”

    I trust only the charts with the price of e.g. the DOW, S&P 500, CRB index, gold, silver, WTIC, gasoline, Natural gas, 10 year & 30 year yields, etc. That are things the gov’t can’t manipulate. And when one combines the right charts then those ratios give a much better indication of what’s going on. There’re other reliable sources available on the internet that have a good view on what’s happening.

    I consider those gov’t statistics as a number of what the gov’t things it should be. Altough there’re certainly trends in those figures the figures are a “little” too much fiction.

  13. [...] many market observers are looking at what might bring about that change. Barry Ritholz of Fusion IQ wrote this week that gold, “has fallen so hard that a counter-rally is overdue.” He goes on to [...]

  14. [...] many market observers are looking at what might bring about that change. Barry Ritholz of Fusion IQ wrote this week that gold, “has fallen so hard that a counter-rally is overdue.” He goes on to describe the [...]

  15. [...] willing to tow the line for the status quo, just as Barry Ritholtz recently did when he stated, “The bull market is broken, the prior narrative has utterly failed, and is no longer taken ser…  And we’re supposed to believe you’re agnostic about the yellow metal?  LOL! As [...]