Can you hear it?
Reports from China revealed that they imported 85.7 tons of gold in October, a 40-fold increase from October of the previous year. China may have imported as much as 500 tons of gold in 2011. Investors added over 170 tons of gold via their ETP holdings in 2011.
In the first 12 days of January investors purchased over 85,000 gold American Eagles from the U.S. Mint. At the current pace, the U.S. Mint could sell 140,000 gold coins this month. According to Bloomberg news, “The 2,359.638 metric tons of gold held in ETPs backed by the metal is within 1.5 percent of the all-time high set last month and exceeds the reserves of all but four central banks.”
“Gold and silver are money. Everything else is credit”— J.P. Morgan
Since the FOMC meeting concluded on Wednesday gold has gained nearly 4% in value. Following Ben Bernanke’s report, SPDR Gold Shares added 9 tons of gold to their inventory. Gold has increased almost 10% this year.
Can you hear it now?
Your feet feel the vibrations coming from the road. This is not a new experience. You are familiar with the sound, you understand what the vibrations mean: this year’s Running of the Bulls has already begun.
While others still wait for the classic running of the Bulls at San Sebastian, gold bulls have assembled and are active participants in this year's events. The multi-month corrective winter is over, and gold prices have advanced as we now experience the first rally of 2012.
This rally is part of a much greater bullish cycle, a super bull cycle. It can be characterized as a multiyear event characterized by price advances that conclude at a new record high that will be surpassed during the next subsequent rally. For the last 11 years gold has had a price gain, and the fundamental factors fueling this run are still solidly intact.
On December 16th of 2011 my commentary presented the possibility that this correction would terminate as a double bottom, which, after retesting the low of 1530, would begin an extended rally. In my last commentary we had the first real evidence that gold had retested that price point and found support. I issued my first buy recommendation for gold on January 2, 2012. Gold was trading at about 1580. Although I believed that gold prices had bottomed and would begin to move higher, hard technical evidence would still have to be forthcoming. When we look at gold prices well above 1700 there can be absolutely no doubt that the running of the bulls is in full swing.
The chart above is a weekly candlestick chart of cash gold. The simple 30-day moving average is now below the current price of gold, signaling an uptrend. A Japanese candlestick pattern called “Tower Bottoms” (analogous to the Western double bottom) has identified signaling support. It has been five weeks since gold traded off the intraday low reached at the conclusion of this last correction, and we are now immersed within this price advance. As this rally continues, more technical evidence confirms our assumption: gold has returned to its former glory and bullish disposition.
The chart above is also a weekly Japanese chart known as an average chart (Heinken Ashi). The strength of a Heinken chart is in its ability to identify trend. Variables such as trend reversals, trend continuations and trend strength are recognizable and actionable. In our current example, the last three weeks have been green Japanese average candles. The current candle has significant body size and an absence of a lower wick, two variables we look for identifying a bullish trend.
Additional confirming technical evidence can be seen in both the MACD (moving average, convergence, divergence) and long-term trend line. The MACD identifies the pivot point or reversal; this pivot point is identified within the Heinken chart as a change in candle color from red to green. Lastly, on a long-term basis on this weekly chart the price has remained above the long-term trend line. (See sidebar for a more detailed explanation of Japanese average charts)
The last piece of the puzzle is the addition of Elliott wave and Fibonacci technical analysis. It is through the combination of multiple indicators - both Western and Eastern - that allows the astute technical trader to gain valuable insight and information. The chart above is a daily Japanese average chart with both Elliott wave count and Fibonacci retracement levels. February's 2011 low of 1307 (C, 2) to December's low (C, 4) of 1525 contains one full impulse cycle. This cycle is comprised of eight total waves, with the first five (1-5) waves representing the impulse phase, and the last three (ABC) representing the corrective phase.
Think of Elliott waves as a Russian doll. Found within each wave is a set of smaller waves. The largest wave count (Major) contains an intermediate count below it. Major wave one, three and five will therefore be comprised of five intermediate impulse waves each. Waves one, three and five are impulse waves that will move in the prevalent direction of the trend. Waves two and four are corrective waves that will move counter trend. We have just entered the beginning of the last impulse wave in this cycle, the major fifth wave. The beginning of this rally that started at the end of December marks the beginning of the final major rally, which will conclude at a new record high price.
Effective trading is a science, but it is also an art. It is my contention that the combination of both Eastern and Western technical approaches has an uncanny ability to reveal and identify trends as well as key reversals. Filtering these signals with each other is a critical component for success. Where a pattern is found within the trend determines the strength or weakness of that signal. By looking at all of these methods together, one gains comprehensive market information. By combining these methods one can produce much greater insight than any of these techniques by themselves. They completely complement each other and naturally form a more synergistic approach to market forecasting.
"Under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth... The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit... In the absence of the gold standard, there is no way to protect savings from confiscation through inflation"
― Alan Greenspan
Side Bar: Heinken Charts
A standard candlestick chart uses the open, low, high and closes of a single time period to create the candle. The Japanese average candle takes into account the previous candles opening price and previous closing price, this creates a midpoint. It then uses this midpoint as the open for the current candle.
Heiken candle formula:
Close = (Open+High+Low+Close)/4
Open = [Open (previous bar) + Close (previous bar)]/2
High = Max (High, Open, Close) Low = Min (Low, Open, Close)
Visually candles allow for quick identification of trends. Of course candle color is the primary visual cue from these charts. Unbroken red declines and unbroken green price rallies are readily evident. However, there are two other key elements used in a Japanese average chart for market analysis. First is the body size of the candle. By comparing the body length to the prior candles one can ascertain whether the strength of the trend is growing or diminishing. A second important component is identifying whether the current candle has a tail. Look for an absence of a lower wick during a rally or the absence of an upper wick during a price decline.
It is easier to use and provides clearer information than a candlestick chart. In fact, Heiken Ashi is actually seen as an improved, updated version by Japanese investors who created both types of analysis. Because the numbers in a candlestick chart do not correspond and reflect each other, it is harder to identify or predict a trend. Because a Heiken Ashi chart is based on averages, candles are better related to each other and trends are more accurately predicted.
Gary Wagner
January 27, 2012
January 27, 2012
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