Gold: Prepare For Unprecedented Volatility
The US government continues to appear to be unable to respond effectively to this crisis. Printing trillions of dollars is devaluing the dollar, which also devalues assets priced in dollars, such as stocks, while real assets, such as gold, increase in value. Gold is transforming into a currency as this economic crisis unfolds, which is exasperated daily by the pandemic. Businesses and industry can’t go back to normal. The current economic policies have become politicized, which is just exacerbating the problem, especially for the middle and lower classes. These appear to be the wrong policies at the wrong time. The US is not showing itself as a world leader, especially if it can’t even lead its own people.
We are beginning to see CPI rising, as prices rise, which indicates some inflation. The velocity of money has stalled since people don’t have money to spend. The rich have money to spend, but no one else does. The rich can borrow at extremely low rates and can continue to buy stocks and other inflationary assets. We are seeing inflation in assets priced in the US dollar, such as stocks. This appears to be a bull trap for people who think that the best thing right now is to hold stocks. When that asset is converted into its real value based on the US currency, investors are going to realize their asset is worth far less than they thought. The dollar’s purchasing power is falling, so any other asset priced in dollars is being devalued. The effect is rippling through the US, developed world, and emerging world economies. Countries that use the US dollar as their currency such as Ecuador have been especially hard hit since they can’t now print more money to get through the current economic crisis. It invites China to take advantage of this gap offered by the US dollar weakness and decline as the global reserve currency. We need to see the velocity of money increase in the system, with people having more money to spend.
The system as it was no longer exists. The bubble broke. Within that larger economic bubble were smaller bubbles and they are beginning to pop in different industries and countries. Gold offers an opportunity that's the other side of everything else that's happening. For seven years, since the up-tick rule was lifted, central banks have used short selling to keep the price of gold and silver low. They sold thousands of paper futures contracts representing production that does not exist, 10-to-1 in silver, to depress the price of gold and silver. They have pulled trillions of dollars out of the precious metals markets, but recently they have suffered huge losses in the $30 to $50 billion area since they were taking the short side of the market as the precious metals rose rapidly. That was when they lost control. When gold fell in March, the short-sellers could not find physical gold to cover their contracts. That was the beginning of the demise of the manipulation of the gold and silver futures markets.
They also manipulated the interest rate market to control the cost of money. Interest rates are at zero and may go negative. If you are dependent on the interest on your savings, there is none. How do pension funds and retired people survive? This is a test that we have never experienced with negative interest rates.
For gold, is the top in? If you look at the fundamentals, it does not appear to be so. This correction appears to have been an opportunity for those who missed the previous move to get into the gold market. We recommend 15% or more of your net worth being in gold. Some trade 80% or 90% of their net worth in gold. We have not yet seen the true demand for gold or what the demand can do to the price of gold. Gold at $3,000, $5,000 or $10,000 may be reached. If we don’t get the economy back to some sort of normal, gold is just going to keep rising.
Long term, we are long the gold and silver markets. Short term, we are buying the markets on corrections using the Variable Changing Price Momentum Indicator (VC PMI).
Gold
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Gold is trading last at $1952.50, up $3.50. Based on our Variable Changing Price Momentum Indicator (VC PMI), the market came down into the Buy 1 daily level of about $1880 as of about 9:15 pm last night. It activated a buy trigger from $1880 and the target was completed. This morning, gold has regained quite a bit of territory from a low $1874. It's up almost $100 off the low in just a couple of days. We are seeing an extreme amount of volatility in the precious metals markets, but it's a trader’s dream. The volatility can mean significant profits.
The average daily price of gold is $1921. The extreme level below that level, called the Buy 1 level, is $1880, while the Buy 2 level is $1834. The Sell 1 level is $1967 and the Sell 2 level is $2007.
The weekly levels do not change during the week. If the daily and weekly match, that makes the trades even higher probability trades. Last night at 9:30, $1887 activated a signal, with $1880 as the protective level. The artificial intelligence of the VC PMI gives you three stop options. The market never came down to meet any of those but reached the target of the mean. The daily signal then went neutral after a 41 cent move or a more than $2,000 gain per contract. The VC PMI recommends never to trade around the mean. Gold was trading around the daily mean, but the weekly $1923 was activated as a buy signal at 1 pm yesterday (Aug. 12). Gold is trading above the daily average price but also activated a weekly buy 1 signal level of $1.923. The weekly Buy 2 signal was activated at $1927 and the market is trading last at $1952, so you can raise your trailing stop if you haven’t taken any profits yet. Use a trailing stop to protect your equity. The worst then is you get stopped out with a profit. You can use these signals for day, swing or position trading.
We continue to hold positions in GDX and NUGT. The correction in gold let us load up the truck. The March 23 low was $1450 or $1451, which gave us great opportunities to get into the market. We are looking at targets of $1967 and $1984, as well as $2007 and the weekly average of $2037. If the market reaches Buy 1, there's a 90% probability of a reversion back to the mean, and it did. At Buy 2, there's a 95% probability of a reversion to the mean. Gold activated a weekly buy signal from $1923 with a target of $1984. By trading above the daily average, the price momentum is bullish.
We saw a huge correction from $2082 down to $1874, which is about a $200 move down in a matter of days. The market is extremely volatile but has the resilience to move right back up. Using the Fibonacci retracements, we use $2089 to calculate the Fibonacci retracement from the low on June 5 of about $1671 to the recent high. We also can use the low made in March, which was a low that could hold for a few years. I'm not so sure we are going to get a chance to buy gold at $1450 for a long, long time.
Silver
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Silver has met the Sell 1 level of $26.78. A close below that level will activate a short daily trigger, but we are in a weekly buy signal, with $27.49 as the weekly average price target. We could be looking at a short day trade. The low is $23.58. The nine-year average is $23.08. It came right into the Buy 1 level daily and then came right back up, meeting the first daily target of $26.78. The Sell 2 level daily is $27.96 and we have a cluster of targets on the weekly average of $27.49 to the monthly Sell 1 of $27.94. At $27.50 to $28.00, it looks like we are getting a harmonic relationship. If silver does get up here, then we want to unload any long positions or hedge, lock in profits and reduce your exposure anywhere above $27.50 whether it’s a swing or position trade. Then wait to see how the market trades up here.
The VC PMI provides the mean for the daily, weekly and monthly data, and then extrapolates two extreme levels below that mean (Buy 1 and 2 levels) and two extreme levels above the mean (Sell 1 and 2). We trade based on those levels.
Disclosure: I am/we are long GDX.
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