Gold’s Cycle Count

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Everybody is watching the gold market right now. Despite the mania being unleashed in retail stores, there are still almost two years worth of trapped longs in the paper market that have to be unwound. This phenomenon does not happen overnight, and for now there will remain a disconnect between the paper price of gold and the ability of the supply chain to meet retail demand. I personally wouldn’t read too much into it until enough time has passed. If you sold widgets and crowds of people suddenly came storming into your store demanding thousands of them because somebody else put them on sale without your knowledge, you wouldn’t be able to keep up with production either. Same difference.

Meanwhile, two years worth of fractal energy has been released to the downside and these moves do not end abruptly. It is no different than a dam breaking, and until all the water has rushed out any strength should be sold. We are also in the middle of a daily cycle that topped extremely left-translated on Day 3 (currently on Day 12), so we can expect gold to perform a bottom test or make a lower low sometime over the next 3 weeks.

April 22nd GLD Cycles

The mining stocks will be sold until the price of gold can stabilize, even though they may lead slightly out of a low at some point. Imagine institutional investors, the money that really moves the market, trying to value a company when they have no idea what the price of their product is going to be from day-to-day. Their typical reaction during the 2nd half of a 4-year cycle is just to sell the stock and ask questions later when prices are finally rising again consistently.

Imagine if Apple didn’t know what the price of their computers was going to be from one day to the next because somebody else set it for them, and huge price drops were common…not as many people would want to own their stock! Until the worst is priced into the miners and gold can stabilize, they will be sold on strength and have been done so since the announcement of QE3. Deflation could reduce their energy costs and expenses, and even if the economy goes into a recession and equities roll over the miners could do very well as gold comes out of a 4-year cycle low:

April 22nd GDX Cycles

Overall, Refined Investors have no positions in commodities at the moment while the deflation trade is on, and we are waiting for the cycles to complete. The price action afterwards is bound to be choppy until the moving averages form a more supportive configuration, and I am not looking for consistent gains in the metals until June or July of this year even though a May pop out of a 4-year cycle low is definitely possible.

Manage your risk, and have a plan if there is further downside.

Good trading all.

Steve Chapman, TRI


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2 comments on Gold’s Cycle Count

  1. Dutchisu
    April 24, 2013 at 11:02 AM (1 year ago)

    Steve

    I was reviewing your gold count report again and I had a question about cycle counts. The daily cycle count from January to February was 33 days. The daily cycle from February to April 4th was 29 days. That makes two stretched cycles in a row. So it seems highly likely that we are currently on day 13 of the new daily cycle and the daily cycle low is ahead of us.

    My understanding is that the only way this would not be true would be if we actually had two 36 day cycles in a row and the bottom for the last cycle was actually on April 15th.

    My question to you is. Is it possible to have two cycles in a row like that which are very stretched?

    • Steve Chapman
      April 24, 2013 at 11:32 AM (1 year ago)

      Right now cycles are difficult to analyze as a primary indicator because a crash can erase everything. The conditions in precious metals are so stretched that price can melt up just because the shorts are in very heavy and any buying will force them to cover. This is a mean reversion event happening in miners, and I think the Barrick earnings report gave the big money the info they needed to hear to place some bets.