GST Issue #215
Dear Member,
Gold popped higher yesterday, and all of a sudden, most traders and investors think, yet again, that gold has finally bottomed.
It has not bottomed. Mark my words and etch them into stone: Gold will not bottom until it takes out at least the $1,000 support level on the downside.
However, in the very short-term, gold has managed to get above the $1,210 resistance level, which does have me a bit concerned. If gold holds its recent short-term breakout, we could see it move as high as the $1,300 level, before the longer-term decline resumes.
First, however, there would be a pullback. And if that pullback holds support, now roughly at the $1,200 to $1,210 levels, we will have to make a strategy adjustment. Right now, it’s simply too soon to say.
I do want you, however, to step back a bit and view my longer-term gold chart. As you can clearly see, gold remains in a long-term downtrend.
Moreover, the recent pop higher has now brought gold right up to important resistance levels at the $1,225 to $1,237 levels.
So right now, here’s what we know …
A. Gold’s long-term trend lower remains in place.
B. Cycles continue to point lower into June. But …
C. Short-term, gold has popped higher, but will meet resistance at the $1,225 to $1,237 levels. Meanwhile …
D. Short-term support now lies at the $1,200 – $1,210 area.
In other words, gold is now in a tight $15 – $25 trading range, and our next move will largely depend upon how it reacts in this new, short-term trading range.
If gold is to break out and get ready for a run to the $1,300 level, it will either have to …
A. Drop back down to test the $1,210 level, hold it, then start to rally again. Or …
B. Soon slice right through the $1,237 level. Or …
C. Drop back down, hold support at $1,210, then rally and close above $1,237.
Until one of the above happens, gold could just as easily fail here, and suddenly turn violently south again.
Importantly, I will not hesitate to reverse your positions and recommend that you go long, should A, B, or C above take root.
But I will not make that adjustment until gold proves itself. And that has not yet happened.
Bottom line: Hold all recommended gold positions, with your good-till-cancelled protective sell stops in place. Also hold your GLD put options.
Question: What then caused the pop higher in precious metals?
First, let me tell you what is NOT causing gold (or silver) to rally.
It is NOT an inflation scare, as some seem to believe. The fact of the matter is that deflation still rules, in Europe, and it’s getting worse here in the U.S. also.
Latest U.S. import data shows prices falling at an annual rate of 10.7 percent, while U.S. export prices have fallen year-over-year at a stunning 6.3 percent rate.
Yesterday’s retail sales figures for the U.S. were also ominous, showing ZERO retail sales growth for April, not a good sign for the U.S. economy. Those figures are certainly not supportive of inflation.
Meanwhile, economic growth in Europe is NOT improving. Yes, France and Italy showed a minor uptick in recent GDP figures, and many are using that as rationale that Europe is somehow improving and will escape a disaster.
But that’s hogwash and bias, because if you look closer, Germany – the main engine in Europe – is showing signs of slowing: Its GDP figures for Q1 came in at 0.3%, well below the 0.7% in Q4 last year.
That’s hardly the stuff that can ignite inflation in an economic zone that is riddled with mountains of bad debt, structural weaknesses, inept politicians, depression-like unemployment, and a failing currency.
Second, it is not dollar weakness that is causing gold’s short-term rally. The dollar is only down roughly seven percent from its seven-year high last month. While a seven percent decline may sound like a lot, it’s less than one-third of what the dollar gained since last year, a very minor pullback. And hardly enough to cause a ruckus to the upside in gold.
Moreover, the dollar remains in a solid uptrend that will soon resume.
What IS causing the pop, and may yet cause a further rally, is simply a combination of …
A. Too many short positions built up in the $1,170 to $1,190 levels. When there are too many shorts in the market, it’s not unusual for those shorts to be tested by what is commonly called a “short squeeze.”
There are various tools I use to determine if this is the case, and so far, all my tools tell me exactly that: The shorts are being squeezed. If this is the case, we should soon see gold turn back down.
This is further being fueled by …
B. The potential for the equity markets to roll over. In other words, gold could be acting now as a leading indicator, tipping us off that a big stock market decline is right around the corner, something my models do indeed also suggest.
That will be good, of course, for the bearish stock market positions I have recommended, which include Direxion Daily S&P 500 Bear 3X ETF (SPXS) and ProShares UltraShort Dow30 (DXD).
So hold both those positons, with your stops in place.
Also hold your Direxion Daily 7-10 Year Treasury Bull 3x Shares ETF (TYD), with your stop in place.
If gold is telling us stocks are about to roll over to the downside, keep in mind that we are positioned properly for stocks – and for Treasuries, which should rally sharply.
Then, all we would need to do is to reverse to the long side of gold for a further rally. However, as noted above, we need to see gold further prove itself at this time, before making a short-term strategy change for gold.
Lastly, hold your DBA July 2015 put options, with a strike price of $23. Grains continue to stair step lower, and this position, though it has recently given back a tad, has plenty of time to go. With grains looking terrible, the potential on these put options is excellent.
Stay tuned, the markets seem to be reaching important tipping points.
Best wishes,
Larry
