Gold Should Be Nearing A Major Bottom

David A Banister-

The recent rally in Gold took the metal from the 1620’s to roughly 1800 per ounce before the ensuing corrective action began.  Back around October 20th we warned our readers about a likely “ wave 2” correction in Gold and we had several reasons for that warnings.  One of the biggest concerns we had was that the sentiment surveys were  running  very hot at the time. The percentage of professional advisors polled that were bullish on GOLD was 88%, with 7% neutral and only 7% bearish.  Elliott Wave Theory is the foundation of our work, though we are sure to mix in other clues and elements to “fact check” our reads.  When you see sentiment readings that high, coupled with a $180 rally leading up to those readings, you can begin to look for clues of a top.

The other warning signal we noted was the MACD signal which had crossed south and was a topping warning signal to get out of GOLD for intermediate traders.  At the time, we surmised that a “wave 2” correction in sentiment, and therefore price was required to work off the overbought conditions.  The first level attacked the 1681 areas roughly and then a “B” wave rally to 1751 roughly ensued. Wave 2’s are made up of a 3 wave pattern, A down- B up- and C down to finish.  It appears that GOLD is now in the final C wave down in sentiment to complete the correction pattern.

Clues for the “C” wave include the Goldman Sachs quasi-bearish 2013 GOLD forecast that came out today.  In addition, the media attempting to explain the drop in GOLD as being related to stronger than expected economic indicators or fiscal cliff negotiations, neither of which make any sense at all.

We expect GOLD therefore to complete the C wave correction at 1631 or 1681 specifically. There are Fibonacci fractal relationships to the first leg down (The A wave) at those levels, and they tend to repeat themselves in terms of crowd behavior.  At the 1681 level we have the C wave equal to 61.8% of the A wave amplitude.  At 1631 we have a more traditional C wave equal to the A wave.  In either event, look for a washout low in GOLD occurring at anytime near term, and for traders to start scaling in long.

Below is the GLD ETF chart showing the two most likely bottoms for the precious metal, one of which already qualifies as of today’s trading:

Gold Market Forecast

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Gold Bullion Prices

Gold and Copper Rising Due to QE3 Hopes

There should be an inverse relationship between gold (NYSEARCA: GLD) and copper (NYSEARCA: JJC).

Most of gold is used for investment purposes.  As a result, it rises when there is economic weakness and investors lose confidence in the fiat currency of a country.  Most of copper is used for industrial purposes.   Therefore, the price of The Red Metal should increase when economies are booming, as there is a greater demand for it from the factories operating at full throttle and for the buildings being constructed.

Gold Bullion Prices

Gold Bullion Prices

As the chart below evinces, the inverse relationship between the exchange traded for gold, SPDR Gold Shares, and the exchange traded fund for copper, iPath Copper, has broken down due to traders positioning themselves for the introduction of Quantitative Easing 3 when Federal Reserve Chairman Ben Bernanke speaks at Jackson Hole this Friday.

Continuing economic weakness in the United States will almost certainly lead the Federal Reserve to act in way that is more powerful than Operation Twist, the selling of short term securities to buy those with a longer term.   Based on the most recent data, economic growth in the United States is falling as the unemployment rate is rising.  A recent statement by the Federal Reserve was unusually clear in calling for greater action.

Both the JJC and the GLD have risen together as traders expect more economic stimulus from the United States Government.  This will weaken the US Dollar and raise the price of commodities, as happened with Quantitative Easing 2.  During the period of Quantitative Easing 2, from November 2010 to June 11, the US Dollar fell in value and the GLD and the JJC soared, along with other commodity prices, particularly oil.  This pattern is being repeated as traders are preparing for the initiation of Quantitative Easing 3 when Bernanke speaks Friday, or at the next Federal Open Market Committee meeting.

Gold Spot Price Chart

Gold Spot Price Chart


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Gold Mining Stocks ETF - GDX

Gold Mining Stocks Continue to Disappoint But Not For Long

Chris Vermeulen –

It is an endless debate for investors interested in gold. Should they buy a direct play on the gold price, either gold bullion itself or even so-called paper gold with an ETF such as the SPDR Gold Shares (NYSEArca: GLD)? Or should they invest into gold equities, particularly the larger, higher quality gold mining companies?

Recent history suggests the answer is gold itself. According to Citigroup, physical gold has outperformed global gold equities 120% percent of the time over the past 5 years. Stocks of the bigger gold mining firms seem to react adversely to bad news (which is normal), but the problem is they react with no more than a yawn to good news. These type of stocks are contained in the Market Vectors Gold Miners ETF (NYSEArca: GDX).

Gold Mining Stocks ETF - GDX

Gold Mining Stocks ETF – GDX

Evidence of this trend can been see in the latest news to hit the industry…the slowdown in expansion as recently signaled by the world’s largest gold producer, Barrick Gold (NYSE: ABX). The company’s stock has fallen by more than 30 percent over the last year due to cost overruns at major projects. The latest blowup in costs of up to $3 billion occurred in its estimate for development of its flagship Pascua-Lama project on the border of Chile and Argentina. The project may now cost up to $8 billion.

In addition, Barrick decided to shelve the $6 billion Cerro Casale in Chile and the $6.7 billion Donlin Gold project in Alaska. Barrick is not alone in its thinking among the major gold producers. The CEO of Agnico-Eagle Mines (NYSE: AEM), Sean Boyd, recently said “The era of gold mega-projects may be fading. The industry is moving into an era of cash flow generation, yields and capital discipline.”

Fair enough. But are gold mining companies’ management walking the walk about yields or just talking the talk? Last year, many of the larger miners made major announcements that they would be focusing on boosting their dividends to shareholders in attempt to attract new stockholders away from exchange traded vehicles such as GLD, which have siphoned demand away from gold equities. Barrick, for example, did boost its dividend payout by a quarter from the previous level. Newmont Mining (NYSE: NEM), which has also cut back on expansion plans, has pledged to link its dividend payout to the price of gold bullion.

So in effect, the managements at the bigger gold mining companies (which are having difficulties growing) are trying to move away from attracting growth-only investors to enticing investors that may be interested in high dividend yields. This is a logical move.

But rising costs at mining projects may put a crimp into the plans of gold mining companies’ as they may not have the cash to raise dividends much. And they have done a poor job of raising dividends for their shareholders to date. In 2011 the dividend yields for gold producers globally was less than half the average for the mining sector as a whole at a mere 1.3 percent. Their yields are below that of the base metal mining sector and the energy sector.

It seems like management for these precious metal companies have the similar emotional response shareholders have when they are in a winning position. When the investor’s brain has experienced a winning streak and is happy it automatically goes into preservation/protection mode. What does this mean? It means management is going to tight up their spending to stay cash rich as they do not want to give back the gains during a time of increased uncertainty. Smaller bets/investments are what the investor’s brain is hard wired to do which is not always the right thing to do…

Looks like there is still a lot work to be done by gold mining companies’ to improve returns to their shareholders. But with all that set aside it is important to realize that when physical gold truly starts another major rally. These gold stocks will outperform the price of gold bullion drastically for first few months.

Gold Stock Rally


Gold Miner Trading Conclusion:

In short, last weeks special report on gold about how gold has been forming a major launch pad for higher prices over the past year. Gold bullion has held up well while gold miner stocks have given up over 30% of their gains. If/when gold starts another rally I do feel gold miner stocks will be the main play for quick big gains during the first month or two of a breakout. The increased price in gold could and value of the mining companies reserves could be enough to get management to start paying their investors a decent dividend which in turn would fuel gold miner shares higher.

Both gold and silver bullion prices remain in a down trend on the daily chart but are trying to form a base to rally from which may start any day now. Keep your eye on precious metals going into year end.

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Chris Vermeulen