October 18, 2005
The Consumer Price Index (goods at the consumer level came out Friday with its BIGGEST ONE MONTH JUMP IN 25 YEARS.
The Producer Price Index (goods at the manufacturing level) came out this morning with the BIGGEST ONE MONTH JUMP IN 31 YEARS.
Gold, the "inflation hedge", has gone NO WHERE on either number and, in fact, closed down $2.00 today.
There is an old trading rule that when a bull market doesn't respond to bullish news, you need to assume it is going the other way.
I have recently been pointing out the Gold market, in my opinion, has become severly overloaded with speculative buyers. Predictions seem to be everywhere that $500 an ounce, and higher, is an imminent inevitability.
What I'm talking about, to some degree, can be seen in the Gold Open Interest chart below. Open Interest is the total number of longs and shorts in a market, and shows you how many participants are in a specific futures market, as well as if they have been entering or exiting that market, which, if you think about it, is ultimately what drives price changes in any futures contract. On the year long Gold chart shown here, you can easily note four distinct occasions when open interest built up as Gold prices rose, then declined as prices came down, most likely reflecting speculative liquidation taking place, with those downswings having been anywhere between $20 and $45 in size....And finally, you'll note Gold's most recent rise has seen open interest rise one again, this time to what are record all time levels....
So what's next? Take a look for and decide for yourself what looks likely....
There is nothing that says there aren't plenty more buyers to carry gold higher, meaning I am dead wrong...But it is my feeling the latest eye-popping inflation numbers (which, again, did nothing bullish for the market) are just about as much ammo as the gold bulls are going to get....that the last real inflation number has been fired, and what you now will have is a bunch of people trying to stay long a 4 year bull market that has come to an end....And to begin the process, I believe you start with a nasty, nasty sell off as all of those record spec longs head for the doors....at the same time.
For one thing, do not forget the Fed's stated number one enemy is inflation. They didn't start raising rates over a year ago for no reason at all and the effects of those raises have been/will be felt in the economy. You can't fight city hall and YOU CAN'T BEAT THE FED....They will squelch inflation.
The funny, but logical, thing about the futures market is you are trading the future. However, more often than not, the media presents the past as though it will be the future...that what has happened absolutely will continue to happen. The latest case would be the media headlines of late seeming to imply inflation, driven by higher energy prices, is here to stay......to which I totally disagree. I again ask you to remember how NUTS the media was about Crude Oil and Gasoline prices during the back to back hurricanes.....how prices had no place to go but higher!, higher!, higher!...Well, quite the opposite has been taking place....
Check out what Unleaded Gas has done since the hurricanes....
I think something of the same is coming in Gold....
The next chart is of the current December 2005 Gold contract.....I'll repeat what I've pointed out in previous newsletters by asking you to note how Gold has been swinging in one direction or another for every one of those 20 months shown here. In fact, you can almost say there are no 30 day periods, anywhere on the chart, in which there was not at least a $20.00 move, one way or the other....Then I would note the last 30 days are just about the tightest "action" anywhere to be found on the chart....The implication?.... That something big is about to happen, one way or the other, and I don't think it's on the upside....And also think it's going to more than a "$20.00 swing".
I may be way off here but I think Gold is about to drop in a BIG way, with at a minimum, the 425 lows being the first big target.
Think about it.....
We've had Terrorism. We've had the Iraq WAR. We've had the OIL MANIA. We've had INFLATION (!). We've had the DOLLAR (remember the CRASHING DOLLAR headlines at the beginning of this year?...The Dollar is now up about 11% since January)....We've had Tsunamis, Earthquakes and Hurricanes......What I would ask is: With all of this, who, that would buy gold, has not already done so? Every bull market reaches a point where "everybody is in"....and when you get there, what it usually means is, IT'S OVER....Who, that's bullish, could not possibly already be "in" this market?
Maybe I'm wrong but I think Gold is a big time sale...I am selling futures and buying puts in the December 2005 and February 2006 contracts looking for, at least, $40-$60 on the downside.
I'm sure there must be some people out there who are truly bearish gold but I haven't seen them. Have you?
Thanks....Give me a call if interested.