Gold Charts

Gold is attempting to make a bottom here, looking to consolidate in the 1100 - 1120 area. The selling was a series of bear raids determined to shake out the new buyers and weak hands from a short term very overbought condition.

The bulls were asking for it, leading with their chins a bit as they say. Newbies tend to buy high, panic early, buy back in abruptly and stupidly, and get taken down again in the normal overbought correction cycle. Its a greed-fear thing.

Now that the easy gains have been made, the bears start running into physical problems, and attempts to push down the price become harder to obtain and less 'sticky.' Dips are met with buying. Its a funny seesaw really, with the price increases overnight when the BRIC's and the Mideast buy, and then decline when Wall Street and the City of London paper hangers move into action.

Remember, anything can happen. It's not over until it is over, and we cannot say it is over yet. Still, the overbought condition has been substantially worked off, if in a rather precipitous manner. If one took the chart's counsel to take profits on December 2, then the portfolio has cash to now buy back some trading positions. Remember we do not touch the long term positions while the bull trend is intact.

We are back up to 1/6 position, having made a small purchase at 1150, another at 1140, both with hedges for more downside, and a larger purchase in the 1120's.

Now we wait, and buy weakness in dips to 1100 while the trend remains intact. There is downside risk to 1070, with the long term trend remaining sound. There really is no need to rush into this. Most markets look like they are rangebound at the moment, and quite possibly into year end. Waiting for a break one way or the other makes compelling sense. No one knows the future.

We have taken the hedges off, at least for now, as holdings in miners are slight. Mining stocks are correlated with both bullion and the SP 500 and should be considered levered positions. What is funny here is that gold bullion and the SP 500 are moving together, which is not the usual relationship. It can be deceptive if it changes.

Unless the markets melt down which is not likely but which is always a possibility, the risk probability is much more favorable now. If you wish to guard against a meltdown, a hedge for a stock decline is easy enough to obtain. Watch your leverage. A change in trend is ALWAYS possible.

And if 'traders' come clumsily piling back into paper gold here, the trading desks will see it and skin them alive, charts or no charts. That is how markets overshoot targets.

A much more deliberate and long term approach to the markets is preferable for those who are not traders. That is about 90% of the people who read these blogs. For them, there should only be four or five trades per year, if that.

We have to look at all markets within the context of the economy in which they operate. As we have stated, our outlook for the real economy is still very gloomy. This is not a cyclical recession we are experiencing. We are in dangerous waters.

It really is going to come down to the willingness of the Fed and Treasury to monetize the next wave of bad debt that comes rolling in from the Commercial Real Estate markets, and fresh rounds of residential foreclosures.

That is what makes the difference between inflation and deflation in a fiat regime of the world's reserve currency: a policy decision, and the willingness or timidity of the rest of the world to challenge the status quo.

The middle ground between Scylla (monetization) and Charybdis (deflation) without a serious systemic reform looks like a nasty stagflation with a few big winners and many smaller players losing big, so that's the target, for now at least.

P.S. Around 3:20 NY Time some downside hedges went back on (gold 1130ish and SP futs 1105). The stock market is bifurcated between big caps and the broad index. Probably year end shenanigans but it makes me edgy. Probably another little cut and bleed, but it helps me sleep.

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