MY OLD FRIEND AND NEMESIS

Here is a weekly chart of GOLD, a market that I have made alot of money trading this year, yet been wrong about the big picture here. I guess I would rather have the money than the ego boost from being right if I had to choose, but it would be nice to have both. I have no desire to see the public get fleeced even though it might seem that way. I am just pointing out in here that rarely in history if ever, has the general public been right indefinitely about huge market moves. They have been here for a few years now which I think probably throws this into a dubious category. I guess the Internet bubble might be another occasion as well as real estate, where this has happened. I do think all of these are the same.

I was listening to CNBC and that Fast Money or whatever that show is called yesterday. The one trader was stating that there is now heavy institutional selling in this market where there has not been before. I would beg to differ on that. If you look at the COT report, this has been going on for quite some time and it is evidence of why you have to be very careful when these big trends get going with the COT report. Often the Commercials will be heavily against the trend for months at a time, so you can not use that as your sole basis for bias. The other thought that has crossed my mind is that the way the government is playing with all of the numbers who is to say they are not also doing so in the COT report?

For the first time in quite awhile we now have some very significant divergence coming into this market in the momentum indicators. You can see the 3 lower peaks now in momentum against 3 higher peaks in price. This is a sell signal. How to enter the trade is up to an individuals own approaches, this is just a bigger picture occurrence that should lead to some downside action. Will it be a huge peak or just a pullback? There is no way to ever know that in advance. I suspect a pullback only. These prices are being rigged by governments so there is a huge amount of buying power to buy dips to keep this bubble inflated.

One of the things I keep hearing that is so frustrating is that during times of trouble GOLD has always been a great place to put your money. Let's take a look at that and see if it is a theory that should work, or one that is actually born out by history. The first chart here shows the last 2 market crashes and what GOLD did during those periods.

How can this be? In the aftermath of the Internet bubble GOLD was flat. You can see then it rose with the price of stocks afterward. Next we have the great crash of 2008, GOLD went down, then again recovered in price when stocks did. So far 2 for 2 of it not doing what the pundits say. Let's go further back in time, maybe I am just not getting this.

The famous crash of 1987, the single largest percentage drop in one day in history, surely GOLD must have been a flight to safety spot then. Oops, apparently not, it declined. Going back to 1982 which was a nasty time in our country with high inflation and soaring interest rates. There are some who debate that was worse than our current situation. How can this be GOLD plummeted during that period. Is this a typo? The data must be wrong. The running tally now, 0 for 4.

Here we have the nasty decline in 74 and 75. Well we finally found an acorn didn't we. Gold actually rose during this period, we broke the shutout. We have now found 1 out of 5 crisis periods where this theory actually bears out. Even in this case you can see GOLD was already in an uptrend following stocks up to the top, it simply just went up a little more during the decline. This is hardly proof of this theory at all.

The point of this whole exercise is not to prove GOLD can't keep rising, it surely can and may. However, if you choose to invest in this, do not do it based on the theories that are out there about it being a safe vehicle in times of trouble. Even though the theory makes sense, throughout history this has not proven itself out in actual price movement. If anything the tendency is for it to go down not rise. This recent run for the most part tracks the stock market as a whole, if you can't see that by looking at charts you are just blind. I believe this is true because really bad economic times generally result in big deflation. During a deflationary time commodities will generally decline. Maybe this time will be different but any reader of this blog knows my thinking on that probability.

As a long term player in this market there is certainly no reason to change your plan at this point. As a short term trader there are alot of reasons to begin looking at the short side here.