I have been toying with the idea of including an analysis of gold in the newsletter, but, for the moment am holding off while I refine my analysis. I follow Gary’s blog on gold found here and generally agree with his position. This time however I’m not so sure.

The inability to change one’s mind when the market tells you that you are wrong is one of the toughest habits to break, but one that is absolutely necessary if you are going to make money in this business. For whatever evolutionary reason, human beings have a very hard time admitting when they are wrong, and an even harder time reversing their thinking 180° even after they know they’re wrong. For the vast majority of traders it is less painful to lose money than it is to admit an error and reverse a trade.

Fine. Agreed.

In my previous post I went over my expectation for gold to move down into its daily cycle low along with the stock market. This should have corresponded with the dollar rallying out of its cycle low. On Wednesday morning everything was set up perfectly for this to unfold. Gold had formed a swing high and was beginning the move down into its daily cycle low, stocks were in the process of reversing back down through the coil, and the dollar had bounced off of the 50 day moving average and was holding strongly above support at 80, clearly in the process of putting in a cycle bottom.

While respecting price action, there are enough false breakouts/breakdowns to make a case for sticking with analysis that is based upon criteria that has been successful over time.

However, as you can see from the chart all of that changed Wednesday afternoon on the Fed statement. The stock market reversed the early-morning weakness, closing strongly. Gold reversed dramatically, closing up over $40, and the dollar collapsed back down through 80 negating what would have almost certainly been a powerful rally out of that cycle bottom. One could either ignore what had just happened, thus exacerbating losing trades, or they could recognize that something fundamentally changed that afternoon and quickly get on the right side of the market.

Which is the projected time-frame and rate of increase in the short end of the rates. Also in my previous post found here the context is provided.

That is exactly what we did. When the dollar reversed and gold started to rally we immediately bit the bullet on our long UUP trade, took a small loss, and reentered GDX. None of our tools (cycles, sentiment, or technicals) were predicting this. However, that still doesn’t give us an excuse to ignore what had happened and quickly make the correct adjustment

The analysis to reverse position, based on the ‘price action’ which may, or may not, have in-of-itself been a gut-reaction trade in the market, may, upon more considered analysis prove that the original analysis was more accurate.

Rising interest rates are bearish for gold. The reasons are fairly obvious: gold provides no contracted interest payments, nor dividends. The gains in gold come from capital gains primarily. Thus, even though the interest rate hikes are a year away, just how much confidence will early buyers of gold, sitting on significant profits, have in continuing to hold gold? Late comers? Where is their pain point?

I have had a look through the various time-frames on the gold bull market. On a 7yr chart, there is a real warning sign that the ‘bounce’ that triggered the ‘price action’ was a false signal. Add to that the ‘indicator’ that I am developing, but not entirely completed, also indicates a breakdown, despite price action to the contrary, I am going to call for lower prices in gold.

Advertisements