Why I’m Wary of the Gold Bull

Gold bugs are still raging. Someone mentioned that because gold has formed such a massive base between $700-$1,000/oz, it can’t go back down. Take a look at the charts below:


The first chart above is the Dow from 1974. In 2000, it topped out and dropped, but then recovered, forming a very strong base out of which is subsequently broke to the upside. Well, now we know that this base did not prove to be much in terms of support.


Now look at Gold’s chart since 1997. I believe we are in a 5th since the ‘99 low. You can see that gold formed a similarly massive base and has just broken out. I could see one more new high, but I think this base could prove to be very weak, too.


Ashish said...

1) Revaluation of stronger Chinese Yuan, otherwise China Commercial Real Estate Bubble will burst earlier than expected. Eventually stronger Yuan will slow down commodity demands.

2) Rising Interest Rates in China to control Inflation as well as Credit Supply. Eventually that will also slow down commodity demand.

3)Credit problems in Dubai & Eurozone not over yet. Stronger flight to US Dollar possible.

4)Latest Dec.09 US Treasury report suggests that China reduced it's Treasury buying by 34.2 Billion which says very much that stronger Renmimbi on it's way.

5)Japan bought the most Treasury in one year in according to Dec.09 report which may fuel JPY to 85/86 against USD.

It means that Gold may not rise that much like Goldbugs are predicting in near term future.

Ashish said...

oops! I looked @ wrong number for japanese treasury purchase. Japan reduced its holdings of Treasuries, cutting them by $11.5 billion to $768.8 billion in December.

Anonymous said...

Fantastic and original fractal comparison.

And I know you are talking about the SMT.

Marc said...

I understand your comparison of gold to the equity market but there's no obvious relation between the two that I can see if you plot them together. You're comparing apples to oranges.

Equities rally on risk taking, PMs have very different motivators.

Just looking at the charts...gold could go either way. Personally I think it's going higher until the central banks figure out how to pull back all the money they've printed but the market can be quite irrational.