Is Gold Crash Proof This Time Around?

[MNeagle]

Submitted by Phoenix Capital Research on 08/10/2010 17:52 -0500

Bear StearnsGold BugsMeltdownSovereign DebtYield Curve


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I’ve been receiving quite a few emails regarding the topic of Gold and how it will perform if another Crash hits. The following are my thoughts on this matter.



The first thing that needs to be said is that IF we have another systemic meltdown like that of Autumn 2008, Gold will likely go down along with everything else. There are simply too many big players (hedge funds, investment banks, etc) with heavy exposure to Gold who would be forced to liquidate their positions during a systemic collapse.



I know this is not what the Gold bugs want to hear, but during systemic Crises, just about every investment on the planet plunges while the US Dollar and Treasuries rally. Of course, this time around if another 2008-type event hits, it will undoubtedly involve or be focused on sovereign debt. So this raises the potential that Treasuries, particularly those on the long-end of the yield curve, could be hammered as well as all other assets outside the Dollar. This is worth keeping in mind for those who view Treasuries as a safe haven.



So if we go into a 2008-type event, Gold will fall. It will likely fall much less than other assets (stocks and industrial commodities), but it will still go down at least at first. This forecast is confirmed by the market action in 2008 as well as the market collapse from April 2010-July 2010. Both times Gold took a hit, but both times it came back quickly.



So if you’re heavily exposed to Gold, you’re going to need to think “big picture” or have a very strong stomach when the market Crashes.



Now, let’s take a look at the charts.



For starters, the number one metric you need to focus on in terms of determining Gold’s market action is the 34-week exponential moving average. Since the Gold bull market began in 2001, this has been THE support line for Gold.

http://www.zerohedge.com/sites/default/files/images/user20289/imageroot/GPC%208-10-1.gif

As you can see, Gold has only broken below this line ONCE in the last ten years and that was during the 2008 systemic collapse. So take a note of this line and always watch where Gold trades relative to it.



Indeed, a significant break below this line that DOESN’T occur during a system Crash would be a MAJOR warning that the Gold bull market is in trouble. Remember, the ONLY time we took this line out before was during the systemic collapse in 2008. So a break below it WITHOUT a Crisis would be VERY bearish.



And if Gold breaks below this line on its own (without a Crisis) and then fails to reclaim it… well, then it would be SERIOUS time to reevaluate the Gold bull market story.



Because of its significance as THE support line for the Gold bull market, the 34-week exponential moving average also serves as an excellent gauge for determining when Gold needs to take a breather or correct.



Indeed, anytime Gold has stretched too far away from this line to the upside, it has usually staged a pretty sharp reversal to re-test this line. I’ve circled the most significant episodes of this from the last seven years in red on the chart below.

http://www.zerohedge.com/sites/default/files/images/user20289/imageroot/GPC%208-10-2.gif

These are the BIG picture gauges and items to take note of: the points to remember in terms of determining where Gold is in its bull market and whether it’s an asset class you want to “buy and hold.”



Now let’s move into the more intermediate gauges and items relevant to determining Gold’s action from a trading perspective in the past and today.



Gold’s bull market of the last ten years has largely taken place within the confines of several very clear upward trading channels. Indeed, each “leg up” has featured Gold breaking above the upper trend-line of a given channel at which point said upper trend-line became the lower trend-line for the next trading channel (see below).
http://www.zerohedge.com/sites/default/files/images/user20289/imageroot/GPC%208-10-3.gif

As you can see, the first “leg up” in Gold’s bull market took place from 2001 to late 2005. At that point Gold broke out of its old trading channel and entered its “next leg up” which took place from 2006-until early 2008 when the Bear Stearns crisis blasted Gold into yet another trading range.



The systemic Crash in Autumn 2008 brought Gold back down into a former range (the only time this happened in the last 10 years), but the precious metal bounced back quickly. It DID have some difficulty breaking into its final “leg up” and staying there this time around, but by mid-2009, Gold was again on a tear entering its highest trading range yet where it remains today.



You’ll note that the clear significance of these various trend lines have made for some great trading: virtually every test of a trend line to the upside or downside made for a good exit or entry point for a short-term trade.



As I write this, Gold is trading in a well-defined range between $1,150 and $1,300. Going by Gold’s action of the last 10 years, we could see the precious metal continue to trade in this range for a while without breaking out either way. This, of course, assumes we don’t have another systemic meltdown AND that the Gold bull market has plenty of more room to run.


http://www.zerohedge.com/sites/default/files/images/user20289/imageroot/GPC%208-10-4.gif

The major indicators that could nullify this forecast are:



1) A break below the lower trend line WITHOUT a Crash

2) A break above the upper trend line that held



Regarding #1, if Gold broke below its lower trend line without a systemic “episode,” it would represent the first time Gold broke to a lower trading range without systemic risk. That would be a MAJOR red flag to watch out for if you’re a Gold bull.



Conversely, a significant break above $1,300 would signal yet another “leg up” has begun and would a MAJOR sign that the Gold bull market has plenty of more room to run.



A final significant move to watch for would be if Gold were to collapse into a lower trading range as a result of a Crash and NOT break out again. Even during the 2008 disaster, Gold was back to re-testing its upper trend line within a few months. So if another systemic Crash hits and Gold doesn’t bounce back quickly that’s ALSO a major warning sign that the Gold bull market is in trouble.



We’ve covered a lot of ground here, so I’ll close this article by listing the main points of this article:



1) “buy and hold” Gold investors MUST focus on the 34-week exponential moving average (currently $1,158). A break below this level WITHOUT a Crash is BAD NEWS.

2) Traders should focus on Gold’s trend lines for determining entry and exit points. Currently the trend lines are $1,300 on the upside and $1,150 on the downside.



A break below $1,150 WITHOUT a Crash would be a MAJOR warning to the bulls. So would a break below $1,150 WITH a Crash that wasn’t quickly followed by a strong bounce back and re-test of the upper trend line.



Good Investing!



Graham Summers



PS. to get more in depth market analysis and find out about a proprietary "buy and hold" trading trigger that has caught both major "legs up" in Gold AND avoided the

2008 Crash, you can join me at www.gainspainscapital.com.

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link (http://www.zerohedge.com/article/gold-crash-proof-time-around?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+zerohedge%2Ffeed+%28zero+hedg e+-+on+a+long+enough+timeline%2C+the+survival+rate+fo r+everyone+drops+to+zero%29)

[Saul Mine]

Nine years ago you could have bought 24 ounces of gold for $6,000 - about the price of a new car. Today your stash would be worth $28,800 - about the price of a new car. In a few years gold might be worth $5,000/oz and then your stash will be worth 120 grand - likely still about the price of a new car.

I would call that crash proof. It's certainly a lot better than the prospects for green paper.

[gunDriller]

Submitted by Phoenix Capital Research on 08/10/2010 17:52 -0500

Phoenix, do you have to wear a tie when you write these things ?

[joe_momma]

Probably not popular - but a key phase is in there

So if you’re heavily exposed to Gold, you’re going to need to think “big picture” or have a very strong stomach when the market Crashes.

In 2008 when the stock market took a hit, everything including gold went down - granted it went back up - but a (the?) liquidity crisis will require a lot of gold to be put up for sale to cover an equities exposure.

Just be ready when your "non-physical holding acquaintances" call you the morning after the stock market collapses.

[mamboni]

The economy is highly unstable. We have reasoned and reputable sources such as John Williams telling us that economic collapse is inevitable and even likely within 6 months. We see signs of inflation and deflation. During times of extreme economic uncertainty where paper assets as preservers of wealth are completely unpredictable and unreliable, one can only count on tangible assets as the ultimate wealth preservers. And of the tangible assets, the pinnacle of assets to hold is gold, as it has been since time and memorial. Once one has shelter, water, food, basic supplies and protection, one must hold gold. Gold is not for trading and speculating at a time of extreme uncertainty like this; gold is a rock stable store of wealth to carry one through the coming economic storm. And I believe silver will function as gold this time around, perhaps better.

[joe_momma]

And I believe silver will function as gold this time around, perhaps better.



Clarification questions - are your predicting that either/both of these are likely?

1) Do you see the ratio of Ag:Au changing - going back to something closer to the historical 30-15:1 ratio.

2) Do you see Ag being more popular out of convenience for real consumer purchases (at the moment 1/10 oz of Au would buy a weeks worth of groceries, 1/10 oz of Ag would buy about a gallon of milk)?

In the first case, both Ag and Au would preserve wealth, though there is an arbitrage opportunity with Ag. In the latter, if the economy moves to a hard currency model, it seems to almost an argument for junk silver rather than rounds and bullion bars (simply because of the lower weight).

[mamboni]

And I believe silver will function as gold this time around, perhaps better.



Clarification questions - are your predicting that either/both of these are likely?

1) Do you see the ratio of Ag:Au changing - going back to something closer to the historical 30-15:1 ratio.

2) Do you see Ag being more popular out of convenience for real consumer purchases (at the moment 1/10 oz of Au would buy a weeks worth of groceries, 1/10 oz of Ag would buy about a gallon of milk)?

In the first case, both Ag and Au would preserve wealth, though there is an arbitrage opportunity with Ag. In the latter, if the economy moves to a hard currency model, it seems to almost an argument for junk silver rather than rounds and bullion bars (simply because of the lower weight).


Yes and yes!

Consider a local economy where conducting transactions has become extremely onerous because of taxes, paperwork, reporting requirements and potential fines and penalties for the smallest oversight. That is where our economy is headed, as the governments seek to raise revenue in desperation and without any concern for the people or the small businesses. Or, the vendor make say to the purchaser: "Instead of transacting, I will accept your offer to trade that silver eagle for 2 gallons of milk and two dozen eggs; because, I am confident that the local mechanic will change my car oil for that silver eagle." No sales taxes to report, no paperwork to complete, no 1099s, no photographing the buyer, no recording of goods recieved: a barter economy flourishes while the paper/credit economy withers.

[madfranks]

Nine years ago you could have bought 24 ounces of gold for $6,000 - about the price of a new car. Today your stash would be worth $28,800 - about the price of a new car. In a few years gold might be worth $5,000/oz and then your stash will be worth 120 grand - likely still about the price of a new car.

I would call that crash proof. It's certainly a lot better than the prospects for green paper.


I don't recall being able to buy a brand new car for $6000 in 2001. I think that while your logic is correct, the volitality of this current economic climate is such that gold is making new highs due to the crisis unfolding in fiat paper dollars. As the fiat dollar collapses, gold will make new highs, most likely higher than gains in other things like cars and other goods. And those highs will be vulnerable to major swings as the dollar jolts up and down.

[gunDriller]

I don't recall being able to buy a brand new car for $6000 in 2001. I think that while your logic is correct, the volitality of this current economic climate is such that gold is making new highs due to the crisis unfolding in fiat paper dollars. As the fiat dollar collapses, gold will make new highs, most likely higher than gains in other things like cars and other goods. And those highs will be vulnerable to major swings as the dollar jolts up and down.

that about sums it up.

is the purpose of the question, "Is Gold Crash Proof This Time Around?" to seek re-assurance ?

for the sake of conversation, define a Gold Crash as $500 gold.

most likely, in a world of $500 gold, other commodies would decline in price even more.

what gold has done well is to maintain its relative value.

yes, it's possible that could change. sometimes i wonder - what would happen if a big meteor shower of gold meteors landed right in the middle of the desert. so that world gold supply doubles overnight, from 180,000 tons to 360,000 tons. a doubling of supply.

but that seems kind of far-fetched. yes they could discover a huge vein of it in Greenland or Antarctica or somewhere in areas that are losing surface ice.

[Plastic]

Also don't forget that if gold dropped to $500.00 an ozt you would'nt find a single ounce for sale in any shop, anywhere. There would of course be millions of "businesses" ready to pay you $50.00 under spot for your barbaric precious yellow.

[gunDriller]

Also don't forget that if gold dropped to $500.00 an ozt you would'nt find a single ounce for sale in any shop, anywhere. There would of course be millions of "businesses" ready to pay you $50.00 under spot for your barbaric precious yellow.


gold at $500 is such an unthinkable number. i just used that as an example of "crash".

i think gold would go into total shortage way above $500. at $1100. the Cartel hasn't been able to push gold below $1155 since April 23 -

http://www.kitco.com/LFgif/auapr10.gif

i don't know what a world with crashed gold would look like. i guess gold was $500 back in 2004, but i think if gold falls back to $500, it won't look anything like 2004.


i think the main thing is to not be personally emotionally crushed if gold falls below some threshold price, however you personally define "crash".

[Saul Mine]

Probably not popular - but a key phase is in there

So if you’re heavily exposed to Gold, you’re going to need to think “big picture” or have a very strong stomach when the market Crashes.

In 2008 when the stock market took a hit, everything including gold went down - granted it went back up - but a (the?) liquidity crisis will require a lot of gold to be put up for sale to cover an equities exposure.

Just be ready when your "non-physical holding acquaintances" call you the morning after the stock market collapses.


If you have investments in both stocks and gold it can only mean that you are a stock sucker and you think gold is just another stock. The stock sucker is a nice fellow who buys things because his friends buy them. If the price gains he gets to brag. If the price falls he gets sympathy. He is not investing, he is buying friendship. Buying gold and silver requires a definite attitude. It is such a prominent attitude that we are called bugs, or worse names. Metal bugs don't whine about a drop in price, we just call that going on sale. And we don't care much about a rise in price because we don't intend to sell any time soon. We have the real money, somebody else has the paper, and that's just the way we wanted it.

[MNeagle]

Yup, assuming someone else at the other end of the tunnel will buy gold/silver from us when this all shakes out.

Gee, that doesn't sound like Treasuries or anything does it?

I better stop now, I'm scaring myself!

[gunDriller]

Yup, assuming someone else at the other end of the tunnel will buy gold/silver from us when this all shakes out.

Gee, that doesn't sound like Treasuries or anything does it?

I better stop now, I'm scaring myself!


it's a fair point.

but is the goal is to have the most perfect medium of exchange - or the least imperfect medium of exchange ?

gold & silver may not be perfect, but they are far less imperfect than Joo-backed currencies.

i can see ways that the government can try to interfere with barter transactions involving Precious Metals ... but i won't elaborate here ... no need to give the JRS/ IRS any ideas.


there was a great essay someone put online about a year ago, it was about how the cavemen used cave wall paintings to plan their hunting, their farming, and their lives. the crude chalk paintings they made were comparable to a form of currency - they had meaning because people gave them meaning by acting on them, sort of like how they behave as if pieces of paper with the pictures of Washington & Franklin & Jefferson have value.

oh yeah - Washington Franklin & Jefferson were the same guys who warned us about Jews & Bankers !

i think most of the general public has an awareness that the government is printing astronomical amounts of money, and that just maybe that money loses value (and meaning) because so much of it has been printed. but these admissions usually occur in nervous laughter between conversations about where to go shopping and which Hollywood movie to see.


the US $ has devalued 90% since i was a kid, and at that time it had devalued another 90% since my parents were children. the trend is fairly obvious.

lead might be even more crash proof than gold and silver.

[Ragnarok]

It's my own humble opinion that gold never "crashes", has never "crashed", and will never "crash". If/when gold ever goes to "$500" again, all that means is that people want vapor-wealth-ware paper instead of gold, for whatever reason. And that condition never lasts very long if history is any guide.

I'm not saying that a certain amount of gold will always be more or less valuable than a certain amount of anything else, i.e., food, water, or shelter... but compared to fiat currencies, gold is a constant, and consistent.


2c, R.

[1970 silver art]

If gold "crashed" to, for example, $250 (2001 low?), then 1-oz of gold is still a 1-oz of gold. That does not change. The $250 paper price of gold just means that a person can buy a 1-oz gold coin for a cheaper price.

[wvojak]

34-week exponential moving average

Actually it looks Logarithmic to me, but since log_a(x) is simply the inverse funtion of a^x I can understand the use of the term.


Gold has only broken below this line ONCE in the last ten years

Um. . Looking at the graph I see MANY times when the price of gold went below that line. In 2008 it went below the line SIGNIFICANTLY twice (went down; then came back up; then went down again)

[wvojak]

It's my own humble opinion that gold never "crashes", has never "crashed", and will never "crash". If/when gold ever goes tp "$500" again, all that means is that people want vapor-wealth-ware paper instead of gold, for whatever reason. And that condition never lasts very long if history is any guide.

Only way I see that happening is if:

- Unemployment goes down to 6%
- Real estate starts selling and values stabilize
- The National debt drops to under $8-$10 Trillion
- The Various States and Cities and Gov Pension plans figure how to balance their finances
- Government stops talking about more confiscation (increased taxes, seizing 401Ks)
- Social Security, Medicare are "reformed" to stop the bleeding
- Obama-care is revoked

People are NERVOUS. Even the "asleep-at-the-wheel" types are waking up and saying "Oh sh*t!". . . Diversification is good and people are looking at other places to put money.

Just don't see it happening.

Even if big entities dump PMs to raise cash to meet other obligations, I think there will be a big demand in the smaller sectors, and from private investors to offset the price drop to some degree.

e.g. If the gov announced a devaluation; or inflation really kicked in because of a currency crisis; I'd take a $50K loan from my 401K and buy additional PMs that same day. . . And I'm pretty sure that a lot of other people would do the same. Would there be some price drop? Probably. But I just don't see PMs losing 60% of their value. . .

[Ragnarok]

Actually, I can see gold "crashing" in one of two scenarios:

1. One-world government absolute crackdown on all PMs with heavy penalties for owning/trading/bartering PMs, and hefty rewards of freshly printed currency for sheeple who report the above.

2. Governments worldwide suddenly wake up and do what they're supposedly established to do - protect their citizens' rights ad assets.

(question is... "do you feel lucky... punk?" )

2c, R.