Gold: The Next Big Stock Market Bubble

It’s been quite a while since my last contribution to Seeking Alpha, but amidst the vast economic turmoil, there is yet another bubble is brewing. Here’s how you can profit from it.

In order to understand the fundamentals of this trade, we need only to review the headlines of the last few months:

Stimulus headlines:

• G-20 nations pledge 1 trillion in stimulus.
• The Troubled Asset Relief Program (TARP) worth $700 billion.
• American recovery and reinvestment stimulus package worth $787 billion.
• The Term Asset-Backed Securities Loan Facility (TALF) worth $800 billion.
• China stimulus worth $586 billion.
• Great Britain stimulus worth $30 billion.
• Japan economic stimulus worth $153 billion.

Unemployment headlines (est.):

• United States at 8.5%
• Canada at 8%
• Great Britain at 6.5%
• Spain at 17.3%
• Italy at 7.5%
• Germany at 8.6%
• France at 8.3%
• China at 9%
• Australia 5.7%

I’m sure I have missed some points here, but hopefully you get the big picture. The fact of the matter is the world economy continues to slow at an alarming pace. As jobs are being lost, world governments are introducing new stimulus packages to help pick up the slack in consumer spending. This begs the question, however, where on earth is all of this money coming from? Given the fact that the IMF just boosted its global lost estimates to $4.1 trillion, surely we don’t actually have the money to actually pay for these bailouts and stimulus packages. And indeed, we don’t.

Let’s get it straight. The money that is being printed at present is being done so with no hard-asset backing whatsoever. The Treasury has clearly been putting the risk of inflation on the back burner with the goal of getting us out of our current deflationary spiral. As a result, we’ve seen trillions of dollars pumped into a faltering economy without any real signs of inflation.

That’s not to say that inflation isn’t over the horizon, because it definitely IS. When you print money at the rate that we’re printing it, you don’t create more purchasing power. Instead, goods and services will become MORE expensive as people need more currency to pay for them. At the same time, people are actually getting poorer as wages fall and jobs are lost.

Even bigger of a problem still is the fact that nearly every country in the civilized world is flooding their own economies with currency. Add to that the tight credit conditions, bank failures, and general fear within the world as a whole, and you have all the ingredients for a terrible economic climate.

So the question remains, where can investors put money during these dark times and still earn a decent return on investment? The answer is gold.

(charts courtesy of thinkorswim)

The above chart is a 9-month chart of the GLD, an ETF that basically tracks the general movement of gold. We’ve been bearish on the GLD ever since we hit a high of $98.99 in late February. However, the downtrend that had been in place since then was broken last Friday on decent volume. We also look to have set in a double bottom at $84.5, which was incidentally an area of strong support. This chart is definitely starting to look bullish again.

(charts courtesy of thinkorswim)

A closer look at the GLD reveals what looks to be a possible inverse head and shoulders on a 6-month daily chart. Ideally, I would like to see the head come up past the 50-day moving average up to $95, before trading lower to form that right shoulder. This is more speculation than anything at this point, but if we can get back above the 50-day moving average and stay there for a prolonged period of time, odds are we trade higher from a technical standpoint.

(charts courtesy of thinkorswim)

And now for the kicker. For anyone that has been following our blog over at Chaudhry and Cole, this chart won’t come as much of a surprise, as we’ve been keeping an eye on it for months now. But for those that haven’t, please take notice. This is a 2-year chart of the GLD on a weekly timeframe. Upon closer examination, there is what appears to be a massive inverse head and shoulders in the final stages of forming. Given the fact that we just broke that downtrend on the daily chart, could we finally start to see that right shoulder form? We’ll see what happens, but if it does form, gold would be on the verge of an absolutely massive break above $1000.

All we can do at this point is and see if it happens. A break above $1000 in gold would seemingly correlate with another leg down in the stock market, not to mention a crash in the dollar, both of which I believe will happen. Over the next few years, the S&P is likely to retest and break through the lows set last March before continuing on its way to an eventual level of 600 or lower. But I guess we’ll take this rally while it lasts, right?

Good luck to all.

Disclosure: I have no current positions in the companies disclosed.

Comments

[Roger Knights:]

Inverse head-and-shoulder patterns are supposed to follow a decline, not an advance.

Apr 28 07:22 AM

[I need more...:]

goldprice.org

Not so much...

Apr 28 08:33 AM

[doubleguns:]

Why the down turn today? Seems fear of the flu would be inverse to price of gold.

This market seems to only run on fear. Fear of not being in on the big leg up, fear of being in during a leg down, fear of inflation, fear of deflation, fear on govt spending.

Now swine flu and all PM's plunge..... I just dont get it.

Does anyone see the logic in this I need help understanding.

Apr 28 09:11 AM

[Screwloose:]

Perhaps this will help....

www.kitco.com/charts/p...

In light trade, gold suddenly got smacked through $900 on the Globex in the dead of night - and again at COMEX opening. Given the pattern of previous illogical takedowns; maybe there's going to be some pro-gold bad news released today....


On Apr 28 09:11 AM doubleguns wrote:

> Why the down turn today? Seems fear of the flu would be inverse to
> price of gold.
>
> This market seems to only run on fear. Fear of not being in on the
> big leg up, fear of being in during a leg down, fear of inflation,
> fear of deflation, fear on govt spending.
>
> Now swine flu and all PM's plunge..... I just dont get it.
>
> Does anyone see the logic in this I need help understanding.

Apr 28 10:31 AM

[Vuke:]

As a "bubble" gold has been a bit of a lead one. It appears to be a carefully managed ascent over almost a decade.

As a preserver of wealth it's a great asset, for a quick buck (or a quick loss), the market is better. Though good gold, oil and uranium stocks have been doing well lately.

Apr 28 10:59 AM

[learnmoney:]

The basic theme is that GOLD is due for a big lift - so his article says BUT he holds no positions! Why not so when you post again you can tell us what you did when you did it - that will make you and your comments so savy...............

Apr 28 11:44 AM

[fireball:]

gold is the constant to measure fiat monies. it will purchase about the same goods today as 5,000 yrs. back. it has been a bit out of kilter with oil because oil has been so wild.

Apr 28 01:51 PM

[Andy Cole:]

I have no current positions because I am waiting for that right shoulder to form, something which I basically actually stated in my article.

Apr 28 02:15 PM

[5142152-337:]

You're giving me chills! Now, all I need is MORE chills! Keep it coming!

Apr 28 02:57 PM

[JSweetness:]

cetin just reads headlines and tells you to buy ma goog and pot lol

Apr 28 02:59 PM

[@TexasER:]

Hey just think, if enough people play the bubble then there is no bubble.

I heard something similar once, about a bear clapping with one hand in the woods or a tree falling or something...

Apr 28 04:14 PM

[capt Brian:]

I have been hearing the same old songs played on old instruments, and when will you realize that gold will go up and down, it is not a play thing. that is for futures, FOREX, Casinos and the like. gold is for putting in the flower bed, dig it up in a few years and it will be more valuable.

maybe

The Capt...[losing my patience, and looking to the sidelines again. Oh, what to do, what to do?

morons

Apr 28 09:29 PM

[Old school:]

The primary Fed bullet is to print money. They have and will continue to print, inflation is the only way out. They will do this until there is balance, it will just be at a higher level. It will work like a fly wheel on a diesel engine. A lot of energy to get it going, then it is momentum that one must contend with. The last question out is this. Will Congress stop spending when REAL inflation is coming like a freight train and voters are entering the Dining Car. As is their history, I think not.

Apr 29 04:16 PM

[Cesato:]

You got it right but the right shoulder bottom will be set in Oct 2009, don't rush too much on finding the right shoulder in 2Q/3Q.

Apr 30 11:49 AM

[Freya:]

Capt: Ya gotta bag it properly too.

Apr 29 01:41 AM

[Freya:]

screwloose: the precious metals section of Kitco.com had an article in the Consumer Goods area on the Indian Gold Festival and how bad it was.

Apr 28 05:02 PM

[Freya:]

Doubleguns: there was a lot of noise on the Big move gold was going to make last week based on a short squeeze that has not materialized yet.

And, there are two Gold Buying Festivals held in India every year. The first was yesterday. it was an unmitigated disaster. At the end of the day, dealers were selling at a slight discount.

That's why there was an overnight selling flurry.

Who knows, the short squeeze might come to pass.

Apr 28 04:58 PM

[Freya:]

Yes, it does look like it has a chance to form an H&S bottom. So the question becomes, at what point do you concede that it is not an H&S bottom?

That is, How far down will you allow the right shoulder to drop before acknowledging That it is not an H&S bottom?

Like you said, all you can do is wait to see what happens but I would like to know what you think will happen if the H&S structure fails?

You know, the Dark side of the above structure.

Apr 28 04:51 AM