A Feeling That the Gold Run May Be Nearing an End

Includes: BAC, GLD
by: Leigh Drogen

These are scary times for the market, truly. One of the first things I was taught about “the market” was that it can handle bad news, it can handle good news, but it can not handle being kept in the dark. The market hates when it knows it does not have the appropriate information on which to place value on assets.

We’re back in that realm right now. Bank of America (NYSE:BAC) may or may not be insolvent, Brian Moynihan may or may not be lying to everyone about how bad it is over there, and you know what, he obviously wouldn’t be the first one. There are rumblings that Societe General is in danger of going under as well. No one really knows how bad it is in Europe, whether or not the Germans will just pull the plug and watch Europe collapse around them. This phase will pass, eventually, the market will get the information it wants and be able to discount assets again going forward. But right now, we’re seeing 7% ranges daily in the S&P 500 futures, that’s a broken market.

By the way, how ironic is it that Germany is Europe’s only hope to stick together, that’s just too good. On the other hand, they could revert to their roots and tell everyone that Germany is eliminating sovereignty from all EU nations indefinitely and driving their fiscal policy in exchange for getting completely bailed out. This probably saves Europe from a complete ponzie collapse, which is where they are headed, but many will certainly scream, and rightfully so, that Germany has just orchestrated their third (attempted) conquest of Europe in under a century.

More than ever, the saying “the market doesn’t care until it cares” is evident. Macro data DOES NOT MATTER until the market decides it matters. I want to laugh every time some academic talks about the efficient market theory. Try trading this tape and tell me the market is efficient.

And all of this fear, opacity, lack of information, is driving the price of gold parabolic. There are many underlying reasons that the supply/demand balance for gold is tipped so far to one side right now. I don’t need to get into it.

We can argue until the cows come home as to whether gold has any real inherent value (my view is no, but that doesn’t matter). So when analyst or traders say, gold could be worth X in 6 months based on A, B, and C, I ignore.

While you should always pay attention to WHY the market is buying or selling an asset, and what the sentiment is around that asset, the chart really tells you everything else you need to know regarding what an asset could be worth in the future. Right now, gold is saying something interesting that I have never seen in this asset, something I want to point out.

I have been a gold bull since August of 2009 when it broke out from a multi year inverse head and shoulders pattern. You could also call it an ascending triangle on the right side there. I have traded it on the long side as per my donchian channel trading algorithm several times. And I have been a fundamental bull due to its classical hedge against (perceived) inflation, hedge against volatility, hedge against a plummeting U.S. dollar, and the fact that it has been in a multi decade bull market.

But I have never seen gold go parabolic like it has over the last few weeks, not after a longer term uptrend like this, not with this type of volatility.

While my nature is move with the trend at all times, which means obviously being long gold here, especially from 153.61 on GLD as it made a new 55 day high recently, I can not ignore the feeling I had today that the chart is screaming blow off top, in a big way.

I have zero fundamental or macro data points to suggest we are coming to the end of the great bull market in gold, zero. And that scares me, all of the news flow is bullish, all of the sentiment is bullish, all of the data is bullish for gold. Hell, even the price action in other markets is bullish for gold. And when all of these things line up, something can’t be right.

I am not naturally a contrarian, but something about what happened to gold today said this can’t last. And the chart, the chart is screaming blow off top. This is not a case of an overbought breakout, we’ve been in a bull market for a while, we’ve been in an intermediate term uptrend for a while. The chart is screaming panic buying.

It can’t last.

Am I saying to short gold, no way in hell. Am I saying to dump all your gold, not a chance. I’m saying that something here doesn’t feel right, markets don’t work this way, they like to hurt the most people the most often, and right now the most people are panic long gold, and have been for quite some time.

On the very shortest time frame, I would be looking for a close below the previous day’s low to exit short term long positions. On an intermediate term time frame I’d still be long until we took out the 20 day low per my donchian channel algorithm. On a long term basis, watch the 200 day moving average as always, it will signal when and if a bear market in gold takes place, that’s at least 6 months away.

I would not be buying gold here on any time frame, and I’m not calling for it all to end, but today was the first time I had that feeling, we might be getting close.