The State Of The Gold Bull And The $1764 Price

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Includes: GLD
by: Bruce Pile

It's time to take a new look at the $1764 gold battle. Back on November 12, I checked in on this with a $1764 Update after gold blitzed through this level last year and embarked on some turbulent price action both up and down. What's so special about this price level? Ask Jim Sinclair. I'm not quite sure I know.

But I do know Sinclair's record of predicting the price of gold. He is widely regarded as the world's most accurate gold predictor.

In the early '70s with gold trading at $150, he predicted in Barron's that gold was entering a long bull market and that the top of that bull market was to be $900. Gold ran to the top of $887 six years later.

At an annual gold conference after the 1980 run to over $800, he predicted gold would "lanquish" for the next 15 years, and he didn't re-enter the gold market until 21 years later.

In 2002 he predicted that gold would go to $1650 in 2011. He had Jan. 14 as the target date whereas gold actually shot to $1920 in August. So projecting out over nine years, he misses by seven months - we'll score that a hit.

In mid-2009, with gold in the doldrums, Sinclair issued a nine-point analysis at his blog, Mineset (jsmineset.com) with points two and three being:

2. End of 2nd week going into the beginning of the 3rd week of June Gold launches towards and this time through the neckline of the reverse head and shoulders formation.
3. Gold rises to $1224 where it hesitates.

("In The News Today" May 26, 2009, Mineset)

Here is what actually happened:

(Click charts to expand)


A perfect rocket launch from the 3rd week of June to $1225, where it turns on a dime into hesitation for months.

Jim Sinclair doesn't always get it so right. He predicted a collapse of the U.S. dollar in August 19, 2009, Mineset article ("Countdown To The Implosion Of The Dollar") that was to happen in early November that year. The dollar did indeed dive badly in 2009 and hit a big bottom around 74 in November, its 10-year floor. But it did not implode to oblivion as he had predicted. So I guess we could score that a near miss.

But on matters of the overall condition of the gold bull market, current or past, his methods work insanely well. You would think such a marvelous prediction system would be bristling with algorithms, software from every major vendor, and an army of highly paid consultants on speed-dial. Well, Jim is from a family at the center of the founding of Wall Street, and he is his own army of consultants on speed-dial. But his method is the same as he used back in the '70s before software was even a gleam in Bill Gates' eye. And as far as I know, he didn't have NASA or IBM help him.

His valuation model is akin to something I wrote an article about back in 2010 "A Possible Valuation Chart For Gold". This simply posits that in cycles of loss of confidence in paper dollars, gold will run to the 100% backing level, as if it were a solid, gold backed currency. The chart I showed looks like this:


Both gold cycles of the '30s and the '70s saw gold run to and briefly overshoot this level. This is basically the M0 money supply, which is circulation and bank cash, but not long-term savings, "dollars in use" in other words.

Jim Sinclair's model is explained well in a piece done at approximity.com back in October, 2009 "Jim Sinclair's Model:The Federal External Debt Equilibrium Gold Price." This model simply looks at the dollars held by foreign banks as official reserves and compares it with the number of ounces of gold held by the U.S. Treasury and divides the former by the latter. You don't need NASA to do that. This gives the "equilibrium" or 100% backing level for foreigners. In a March 4, 2009, entry at Mineset, Sinclair states:

Gold's job is, and will always attempt to during periods of monetary stress, balance the INTERNATIONAL Balance Sheet of the USA.

The fact that both of the above backing levels, foreign and domestic, go to 100% during the loss of confidence cycles points to investors putting gold where it should be if we had a gold backed currency. Not such an obtuse valuation metric, really. U.S. investors want a gold level to back all "dollars in use" and foreign investors want a gold level to back all U.S. issued IOUs held by them.

This equilibrium price of gold is something you can keep a running tab on and chart as a moving target for gold bull markets. Approximity.com did this and this is what the chart looks like:


In the early '70s, when Sinclair made his prediction of gold finding its way to a $900 top, he says he based it on trends in place then, which perhaps didn't allow for the "soberness"(Approximity's word) that set in on debt in the late '70s and early '80s, as can be seen by a flattening of the curve. So the unbridled debt growth foreseen by Sinclair in the early '70s, as shown by the slope of the orange line, gives closer to a $700 equilibrium price vs. the roughly $500 actual value at January, 1980. In actuality, the real gold price over shot the equilibrium by at least 25%, as the domestic value chart above shows for the '30s and '70s cycles. Now, in lieu of the traditional debt soberness flattening out the curve during times of trouble, we have a drunken Helicopter driver named Ben accelerating it upward. This would suggest an eventual top at least in the area of the current $12,900 equilibrium chart price.

Which brings us to this $1764 level in gold. It is, according to Jim, a game-changing trend level just as he correctly predicted $524 would be in 2005, where gold came out of its years of slumber and sharpened its climb, gaining attention as a bull market. His short-term projections are based on his squares progression methodology and on the technical work of his TA man, Alf Field. In Sinclair's words from mid 2011:

The key number in the gold market is $1,764. As gold approaches that number you can anticipate furious but very short price reactions ... Dean Harry Schultz said that I should call him when gold trades at $2,400. Stay near your phone my dear friend of more than 45 years, Dean Harry.
("No Top In The Gold Price, Next Target $1764", August 6, 2011, Mineset)

So, what has transpired since then?


The date of Sinclair's article is shown by the circle. Gold immediately burst to over $1900 and we began the "furious but short" push backs predicted around this critical swing point. My thought when I wrote the November 12, update article was "I somehow suspect we're going to get maybe one more knock down to the 140 ema area and maybe a scary break of it before we're through..." And that's been exactly the storyline on gold since then - the big scary 200-day moving average breakdown.

Now as we are approaching this attractor-repeller $1764 area again (check last week's close around $1760) it may behoove us to review the words of Jim Sinclair concerning it:

... a move above $1,764 would be the equivalent of $524.90 in the sense that you would go from the runaway that was born at $524.90, into a hyperbolic market ... a move above $1,764 brings into focus prices as high as $12,000, so we are are approaching the most critical milestone in the entire gold bull market.

It will be reasonable to assume that every effort will be made not to allow gold to get through that price.

$1,764 should put up the biggest battle of the entire bull market. The number where confidence is lost is $1,764

("Jim Sinclair-Gold Milestone at $1764 Paves Way to $12,000" King World News-Blog, 7/15/11")

Disclosure: I am long UGL.