Gold: Volatility Reigns Supreme

Summary

• Gold is now an economic indicator and it has become a currency that governments, individuals and institutions can use as a tier one asset collateral.
• Even though we have been in a consolidation pattern since then, testing the $1681 level about four times since April, it is basically a consolidation stage.
• We are entering a very interesting period when the physical market in gold has regained leadership, at least in terms of directing the price for the time being.
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Gold Fundamentals

As we look at the spot price of gold at $1699.90 ask and the futures price in the futures market at $1703.2 bid based on the August delivery. If we go back a couple of months, this spread was as wide as $80, which meant that people who wanted to take physical delivery in the spot market had to pay up to an $80 premium. The arbitrage between the futures contract in the past allowed central banks to use this contract to narrow the spread by selling in the futures paper market record numbers of supply contracts that did not exist in the physical market, but which manipulated the price to come down to narrow that gap and bring the price of the futures contract down to as close to zero as possible. Part of the problem that these short-selling predators in the gold market ran into was when there was no physical gold to cover their short positions. Therefore, we have seen a rally in the price of gold to a high of $1788.80 on April 14.

Before that rally, we experienced the coronavirus liquidation in early March, which brought the market down from a high of $1704 to a low of on March 16 of $1450. In seven days, the market collapsed more than $300. There was massive selling pushing the market to these levels. Coming down to this level identified by the Variable Changing Price Momentum Indicator (VC PMI) annual report published in September 2019, with the moving average at $1454. BY the market coming down to making a low of $1450.90, it activated the trend momentum. When the price closed above that trend momentum, it activated a bullish yearly signal from the 9-month trend momentum, which reactivated once again the upper levels of the Sell 1 target of $1655 to $1800, which we published. The gold market rallied in reaction to the pandemic and the lock down, and made the transition from the fundamental market that had been used to price gold as a commodity into a currency. It inverted its value to a currency, particularly when the federal government announced a record-breaking stimulus package. The paradigm change meant that the gold market began to discount the future devaluation of the US dollar and challenge the dollar as the world's reserve currency. What we saw was an incredible amount of buying that came in, which pushed the price up to $1788 by April 13.

Even though we have been in a consolidation pattern since then, testing the $1681 level about four times since April, it is basically a consolidation stage that is building the next leg to support the next price fractal. As we look at the data points from the COMEX in relation to the record number of notices given for delivery, it has put into question the integrity of the availability of the gold to make those deliveries. There appear to be about 40,000 contracts that require the delivery of physical gold.

We are entering a very interesting period when the physical market in gold has regained leadership, at least in terms of directing the price for the time being without any of the manipulation that previously took place in the gold market.

The data also indicates that central banks have taken huge losses in the past few months as the reversion in the gold market occurred. This also is a sign of the change in the gold market paradigm. Gold is now an economic indicator and it has become a currency that governments, individuals and institutions can use as a tier one asset to borrow US dollars, which itself has become a commodity, not a real currency but a fiat currency.

Gold

Based on the Variable Changing Price Momentum Indicator (VC PMI), we recommend taking profits ( + $14,040 ) on DUST on any short swing positions. We have reached the daily target at $1711. The $1722 target was also completed. We are now trading at the extreme below the mean of $1740, which is the Buy 2 daily level.

Courtesy: TDAmeritrade

We have been recommending to unload some of their long positions or hedge into this $1761 area. It was a failure to challenge the previous high in April of $1788. Now we have come down to the extreme below the mean, which on the daily charts, tells us that we are in an oversold condition. Now we recommend to begin to get on the long side.On the daily, trading below $1711 connects to the weekly target of $1681. This appears to be an area of support.

If buyers are going to come into the market, they are likely to come in around the area of $1711 and $1681. The Artificial intelligence tells you not to go short on the daily, since the market is at an extreme level below the mean. The lower the price goes, the higher the probability that the price will revert back up to the mean. If you get a chance when there is a spike low in to the $1685 level, load up the truck. That would mark the completion of a major correction since April. The upside had not been completed and we expect $1800 to be reached based on our annual analysis. Use this correction to cover your short positions and build a long position for the long term.

The VC PMI is a contrarian indicator. When everyone was buying up in the $1780 area, the VC PMI was recommending selling. You can check our reports over the past few weeks, where we recommended selling gold short. In May we said to sell in May and go away. Leave your emotions at the door. Wait for the market to confirm the VC PMI signals and trade as it recommends. Try not to be tied emotionally to the market rising or falling. We are looking now to buy anywhere down to $1681 or $1686. This is a fantastic opportunity to be buying the gold market. We expect gold to return to reach $1800, which is the VC PMI’s annual target. Every time we move down into the area where we are now at about $1681, we find buyers and the market reverts. So $1681 is a major level of support. There is a lot of panic selling, which is causing the volatility. It is a good time to go in and buy metal stocks, ETFs or even triple X velocity ETFs like NUGT or JNUG, depending on your risk tolerance.

Silver

Silver is entering into an area that represents buying on the daily signals. Silver is a little more confusing because we are getting mixed signals. The daily is showing an area of support, while the weekly is in a bearish mode, activating $17.64. The price in silver at $17.71 is trading above the monthly Sell 2 level. Prices appear to be coming down into this $17.71 (Sell 2 monthly levels) to $17.64 (Buy 1 level) area, which is the weekly target and the daily Buy 2 level--a perfect alignment, which is a high probability for the market to revert from those levels.

E-mini S&P

Yesterday, we got a short signal for the E-mini S&P but it did not follow through. The market reverted right away and made a high of 3106. 3143 would be a 78.6% Fibonacci retracement. The price continues to defy the political and economic situation, by refusing to decline. We are facing a major depression, yet the market keeps going up. It just does not make sense. It appears that the stock market is now virtual and separated from the real economy.

Analyst’s Disclosure: I am/we are long GDX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.