Dear Bottarelli Research Reader,
Such timing. Last week, I wrote to you about where gold might be headed.
As I headed off to northern California for a family wedding – the land of the original ’49 gold rush – my recent gold chart analysis was definitely on my mind.
Turns out, just about the only thing to go crazy while I was away was gold. And now, as I return to my desk, my inbox is full of e-mails from readers who want to know the latest on our theorem.
Let’s look at the charts to see what everyone is talking about…
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Here’s the daily chart for the Gold SPDR (GLD – NYSE), showing the big 12% jump in gold over the past few weeks, including Monday’s wild 3% spike.
That red line diving down from left to right is the 50-day moving average, which is where the GLD has stalled for two days running. So, the first thing we know is that despite all the talk and crazy action, GLD is still responding to your basic technical limits.
The next thing you see is that these wild moves are not all that unusual. There are six similar up or down gaps in this chart just over the past three months.
Now, let’s take a moment to talk about this particular episode. Because quite frankly, the details are weirder than the actual action.
Weird Tales
It seems there are rumors floating about that the large gold repositories have actually lent, sold, or stolen the gold they’ve been holding for clients both large and small.
Quite honestly, I don’t know if this is true or not.
I can tell you that this basic idea has been around for years. Back during the last election, now-retired Representative Ron Paul demanded that both the Fed and Fort Knox’s gold holdings be audited. And supposedly, the Treasury actually did perform an audit on the Fed’s stash in mid-2012, and he was perfectly satisfied that “Goldfinger didn’t sneak in at night and take our gold.”
UBS’ Art Cashin wouldn’t address the facts behind them, but grants that these rumors probably powered the latest spike in the price of gold. He said…
The worst (and most strained) claims the world’s central banks have put a bear raid on gold. That rumor claims that they are trying to cover the fact that they have sold/lent the gold they were supposedly safeguarding for their citizens. A plunging gold price would reduce the urge to look behind the curtain (or into the vault) and discover this misfeasance. A more pervasive form of the rumor/hypothesis substitutes the global banks for the central banks but with the same, theoretical, abuse of custody. A key support of these theories is the backwardation in gold – the spot price is higher than the near future contract. That’s unusual. It could normally be resolved by selling spot gold and buying the cheaper future one month out. Thus, in a month, you would reap an apparent locked-in, riskless profit. Yet no one seems to be doing it. Is there doubt that there is gold in storage that will be deliverable in a month? So, the theorists assume.
Hard Facts
I have to tell you, 999 times out of 1,000, rumors like this don’t amount to a hill of beans. And if they ever do pan out, we’ll have the sort of troubles that require firepower rather than puts or calls. Seriously, if the country’s gold has vanished, the exchanges will follow fast behind it.
Earlier today, we were researching Caterpillar’s approaching quarterly report, and came across a survey out of Citi noting that falling prices for copper, aluminum, and gold are driving down the mining and equipment sector. The report said…
Spending plans by mining and construction companies shows a 16% decline in expected spending on mining equipment in 2013 compared to 2012. The weakness is notable across all types of equipment and all types of commodities, and the outlook for prices of mining gear has deteriorated considerably from our first-quarter survey. Mining companies are turning away from growth and re-focusing on costs and returns...We believe the consequence will likely be a multi-year decline in capital spending.
Doing the Math
If we step away from pure gold for a moment and look at the chart of a gold and metals miner like Freeport-McMoRan Copper & Gold (FCX – NYSE), it might help us get a clearer picture. That way, we can place the recent spike in gold in the context of the long slide in metals.
You can see below that the recent action is really quite typical – and so are the losses that followed each time. In the past year, FCX has popped up and over its 50-day (10-week) moving average six times. The median loss following the first five episodes was -18.40% and the average loss was -18.20%.
Honestly, I can’t swear to you that that there’s an ounce of physical gold sitting in the vaults right now, or just dust bunnies and moths. In fact, it might be decades before we know for sure — if we ever find out at all. That might be one for the history books.
But, I can tell you that the overwhelming probability is that the FCX rally will fail, and its shares will drop to $24.62 over the next five weeks. That’s just math.
As always, the charts tell all.
Sincerely,
Adam Lass
Bottarelli Research Newsletter
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