Yes, I know that dentist’s photo is an ugly sight, but so is the current daily chart of SPDR Gold Shares (GLD). As one can see, the gaps on the daily charts have essentially been filled. As I stated in previous posts on GLD, the road to any new highs is going to be rocky. I still think that a target around 211 is possible for GLD, largely because investors, traders, and holders of the physical metal or ETF shares still believe owning any fiat currency (U.S. Dollar, Euro, or Japanese Yen) is a bad bet on future currency, price, and economic stability. Regardless of my opinion, one should view the playing field from various time frames to truly get a picture of how wide these price swings can be and STILL be in a bullish trend (look at this weekly chart in context with the daily chart in the next paragraph).
There are basically two scenarios shown here. Either we see GLD head back toward 143.97 ending in AB=CD price symmetry, or we simply rally to 197 to 213.
1) AB=CD scenario with price correction: It is not impossible for GLD to correct all the way back to 143.97, and still be in a bullish longer term pattern. The AB=CD Fibonacci pattern is quite commonplace, and that correction would land right around 143. A look at the weekly chart shows that a longer-term uptrend is not erased even if GLD were to trade as low as 143.97. That AB=CD Fibonacci price pattern completion is a bullish pattern, meaning that in all likelihood the march back to 211.87 would occur after that.
2) A retest of the previous highs occur before GLD rallies back to 197.38 and eventually 211.87, the longer range daily target. This is quite possible as well if some kind of quick resolution to the debt crisis in the Eurozone.
Which will it be? At present, I would tend to think that we are close to seeing a correction in the fashion of AB=CD, but momentum has not yet turned bearish on the daily chart.
What could be the driving forces for a major rally in GLD?
1) The talking heads and meandering political class is really right and the Eurozone debt crisis is going to be solved by Greece taking a massive haircut and a neutered Italian government without Prime Minister Berlusconi will do all the right things, accept austerity, thus saving the other major sovereign debt basket cases (Spain and Portugal) from detachment from the once pristine ECB credit rating. Sure, you believe that, don’t you? I for one do not, and neither do people like Dennis Gartman, who thinks gold will hit 1800 an ounce (which is roughly equivalent to a price of $180 on GLD). He has experience in most of the precious metals, and besides, he is an N.C. State graduate and dresses rather dapperly. If this austerity thing holds up, it is indeed possible for those outside targets as shown in that initial daily chart to be hit. If the Euro strengthens, oil and other commodity prices will rise, and inflation at the consumer level in the U.S.A. could spike again, just as the holiday season (and the bill paying season afterward) hits.
2) But what if it doesn’t and rates run through the roof (as shown in that chart of Italian debt in the video, which would occur in other nations of the Eurozone)? GLD would likely break below 143, the dollar would strengthen versus the Euro, and the cost of U.S. exports to the EU (and likely the Asian nations as well) would spike. That would hurt U.S. equity prices, likely plunge the Eurozone into another recession, and set off a bunch of nasty world economic events. In the next few days I will cover what possible longer term effects will befall the Euro (EURUSD) and energy prices as well.
Once again, the U.S.A. is caught between the vice of either higher commodity prices or a potential global slowdown, neither of which is particularly good for the American consumer. The U.S.A.’s only salvation is that the Euro continues to strengthen and that some method of burdening a Eurozone (or should I say German) taxpayer with bad debt is possible. In that way, the continued profligate spending ways of the part power-and-incumbency obsessed and part brain-dead American political class weakens the U.S. dollar to expand exports. As long as the Federal Reserve continues to force rates lower via this new “twist” procedure, then the down-the-road-can-kicking methodology can continue and the fragile U.S. economy can continue to grow GDP at half of its 200-year historical rate of 3.0 percent per annum.
What do I think will happen? Well, we think that we got Berlesconi to resign. That does not mean, however, that the government to come (which will be some kind of loose coalition) will buy into austerity. With a limited mandate and a lot of angst over how to reduce spending, nothing can be taken for granted, even with a so-called “technical” government. This near-term “positive” development will likely cool the jets temorarily on GLD and gold price rallies if progress is made on debt issues. Still, NOTHING has changed with regard to currency debasement. Even if this debt crisis can be defused, most investors do not trust either American or Eurozone measures to tame spending (and the longer-term inflation that spending would create) and they will continue to flock to GLD and gold. I think, with or without the neural net analysis (which I hope to have back in tip-top shape next week), we will likely see another correction in gold that should nearly match the AB=CD pattern in short order, trapping the gold bears once more before running back to the highs I estimated. There is still Spain and Portugal to deal with (and Greece for that matter). At some point, this Eurozone agreement will likely melt down, causing another panic to grip bond, currency and equity markets. I simply do not think that there is even an ounce of true consensus among EU members to agree to anything (other than perhaps to have Germany pay for everything, which Germany, or at least Angela Merkel, would not accept, because she would like re-election as well).
Conclusion:
Bottom line is this: I think it is impossible to know for sure if this debt crisis is over. Quite frankly, I am not optimistic that that the European Union can survive in its present form in the long run. Negativity with regard to any debt agreements will likely fuel weakness in the Euro and will likely put some near-term pressure on GLD prices, pressing it toward 143. I would still be long gold, however, because even as the Euro weakens, the U.S. Congress inability to reduce spending is likely to weaken the U.S. dollar as well. Keeping stops at least below 143.97 for long-term holders of GLD would be the best thing to do for now until this crisis subsides. GLD is a victim of the value of the dollar. It will rise as the dollar weakens, and fall as it strengthens. The long-term prospects for the U.S. dollar are not that wonderful either, so staying long with a portion of your portfolio with GLD is a good idea still. Even if we do see a correction to 143.97, ultimately we should still see 211.87 or so. The situation has really not changed, but the volatility associated with that change HAS. It will become more noticeable as the crisis deepens.
This is not a time to be flailing happily with your cash in buy and hold schemes, except for core holdings. I still think GLD in the next 6 months to a year can still be a core holding. Once we reach these outside targets, it may be time to re-evaluate the positions, but for now governmental arrogance and folly will pressure gold and GLD prices higher as the U.S. dollar ultimately weakens. Just make sure you have your crash helmet and kevlar jacket handy. If you don’t, you might lose a few of your gold fillings.
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