June: The Month Of Bull Era Wine

Today is gold options expiry day on the COMEX.  As expiry day approaches, gold has a tendency to trade sideways to lower.

Option traders tend to focus on round numbers, like $1200.  As they battle amongst themselves for higher or lower prices, their actions can effectively cancel each out, and the price goes nowhere.  On expiry day, both Put and Call options often expire with little or no value.

That’s the daily gold chart.  As options expiry drama comes to a head today, gold is likely to stage a small advance towards $1220, or a small decline towards $1170.

The blue triangle pattern and the black bull wedge pattern suggest that $1220 is more likely, while the sell signal on the 14,7,7 Stochastics series at the bottom of the chart suggests that $1170 is next.

Swing trading can definitely form part of a general investment portfolio strategy, but no more than a small portion of an investor’s net worth should be allocated to it.

For the past two years, most bank economists and Western gold gurus have unsuccessfully tried to forecast big moves higher and lower, for the price of gold.    

They have failed because the gold market is in a state of massive transition.  For hundreds of years, the fear trade (bars and coin investment in the West) has dominated the market.  Now, the Chindian economies are experiencing the greatest industrialization in the history of the world. 

Mainstream media in the West doesn’t seem to really understand the enormous size of this process, or its ramifications for the global economic order.

The gigantic populations of China and India are focused on the love trade (jewellery), and in the coming years they will overwhelm the actions of Western fear traders.  For now though, the global gold market is essentially unpredictable.

Price discovery is now the result of a bizarre mix of fear traders and love traders, who each have totally different views about what economic news means for the price.     

Please click here now.  While there may or may not be a “grand conspiracy” by Western banks and governments to keep the price of gold under pressure, there’s no question that banks have engaged in market “games” from time to time. 

Regulators are now moving their focus from a regional one in London to a global one.  That’s good news.  It adds legitimacy to the market, and attracts institutional investors to what I view as the world’s greatest asset. 

From a seasonal perspective, there’s no question that the first half of the year is generally soft, and the second half is usually firm.  June is almost upon us now, and it’s the last month of gold’s soft season. 

These snapshots of the latest gold and silver COT reports show that investment funds (non-commercial traders) were covering short positions and adding longs recently, as the gold market rallied towards $1230.

Commercial traders tend to have a better track record than the funds.  They added a lot of short positions into that rally.  Their actions fit nicely with the general seasonal softness.

Based on their analysis of the next potential move for gold, some analysts are urging Western gold community investors to “Sell now, and buy back later!”  Some are urging a strategy that is essentially…“Buy the final decline, before the train leaves the station!”

I think it’s important for Western investors living the fear trade legacy to be very realistic about their personal situation.  That’s much more helpful to building wealth than guessing about what may or may not be around the corner in the short term.

The bottom line:  If an investor has, reasonably systematically, bought some precious metals and related equities into the weakness of the past couple of years, there’s no need to get wildly emotional about whether gold is set to decline $100, rally $100, or just trade generally sideways.

China, India, and Dubai are building an enormous gold market infrastructure for what I call the “bull era”.  It will take about two years before Western gold price enthusiasts see the fruits of those labours reflected in the gold price on a daily basis, but I expect many gold mining stocks will show relentless uptrends during the building period.

I use this weekly chart of China’s largest gold jewellery retailer, as a key leading indicator for Western mining stocks.

The drama surrounding the COT reports and option expiry day can cause investors to panic, but most gold demand comes from Chinese and Indian jewellers.  Chow Tai Fook is in the midst of a spectacular expansion program.  Over the next five years, I expect the company will easily increase the number of its stores from about 2000 to 4000. 

That’s another look at the Chow Tai Fook weekly chart.  I believe there’s an enormous inverse head and shoulders bottom pattern in play, and the right shoulder itself is a massive bullish wedge.  I think Chow Tai Fook will trade at $100 by the time the expansion program is complete, and perhaps sooner; Hong Kong and China are merging their stock markets in July, with a mandate to trade 300 billion yuan a day.  Chow Tai Fook is based in Hong Kong, and institutional money managers are likely to invest heavily as the merger is completed.

This GDX chart shows that most of the bigger gold stocks are grinding a bit lower, after rallying from mid-March to mid-May.  Nothing is out of the ordinary. 

The most successful investor now is the one who dials down their obsession with predicting the next price move, and simply pours themselves a glass of fine bull era infrastructure construction wine.  Enjoy the month of June!  

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