More on gold

In my previous post regarding gold I basically concluded that longer term, gold is to have a major setback if not crash into a new bear market. I also said to beware betting against gold too soon because the mania phase can be quite dramatic and the price is still making fresh new all time highs which in my experience is a powerful bullish signal. So, even if you think that's it just a matter of time before the party is over, when something makes all time highs it's saying that you are either flat out wrong or early, either of which will have the same result to your bottom line if you bet against it.

I think it's quite likely the gold bull market will end in parabolic fashion similar to how previous bubbles and crashes end. But as I said before, something that is going parabolic can simply go even more parabolic. So, how can you get a sense in quantitative terms when the parabola will exhaust itself? One way of doing so is to look at previous bubbles and crashes and determine the range of how severe the parabolas got before they exhausted themselves. To do this, I take a look at how far above or below the asset was trading relative to its 200 DMA when it peaked/bottomed.

Let's look at 2 recent bubbles and 1 panic - the tech bubble of 2000, the oil bubble of 2008 and the panic of equities in 2008.

Tech bubble peak: 46% above 200DMA

Oil bubble peak: 34% above 200DMA

SPX bottom in March 2009: 33% below 200DMA

SPX bottom in November 2008: 37% below 200 DMA (I included this date because this was the point where the market was the most stretched below the 200 DMA even though it wasn't the final bottom).

So, you can see that once you get above the 30% threshold, the end of the road for the mania/panic is near. At the very least you can expect to see a major counter trend move. If you bought a long term out of the money option against the trend at this point and held, 6-12 months later you would have done very well even though you would have suffered initially.

So where are we with gold right now? Despite this rocket move it's only about 15% above its 200DMA. If gold was to hit the minimal 30% threshold that was observed with the termination of previous bubbles/panics, based on the current 200 DMA of gold, that gives you a target of $1545...and that's just a minimum target! Can gold get this high before it's over? I don't see why not based upon how crazy things got with other bubbles/panics. Of course that assumes the gold bull market will end with a blow-off/bubble move. It's possible that it could end rather quietly but I doubt that's going to be the case especially with such an emotionally driven asset like gold.

I should also note that the last 3 major corrections for gold (ranging from 15-30%) occured May 2006, March 2008 and December 2009. At those times, gold was 33%, 24% and 23% respectively above the 200 DMA. Therefore, even if you think only a significant correction is overdue like a lot of the pundits on TV say, it would still be premature to think so given that gold is only 15% above the 200DMA. Minor dips are certainly possible but odds suggest that's about all you can expect...for now.

To play devil's advocate to my previous post on gold from a sentiment perspective, yes there is excitement for gold but it can certainly get giddier (is that even a word?) Many of the loser traders I track for instance aren't long gold and the euphoria in general towards gold isn't as much as it was with the tech bubble.

All of the above suggests that although gold may be in its final few innings it isn't likely to be over just yet and with gold hitting a fresh all time all today, the bull market for gold is still firmly in place and higher prices still lie ahead. This is lucrative time for traders.