Sunday, August 28, 2011

US Dollar, Gold and Miners - Now What?

With Ben Bernanke's public speech from Jackson Hole last Friday somewhat behind us, perhaps this post can provide some food for thought regarding the immediate direction of the dollar, gold and the miners.
My take on market reaction to Ben's speech was that a predictable immediate sell off would be very short term when QE3 was not announced and lead to a more significant rally. Indeed, this is exactly what happened, with gold closing higher for the day 3.16%, the HUI gold bugs miners index up 2.53% and the S&P 500 up 1.51%.
The headlines seem to suggest that traders became relieved that QE3 - or something like it - is still on the table for the Federal Reserve's next meeting in September. And unless that perception changes for very long, my hunch is this provides the perfect 'excuse' for gold and the stock markets to rally further.

We'll look at some charts today and begin with a long term (20 year) look at the US Dollar index with an eye to identify both gold's secular bull market C-wave tops and the 3 year cycle lows of the dollar.
Gold's secular bull market began on April 1, 2001. The C-wave tops are identified with a green arrow and the exact date. The early 2004 C-wave was a double top, which explains why I have two green arrows at that location. The last definitive C-wave top was in 2008 on March 17.
I have identified the 3 year cycle lows on this monthly chart of the US Dollar index with an orange arrow - just above price and in the lower True Strength Index (TSI) indicator panel. If you look carefully you will notice that not a single 3 year cycle was exactly 3 years. Indeed, a couple of the earlier cycles were just a shade short of 3 years. And, the longest cycle so far (1995 - 1998) was 42 months (3.5 years). Our current cycle, assuming it has not bottomed, is on month 41.
The weight of this evidence suggests that our current 3 year cycle low is not likely to be much further in the future. And, this suggests that a top in both the gold and stock markets is not much further ahead, either. A period of deflation - where assets fall in value as they are sold to raise cash and pay creditors - will be the fuel that powers a rise in the dollar from its 3 year cycle low.
The TSI indicator did an excellent job of pin pointing nearly every 3 year cycle low. The only exception was the 1995 cycle low. Here, the TSI did finally get it right when it identified the final low with a positive divergence BUY signal. Our currently anticipated cycle low will likely be identified in the same manner. Namely, a marginal new low in the short term will likely not make a lower low on the TSI reading - thus a positive divergence.
The final takeaway from this chart is to note that C-waves top at the conclusion of a sharp fall in the US Dollar index. The exception here is the first C-wave of 2003. The idea for today is that if the dollar has not made its final low, neither has this C-wave.
Should traders continue to find the excuse that QE3 is still on the table, the dollar may indeed continue to slip lower giving gold and the stock markets the encouragement needed to rally.


Now let's turn our attention to a weekly look of gold, and specifically the retracement levels achieved within each intermediate cycle of this C-wave. Gold's intermediate cycles (also known as 'weekly cycles') have tended to be about 5 months in length. As you can see on the chart we are currently in the 5th intermediate cycle of this C-wave, which began in April 2009.
I found it interesting to notice that the first and second intermediate cycle retraced exactly 50% of the distance measured from that cycle's trough (beginning) and peak (highest price). The third intermediate cycle looked like it too would retrace 50% but I guess the trick became too predictable - traders obviously starting buying en masse before price reached the 50% level and thus it never quite made it to 50%.
The fourth intermediate cycle only retraced to the Fibonacci 61.8% level. Apparently traders decided that gold was simply too bullish to play the 50% game again, and that 61.8% was 'good enough'.
Our current cycle is the fifth. I find it troublesome that it has already made a 50% retracement of it's high. I view this a serious breech of the pattern of gold's intermediate cycle strengthening as it has progressed. In other words, this is a parabolic wave that is no longer parabolic. Secondly, it is of little comfort that the peak and significant retracement has happened so early in the intermediate cycle - on just week 8.

OK, let's take a look at gold from a different vantage point. We'll use the daily chart this time and throw a few of the 'mainstream' indicators on the chart, as well.
What I see here is not too comforting either. RSI, MACD and MFI appear impossibly positioned to confirm a new high price in gold, should gold make a new high, that is.

I'll conclude the chart show and tell with a couple of weekly peeks at the HUI - Amex Gold Miners index.
This first chart illustrates the dual chart pattern dynamics I believe are in play. First, you have the obvious rectangular shape of the large price consolidation. And second, you have the less obvious megaphone pattern which suggests a breakout of the first pattern does not necessarily guarantee that the miners are free to fly.

This second chart of the mining index has the megaphone outlined on price, but additionally considers the TSI status.
I'm not from Missouri. Actually, I am from California. But I feel a little kindred with the nice people of Missouri at the moment. Their license plates read, 'The Show Me State'. And for now that sentiment is exactly what I think about the miners. Show me. Let's see the TSI breakout and the megaphone breakout first, then I will get excited.


  1. Good report John. Are you still short dzz?

  2. TSItrader
    It's going on a month since your last trade (long or short )? Does this mean you have found nothing anywhere, or are you just laying back for a while?
    I miss your trades.

  3. Hi Jeff - yes, I'm still holding my DZZ position of $4.96. I tried to add to the position literally at gold's very top last Monday. My order was not executed as I was a few dimes too high. Then I had to focus on my work and decided I didn't have the time or energy to play cat and mouse. Anyway, I hope gold price keeps rising and I get a second chance.

    Anon - Both trades I am in (DZZ and TNA) I believe in and that is why I am still holding. But I will be the first to admit that I mistimed the purchase of both.

    I still research opportunities.

    Some miners that I find interesting at the moment are: AZC, CENX, CLF, DNN, GMO, GSS, HWD, ICMTF, NOR, SWC, TCK and ZINC.

    ETFs that look good include:

    I came up with these particular ticker symbols based on their having a trend line break buy signal and close proximity to making a bullish ZERO crossover on TSI (7,4).


  4. good evening john,
    I thought I'd get to bed a little early tonight, but, I see you have posted another anxiously awaited blog, so, I must stay up and read it first. This is really good John. Thanks. I sold my DZZ at break even because I think gold may go higher before it goes lower. The dollar seems to be the key most of the time. In my mind, is the pattern a descending triangle or a bullish wedge? which one?

  5. good morning Monty,
    congrats on the excellent DZZ trade. the goal is to not lose money and you succeeded. I had not payed any attention to the pattern of the us dollar price until you mentioned it. but yes, i have seen this many times before now that i look at it. it is a descending right triangle, a continuation pattern, and you can read about it here:

    i have been involved with stocks, in the long ago past, that had this pattern - and i can vouch for how they are resolved - bearish.

  6. Monty - i forgot to mention that while i had not been focused on the price pattern, i was paying attention to the TSI pattern. Beginning with the July high the TSI has formed a wedge (lower highs and higher lows). Last Friday's trade put the TSI, again, right on the lower trend line of the wedge. Beginning today, the wedge has been broken to the downside, with the TSI falling below ZERO. This is bearish, of course, and again, the TSI is right at or just ahead of future price direction.

  7. John, >>Beginning today, the wedge has been broken to the downside, with the TSI falling below ZERO<< On my TOS DX daily chart the TSI (7,4,1) broke below zero on August 12 and has been below zero ever since. Are you refering to a different set of parameters? Thanks. Bruce

  8. John:

    I know you are up to your ears in work now, but sometime when you get a chance could you do an expose like this post on the interest rate complex. I've been following you for a while now and I can't recall you ever commenting on interest rate ETFs. By the way, I'd like to start a quiz on this post to see who can guess what you teach in school. My guess is secondary education, chemistry or math.


  9. John. Great article. You have summarized my conclusions in a grand way. That's what bothers me. If you agree with me, you must be wrong.

  10. These are today's results from the miners and ETF's I suggested yesterday in response to Anon -6 or 7 posts above this one:

    AZC +7.36%
    CENX +6.93%
    CLF +6.03%
    DNN +9.87
    GMO +4.45%
    GSS +0.84%
    HWD +4.11%
    ICMTF -3.72%
    NOR +7.47%
    SWC +3.02%
    TCK +2.85%
    ZINC +7.42%

    ITB +4.57%
    IXN +2.72%
    IYT +3.60%
    SOXL +11.16%
    TNA +14.32%
    TYH +8.85%
    YINN +8.11%

    18/19 wins = 94.74% accuracy
    Avg gain per trade = 5.79%

  11. Hi John
    Your ETF is 100% win , 18 out of 19 win , can't ask
    Anymore than that, too bad I'm didn't buy any of this
    My position all in ABX and SLV,
    Happy Trading
    Good day

  12. Hi John, nice blog, I really enjoy your comments, actually I am reading you from Spain.

    How do you see DZZ? Are you still holding it? I am holding a position but with the movement of Gold today I am getting lost. Do you think will we retest the 1800 support? Thats my breakeven point.

  13. Hi Toni and thanks for your compliments.

    Yes, I am still holding DZZ and plan to do so until it is a profitable trade. My breakeven is not as good as yours - I think it is around $1744.

    Retest $1800 support? I know that is only $37 lower but my thought is, not necessarily. In my mind it is much more likely that gold retests the $1900+ highs. Momentum considered, gold is doing very well at the moment and I think likely to continue to do well.

    For myself, I am just treading water waiting for the D-wave. The ups and downs of late are not a big concern, but of course I am paying close attention.

    This C-wave began at $691. When it finally peaks, assuming it has not already, it will retrace at least 50%. All 6 of the preceding C-waves have retraced more than 50%, anyway.

    At the moment, this concept suggests a D-wave bottom of $1300 using $1910 as the C-wave top. Should gold make it to $2110, that suggests a D-wave bottom of $1400. $2310 suggests a D-wave bottom of $1500.

    If gold flips one of my fuses (as it did at $1900) and I think it is going to begin falling, I will again try to add to my position. Until then I just wait patiently.

    I hope my thoughts helped you.

  14. What about fundamentals. What happens if gold is revalued? which is probably the only way out of the debt crisis. all the charts in the world wont help you then.

  15. John, great stuff as always. Do you expect that end of this intermediate cycle in gold will be the D-wave? More generally, how have C-wave tops/D-waves fit into the int cycles in the past (specifically the last two - '06 and '08)?

  16. Anon - I have yet to see a parabolic that did not collapse. If you have a few examples otherwise, please share. Second, the fundamentals are that gold is, for the most part, relatively useless. It is one of those objects that mankind has assigned a monetary value to for thousands of years and changes its mind on what it is worth every minute and hour of the day, every year and decade. A decade ago it was valued at $250/ounce and today nearly $2000 an ounce. How rational is that? I really think the secular bull market in gold will end when everyone finally decides that you really cannot eat a piece of metal when you are hungry and that there are other assets that are comparitively far better representations of value. Finally, your thought that gold is probably the only way out of the debt crisis was provocative. If you would care to develop that thought, explain why you think that, I would be interested in listening. Thank you for your thoughts and questions.

    Hi Harry - yes, I personally think the current intermediate cycle will be left translated (top before the midpoint week) and then the D-wave will begin. I just took a quick look at `06 and `08. Both C-waves were considerably shorter than our current situation. `06 topped during its third intermediate cycle. `08 topped during its second. Our current situation is now on intermediate cycle number five.

  17. John: Can you suggest the "other assets that are comparitively far better representations of value" in which I should be investing? Thanks.

  18. Anon - I am sure you realize you have taken my words and quoted them without the preceding portion of that same sentense. The context I referred to in this sentense is the conclusion of gold's secular bull market.

    At the conclusion of gold's secular bull market, the price of gold will likely equal the price of the Dow Jones Industrial Average. (like 1980) The ratio today is 1:6, so we have a long ways to go yet to get to 1:1. I believe that when the secular bull market for gold ends it will be because investors decide that there is great value in stocks than in pieces of metal. That certainly is what investors decided in 1980, as well.

  19. John,
    Would you mind showing me a chart comparing gold and the DJI? How do you come up with this ratio? Oh, and how dare you speak so harshly about about gold. How could you say such things? Hah Hah. M

  20. Hi Monty - yes, every once in a while I actually speak my mind, then look at all the trouble it get's me into!

    The link above will show you the DJIA:GOLD ratio from 1885 to 1995.

    The above link will show you the DJIA:GOLD ratio from 1960 to 2004.

    And finally, you can make you own chart of this at For the Symbol, simply input: $INDU:$GOLD Then adjust the chart to the time frame desired.

    How to calculate the ratio? Simply divide the current price of the DJIA by the current price of GOLD. The ratio as of yesterday's close was 6.36 : 1

  21. to Anon - gold is not a solution to the debt crisis. Imagine having to pay back 14.5 trillion in gold? The damage is already done, they either reform or everything goes down the drain, cash will be needed to pay the debts back (or whatever is left of them) from now on its a schizophrenic market trading. Good luck and try not to end up in the poor house!

  22. I think we are past the point of reform and to attempt to explain what Anon was saying about gold being revalued, I think he means currencies will be devalued against gold therefore the debts will be payed back with a devalued currency. I don't mean to insult but I find the you can't eat gold to be ignorant of the fact that gold is money. I could expound on what properties gold has that makes it money but I think it would be lost on technical traders. I guess you are right central banks aren't storing gold for when they are hungry I guess as Bernanke says it because it is tradition right?

  23. Anon - thank you for sharing your thoughts, which I do not find insulting at all. If anything, I am disappointed that you are entirely missing my point.

    Gold is money. Yes. Always has been, always will be. No disagreement there.

    My point is that all assets are 'valued' differently at different points in the economic cycles.

    For example, at the end of a stock market secular bull market, stocks are 'valued' at an extreme that cause investors to slowly begin to realize is unjustified - silly. Think Internet stocks in the late 90's with no earnings, no dividends and no hope for earnings. Or a S&P 500 price to earnings ratio of 60:1 - which is historically just plain nonsense.

    AT THAT SAME TIME, another asset class, say, precious metals, is concluding a secular bear market. Gold is selling for $250 an ounce and silver for $4 an ounce.

    The pendulum then slowly swings the other direction until the opposite extreme is reached.

    At this point you may find the S&P 500 trading not for a PE of 60, but 5. And you may find gold trading not for $250, but $5,000.

    At this point I believe people will come to their senses and realize that they cannot eat metal and that it produces nothing, earns no interest and is given a 'value' in people's heads that is really arbitrary and excessive. This particular asset, gold, in comparison to the earnings capacity of a good company (stock) is of fantasy value.

    Here are a couple historical charts of gold price:

    Humans never seem to value an asset the same two days in a row, let alone for a month or even a year. Right now the momentum (secular bull market) favors an increasing 'value' for gold and a decreasing 'value' (secular bear market)for stocks. It will reach an extreme and then it will reverse again, unless human nature somehow changes in the mean time.

    Gold has NOT been 'valued' in a straight ascending line for hundreds of centuries, nore will it ever be.

  24. John,

    Have looked at TZA lately?

    It appears on the verge of a TSI buy signal.

  25. 23t870 - I completely agree. The 4 hour TSI (7,4) on SP-500 gave a trend line break sell signal yesterday. Looks like today will be a continuation of that signal.

  26. John
    Thanks for clarifying your view on gold, makes sense to me.

  27. Hi there John!

    How are you doing? Hope your Labour Day was great, we've been working in Spain, to many problems to solve here :p Just joking a bit.

    I've been following the POG and it looks like a rocket, we are now steady on the 1.900$ and I'am a bit surprised. I am still holding a big position in DZZ but I am starting to be afraid. Everywhere people is expecting gold to hit fastly the 2000 or 2100 so it looks like a sure play... I knot it never is but what the hell, I thought we would see a nice correction before the 1900.

    How do you see this month of September for gold? It is always (or at least most of the time) a bullish month. And just a small question, can you explain a bit which one is your fuse that sometimes flips? I mean, which signal are you looking at.

  28. Hi Toni - oh boy, DZZ....what to do? I have done a lot of research this weekend - seems almost night and day. I seem to be coming to the conclusion that the upcoming action is more definitely going to be coming from the miners and not gold or silver. Although I think gold will consolidate more once it makes a new high, I cannot be sure of that. Most likely I will take my lumps on DZZ in the morning when the NYSE opens and buy miners - most likely DUST - and figure on sitting there quite a while.

  29. John,

    DUST is an inverse ETF.

    If you want to go long, you want NUGT.

  30. David - you are soooooo correct and I was soooo wrong. Yes, NUGT for 2X long miners, DUST for 2X short miners. Thanks for the correction!

  31. hi John, are you still holding TNA and do you plan to sell it anytime soon ?

  32. Anon - yes, I still am holding TNA. I do not plan on selling it today. However, if the S&P does not hold 1130 I may just throw in the towel. For now it looks like it will hold.

    We are clearly in a confirmed bear market for stocks. The trend now is down, not up. Sentiment is finally reaching extreme bearishness and so I think odds favor a counter rally to unload this losing position into. The dollar has gone up 5 or 6 days now and appears to be ready for a break - that should help my cause.

    I also am holding DZZ, again, another position that is incorrectly going against gold's trend which is still up and not down. I thought about trading that position for NUGT today but see that gold made that new high overnight that I was expecting, along with all the divergences I was expecting. So, it appears their could be a temporary top in gold now and hanging onto DZZ a little longer may work out better than it appears at the moment. Gold has come down $40 just in the past 5 hours overnight.

    If I could take back both trades, would I do it? Yes, obviously. But they don't let you do stuff like that so the challenge becomes 'when do I cut my losses'? I'm working on that.

  33. august 28th article
    Where are you? You are writing intermittent articles and have stopped trading. Are you closing shop?

  34. I am also still holding DZZ, I will wait a bit expecting POG to take a breath, last hours chart looks like possible. If I can make some profit, I will exit fast from DZZ and change my position to long gold.

    Thanks for sharing your knowledge John. Can I ask you where are you from? I guess from USA, am I right?

  35. Anon - not sure what to tell you. I've been back at work each day for the past month. Before that my family and I took a 2+ week drive across half of the United States. I've been busy with other things, I guess is what I should say.

    Anyway, I've got some great stuff to write about now, but finding the time is a problem. I hope to have something done next weekend.

    Toni - DZZ made a trend line break (BUY signal) on the 4 hour chart earlier this morning. So far, so good I guess. I live in Texas, USA.

  36. I would love to see your latest thoughts and charts John.. Hope school is going good

  37. Your HUI megaphone chart looks to have broken out and backtested the pattern. (daily)