Sunday, September 25, 2011

US Dollar, Gold, Silver and Violent HUI Price Swings

This weekend I have been primarily working on getting a grip on the big picture for gold, silver and the miners going forward. A couple of charts I made in the past have been revisited and updated. And I wanted to do some new study on the price movement of the miners (HUI index).

Click on any chart to ENLARGE

I guess we need to start with the heart beat of the patients - and that would be the US Dollar Index. This is a chart that I originally posted on August 28, 2011. It is now presented without the historic data preceding 2003 and has been updated to this past week's action.

The most critical thing I am focused on is the US Dollar Index 3+ year cycle, it's effect on gold once it has completed that cycle low point, the timeframe that it tends to rally strongly after achieving that low, and any True Strength Index (TSI) indicator signals that could serve as affirmation of what the thing is going to do next.

At this point I am convinced that the most recent 3 year cycle low was achieved on May 4th, 2011. Following that date the dollar essentially consolidated sideways for 4 months and then began its rocket launch. The first strong day after concluding the consolidation phase capped the price of gold once and for all (September 6, 2011).

The evidence on the chart suggests that the rally in the US Dollar Index is hardly over and has a long ways to go. Conversely, I believe now that gold also has a long way to go - in the other direction, that is.

Now let's take a quick look at a monthly chart of Gold and see if it appears reasonable to conclude that the D-wave has begun.

C-waves typically conclude with a parabolic finish that propels gold high and far above its mean which is the 200 dma. We note that gold recently reached 29.8% above the 200 dma, respectably similar to 2006's 36.2% and 2008's 28.0% performances.

This was the longest C-wave to date and the TSI analysis is therefore more challenging and somewhat ambiguous. The TSI peak reached in December 2010 was the actual momentum highpoint, and the two peaks reached after that time were negative divergences.

Also, a trend line break sell signal is drawn and encompasses the entire length of the C-wave.

Some readers have been asking me about silver, so let's take a look at that now.

I wrote about what happens to silver after it's parabolic pops on August 6th, 2011. At that time I showed the silver parabolics of 2004, 2006, 2008 and 2011.

This chart is the one I used to show what happened after the 2008 silver parabolic popped. The words I used to accompany this chart were as follows:

"The 2008 silver parabolic retraced to the Fibonacci 61.8% level then fell to the 0% level and kept going towards the dark side of the universe. This is what happens in a deflationary period - all assets lose value (even silver and gold)".

I used this next chart to explain what I thought silver was likely to do next (after August 6th, 2011) and wrote:

"The 2011 silver parabolic retraced to the Fibonacci 61.8% level and so far has fallen to close at the 38.2% measurement.
Using the three previous silver parabolics as our guide I would guess that silver, as it has not made it below the 23.6% yet, is going to do so soon. And if we get into a deflationary spiral (as I personally am nearly certain we will later this fall) silver could, like 2008, reach the 0% level and just keep going south".

So what does silver's chart look like today?

Well, it ain't pretty.

And yes, it has crossed below the 0% level ($32.50) and kept going south.

If this thing does make it to $20 it will be the buy of a lifetime.

BTW, the 2008 silver actually corrected even lower than the equivalent $20 mark I am showing on this chart as a projection. So if you think what I am suggesting is not possible, please think again.

And finally. let's have a look at those miners- the Amex Gold Bugs Index (HUI).

For the most part I was trying to get a sense of the potential volatility that may lie ahead of us this Fall.

Using my Excel spreadsheet I asked the computer to tell me the % gain or loss each day that was the result of 5 trading days.

In other words, each and every day I calculated the % gain or loss had one owned HUI that day, and bought it beginning 4 days earlier.

It was kinda interesting because for years the HUI would never show much volatility in it's quiet march up the hill from 2001. But when it got to a C-wave top, OK, then we always got some volatile action.

This weekly chart spans the timeframe beginning just before the 2006 C-wave top.

Based on the data I see here I don't think I can say with any evidence, much less certainty, that the HUI in 2011 is going to be a replay of 2008.  (However, I do think my previous discussion about the US Dollar, Gold and Silver do provide clues that suggest something similar to 2008 is entirely possible).

Anyway, the chart does not show a hint of a current BUY sign on the TSI indicator. This is a weekly chart and it appears to me it will be weeks before a credible BUY signal is in place.

The 2008 period was absolutely violent. I had no idea just how violent until I made this chart. 5 day swings of more than 15% were almost insanely 'normal'. And look at those swings of 20, 30 and even 45% - IN 5 TRADING DAYS! 

The TSI indicator did an admirable job, as usual, of identifying the significant buy and sell points. There are other signals in there but I thought the chart had enough 'stuff' on it already.

The immediate concern on this weekly chart is that the TSI reading has now slipped below ZERO to -0.04.  That is not good. The longer the indicator remains below ZERO, the longer the HUI will fall.

I wish you good trading this week. If you would like learn more about using the TSI indicator or I can be of asistance to you in any way, just send me an email, OK?


1 comment:

  1. I really enjoy your blog and wonder if you could add a "recommended reading list"? I would really appreciate it.