Has It Happened Yet Again?

October 15, 2001 – When gold resumed trading in New York after the disruptions related to the September 11^th attacks, gold held tenaciously around $290. For the first 17 trading days, every dip in gold was bought, and there were several assaults on over-head resistance around $292, with gold briefly trading above that level. I think it is very telling, however, that gold was unable to stay for long above $292 once that price was hurdled. It has been an area long identified by me as a key resistance level.

I’ve consistently argued that if the shorts were going to ‘circle the wagons’ and make their last stand, it would be at the $292 area. I’ve mentioned this area many times, and not just in recent months – but also earlier in the year. For example, before the rally in May failed at that level, in Letter No. 284 I said:

“Another plausible scenario is that Gold will take a breather under the $292 area, a level which has marked key resistance in the past. Some consolidation though would eventually enable Gold to take out the $292 level, sending Gold over $300 and on its way to the $320 area.”

That “consolidation” lasted into the summer, so it took longer than I expected. But as I noted in August and then again on September 10^th in Letter No. 291, “Everything is on track for gold to rally after the Bank of England auction scheduled for September 12^th“, and rally it did.

Therefore, the inability of gold to penetrate $292 in recent weeks has the appearance of manipulation of the gold price by the shorts, which are the big bullion banks. Even beyond their immense size and financial clout, their position is all the more formidable because they have the central banks and other government resources working on their side.

When gold broke down early last week, there were a number of commentators suggesting that the gold market was trading unusually, if not completely rigged. There were observations like “Gold’s performance was strangely subdued” and the comments by another of “the past day’s weird moves”. One trader stated: “There were those who thought the escalation [in Afghanistan] would take gold over $295…I was a bit surprised it did not happen.”

So market manipulation is one explanation why gold could not climb over and stay above $292. But there is another less sinister reason – gold wasn’t quite ready to make its big move. A reasonable argument could be made for this latter reason.

In fact, this was the view taken by a good long-time friend who was a houseguest over the Columbus Day weekend. His view in my mind takes added weight because he happens to be one of this country’s top commodity traders with a lot of successes under his belt over the past thirty years.

Needless to say, we talked a lot about markets that weekend, and the precious metals probably got the lion’s share of that discussion. Interestingly, I could not persuade him to my way of thinking, that gold had done enough work and was ready to finally take-out $292 and head higher.

We went over the long-term and the short-term charts. We went over the fundamentals.

We went over the way the market was trading. In other words, we discussed the gold market thoroughly and covered all the bases. And while he remained bullish about the longer term trend, I could not shake him from his conviction that gold would need to trade first back into the $280’s before eventually moving higher. And more to the point, he remained steadfast in his view that gold would drop back into the $280’s after the Columbus Day holiday, which was last week and is exactly what happened. The reason for his view?

It was really quite simple. Gold needed to drop back into the $280’s in order to retest its support. His view was based entirely on the short-term chart. He was basically saying that the market had gotten ahead of itself.

Sentiment was too bullish, as a result of the big move after the September 11^th attacks. The market had gotten ahead of itself, so he did not think the current price was sustainable. And in that kind of scenario, a re-test of support in his view was likely. And he was right.

The conclusion is that last week’s downdraft in the gold price can be explained by something other than price manipulation. Normal market forces can explain it. At least that is the conclusion by a top commodity trader.

I don’t disagree with that view, and I’m not just making that statement because we are looking back at last week with hindsight. I allowed for that possibility. How?

When I put these letters together, I have to try looking two to three weeks in advance. I must allow for all reasonable contingencies, while still focusing on the major trend. And I thought that another dip into the $280’s was possible within its major uptrend. Put another way, I sensed that it was possible the market had gotten ahead of itself. There were a number of reasons for this observation, but they all came back to the point that bullish sentiment was indeed running high.

So in Letter No. 292 published on October 1^st, I left our stop-out point at $278.50. That level was well below where the market was trading at the time.

Given that the market was over $290 when I wrote that letter, a normal stop for me with the big position that we are carrying at the moment would have been in the high $280’s. But as readers know, I don’t play for the short-term trends in these letters. I play for the trends that last several weeks or a few months, and I attack these trends the same way.

We build up a big position, like we have currently, and then try to hold on to that position as we try to ride the trend higher. Notice that I have put the word “try” in that previous sentence a couple of times and purposefully so – it is never easy trading markets, so all we can do is ‘try’ our best.

So in the discussions with my commodity-trading friend, I was to a certain extent playing devil’s advocate. He was drawing out my thinking, and I was drawing out his. The only difference was the near certainty to which he thought that gold would drop back into the $280’s. In contrast, to me it was far from certain; it was only a probability.

Maybe the shorts were indeed trying to manipulate the gold price and keep it below $292, and maybe they weren’t. These details don’t really matter in the short-term.

What does matter is that the days of the manipulators are numbered. As gold inches higher from the base that it established this summer, we are getting very close to the point where $292 will be taken out, launching a new uptrend in the gold price. But how much longer will it take before this uptrend begins?

After the failure under $292 in May, gold consolidated for about two months, and even dropped all the way back into the $260’s. This time I expect that gold will only take two weeks to consolidate, and I don’t expect gold to drop back below $280.

If gold does move below $280, it will be an indication that all is not right. And for that reason, we have a stop. We all know that no matter how hard we may try – there’s that word again – to read the markets correctly, there are no guarantees when it comes to the future or the ability to predict how any market will move.

Success in commodity trading comes not from predicting the future, but being able to take positions and ride the major trends until it is time to get out of the position because the trend has changed. Building and carrying positions in accordance with this strategy is the basic objective of the newsletter.