Thursday, February 02, 2012

Gold Volatility Index Update

I have shown this gold volatility index numerous times on here.  In fact, I showed it when it was hitting the lowest level in years and then as it started to rise well before this most recent correction on gold.   This index was one of the factors I used to warn that gold was going to plunge in 2008 and then within a day of gold stocks bottoming in late 2008, I said that the only equity investment I found attractive were gold stocks.   It is a powerful predictive tool that you won’t see anywhere else.  

This time I have included simple volatility bands in blue around the graphic index.  A simple rule to follow might be that once the volatility index pierces the upper or lower band, one might wish to consider watching their gold trading systems for long or short exits respectively.   This graphic is obviously a weekly perspective.  One could also use a daily perspective but the potential for greater stopped-out trading losses would potentially exist with more false or shallower signals. 

There are a lot of people out there now stating that it’s time to get back into gold.  But, their perspectives, as I understand them, are simply based on opinions.  I don’t do opinions.  The gold volatility index is still rising on the weekly chart and that means gold is not going to make any appreciable movement to the upside until this index starts dropping.   Or, put another way, we could still see more downward pressure.  One might also be interested in the fact that this gold volatility index has hit the lowest level in sixteen calendar years on the monthly chart.  Yes, sixteen years.   Low volatility in periods of high volatility often have the consequence of a loaded spring.  In other words, unless we are entering a period of very low volatility, (Yes, I am joking.) I would not want to be a buyer of gold right here. 

As we have already said in prior posts,  fundamental demand for gold has been falling quite substantially for some time while speculative financial demand continued to rise.  But, now net long positions in the gold derivatives and futures markets have recently imploded by over 50% according to CFTC-reported data.   Additionally, there is one particular metric of global physical gold purchases that I am aware of and it has turned negative.  In other words, just as we discussed would eventually happen, net purchasing of gold would be replaced with net selling of gold around the globe.  Is this temporary or the beginning of the end?   Are both the financial and physical speculators in gold drying up for good?   That all depends on central banking policy and the future actions of political idiots.  But don’t expect the low interest rates through 2014 just announced by the Fed to affect that one iota.  Low rates in themselves mean jack squat regardless of the uninformed opinions of some gold advocates who have jumped all over that announcement as a reason to re-enter the market - this shows how little they understand about monetary economics.

Additionally, if you think owning the underlying gold asset is going to protect you, think again.   One of gold’s biggest advocates got fleeced in this MF Global fiasco and lost his entire account.   I warned this was coming.  Physical buyers of gold somehow think their investment is going to be protected.  You mean like owning the underlying asset in the real estate bubble?  There is no difference.  Financial speculators used paper leverage to create an illusion of higher real estate prices for quite some period of time.   And, then when those paper leverage products imploded, the physical asset imploded with it.  Owning gold is not a safe haven for prices achieved through financial speculation and leveraged paper gold products aka derivatives.  Just ask owners of real estate in Arizona, California, Florida and other places who are watching their asset prices continue to collapse years after the financial bubble popped.   

Look, we already know what gold is going to do in a crisis.  We saw in 2008 and we saw again last year when Europe was melting down.  Both times gold took a hard hit.   Look at the gold volatility index during the 2008 crisis.  Does this look like a safe haven?  Hardly.  The crisis in gold back in 2008 was as substantial as the crisis in all assets that were the result of financial manipulation, derivatives, Ponzi schemes and speculation.  In 2008 it was an actual collapse in gold, silver and mining stocks.   The facts are the facts and illusions are illusions.   

If you think the Federal Reserve is going to keep bailing out gold buyers living off of welfare benefits provided by Ben Bernanke, then you should keep buying gold.   If you believe supply and demand determines price and at some point this game of endless spending by the Soviet state to bail out its cronies will end, then gold is going to have a day of reckoning. 

Gold Volatility Index (Rising means rising volatility.)

2012-02-01_1610(1)

posted by TimingLogic at 1:15 PM

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