So, where do I stand?

It has been 10 months since my last post. At that time I started building a long position based on the notion that the market structure and dynamics had satisfied my 5 stages of setting up a gold bull market. I was long market from June 2012 to the middle of September when I reduced my position to 25% long waiting for the correction down to the 35-39 where I would get 100% long and stay invested for minimum of 700 days. Unfortunately, the setup didn't work and the 35-39 echo, that was supposed to provide support, failed miserably. I got rid of my October purchases but never sold my 25% position. At some stage this position was down as much as 55% but overall the loss was never bigger than the profit I booked in being long from May to September. 

I am playing only the long side of the market and there has been nothing interesting to report on until a few days ago when finally a new setup started emerging.

Let me remind you of the first three steps of the proper setting of the gold bull market and see where we are at today regarding the HUI index:

Step 1

Proper index alignment: 16-20 bellow, 35-39 in the middle and 92-96 on top. To achieve this order the price has to go down for an extended period of time, usually a couple of months. This has been achieved since the price of HUI fell through $400 in February 2013.

Step 2

Forming a bottom. The bottom is signalled with a failed 16-20 sell signal. Since the step 1 has been satisfied we had five 16-20 sell signals, all successful. They were even followed, each one of them, with a failed true 16-20 buy. Not a nice picture except if you were short the gold market. The change in behaviour started with this last 16-20 buy signal that was the first one of five to sell for a profit. The ensuing sell signal that is still active today looked at first like it will succeed but then, just a day before it was about to end, the price turned up and rallied to buy the 35-39 echo and further to try to reach the 92-96 echo. This means that the 16-20 echo finally turned from the resistance into the support. Today this signal stands at 8.46% above its sell price. It is a failure so we can conclude that the bottom was signalled.

Step 3

The confirmation of the bottom. It is manifested as a rally that has the structure of an impulsive initial wave up. A proper confirmation rally will buy the 92-96 echo because without this buy a true bull is not possible. If, at the end of this coming week, the HUI price stays above $270ish for a few days the 92-96 will buy. This seems very plausible and I am watching this development very closely. If the 92-96 buy is generated it can easily morph into a true 92-96 bull market by simply selling and buying back in a couple of days. This would be the step 4, the breakout. It would be a classic behaviour but let’s talk about it if and when it happens.

To shed some more light onto the chart of HUI I am going to show you two more charts that I think are the most important at this time.

UUP – US dollar long

Beside all the fuss about the strong dollar that I read on many forums it seems to me that the dollar failed to take advantage of the extreme weakness in gold and euro. While the gold fell to multi year low the dollar had been in a sideways move and not able to move even above the 2012 high.

TIP/TLT – Inflation

Here is the chart that signalled the fall into the deflation abyss in 2008. The same as for the ‘strong’ dollar there was a lot excitement recently about the coming deflation among the experts and in financial media but this chart didn’t confirm. On the contrary, while the gold and especially the gold stocks were printing new multi year lows the inflation index was slowly grinding higher to breakout above the equilibrium line a few days ago. This could be the sign of things to come; the inflation could finally become one of the forces behind the rising price of gold.

So where do I stand? I started buying in June based on my short term system that is not part of this blog. The Aussie gold stocks fell to such ridiculous level that it was just a sin not to buy some of them; NCM below $10, OGC below $1.5, RSG below $0.7, KCN below $1.3. Half of these purchases have already gone and the other half should go with the 92-96 buy, similar to what I did the last year. The problem is where and when is the 92-96 going to happen? If the price goes straight up and buys the 92-96 at around $340 in about two weeks I will sell the rest and wait for the new 16-20 buy to reconsider buying again. I think that the odds are not great for that scenario. On the other hand, if we float around $270 for another 2 weeks and generate the buy there I will not sell but rather consider taking my position up to around 75% invested and wait for further development. If then the price rises to $340 without morphing the signal into the true buy I will sell new additions and reconsider buying again at the touch of the 35-39 echo. If, after the signal, the price keeps hovering around $270 it will most probably transform itself into the true buy and I will add to 100% invested. For all this time a 35-39 sell will be my stop loss. I will not sell the 25% that I carry from the last year.

Good luck to all.