I originally posted this wolfewave setup back on October 2008.  I became very alarmed at as the lease rate (forward hedging) picked up significantly and believed that prices would retest the $650 level.  Bad call on my behalf.  Instead, prices have continued to lift as markets exhibit sickness due to the financial crisis, and in spite of a rising dollar.  Today gold is testing the previous spike high around $1000.  Exactly at the pattern target measurement.

Normally, gold trades inverse to the dollar.  The more the dollar is subject to devaluation, the more precious gold becomes.  This relationship has held for many years, however in the last three month, we have witnessed a divergence in which gold AND the US dollar have risen together.  The only way to explain this phenomenon is that the dollar is now considered a ‘safe haven’ currency, and gold a hedge against the global bouts of competitive currency devaluation.  As zanussi commented in this blog a few days ago “Интересно, как мы будем жить, если доллар рухнет?” – “I wonder how we will live, if the dollar collapses?”

Where does gold go from here?  This chart was from 2002 as gold attempted to scale the $325 resistance level.  In many respects, this daily pattern looks eery similar to the current weekly price action.  There is also overlap which is visible on the daily gold chart much like back in 2002.  This is just a head’s up to keep a tight stop if there is no decisive breakout above $1000 on this attempt.

The gold lease rates have returned to more ‘normal’ levels following the Indian wedding season 5-fold spike in September – October.  Monitor this signal and be suspect of any sudden surge in the forward hedging activity.

“Hegemony is a concept that has been used to describe and explain the dominance of one social group over another, such that the ruling group or hegemon acquires some degree of consent from the subordinate, as opposed to dominance purely by force.” – wikipedia.org

About a month ago, I wrote about the issues facing gold.  Despite the printing presses whirling at an every-alarming rate by our treasury secretary Paulson, the precious metal seems to be unable to advance any significant amount.  Perhaps this is due the perceived notion that the US is now firmly entrenched in a deflationary environment similar to what Japan experienced throughout much of the 90′s.  The hard cold numbers are readily available for examination, and it appears the gold delivery scheduled for November 28, 2008 didn’t inspire a run on bullion that many expected.  Quite the opposite, gold tanked a solid -5% or -$41.6 yesterday.

What can we gleam from the price action?  The initial bounce from the October spike low of $681 to $775 three days later could be considered a nice ‘A’ wave.  ‘B’ wave lows were established around $698 by mid-November, followed by an advance to $833 in another three day wonder – wave ‘C’ (measured move approximating $100 push upward).  Put all the pieces together, and it adds up to another bear flag pattern on the daily charts.  In the larger context, it is a gartley pattern with a rebound very close to a 62% Fibonacci retrace. Examining the weekly chart, gold was barely able to lift into the midpoint of a well-defined downtrend channel.

As mentioned in the last post, gold would need to see a significant reduction in the forward hedging activity before a buy was initiated. This has yet to occur, and quite to the contrary it seems that the forward selling in bullion is picking up each time the price spikes higher. Thanks for nothing, hegemon JPM.

Both the hedged and unhedged gold miners indicies have encountered downtrend channel resistance on their respective daily charts. The chart patterns can also be considered bear flag formations. Sooo, the wait continues for a solid wolfewave pattern to form in the GC futures contract and XAU / HUI indicies – only then will I consider this bear market in gold to have run to its conclusion.

All that glitters is not gold. At least not right now. The lease rate, or forward hedging has spiked dramatically higher in the last month. Whether this is the miners re-building their forward hedge books (selling gold futures in essence) at these lofty levels to lock in rates, governments unloading bullion for cash, or some silly excuse like hedge fund liquidations, something is changing in this landscape. Many folks have been obsessed about the LIBOR rates as a gauge of easing in the credit lines, and in that same vein, gold bugs need to keep an eye on this signal and look for a clear drop in lease rates before considering putting a single dime to work.

Why am I suspicious of this behavior in the markets? As conspiracy theorists love to point out, JP Morgan in effect controls the direction of this market, in the same way that Goldman Sachs effectively owns the oil market. Gold bugs know that the Indian wedding season is traditionally the season which exhibits a spike in demand. Heck, even JPM reminds us about this fact. So when does the spike in forward lease rates correspond to? Starting September 25, 2008, the rates went up five-fold, just as gold fans theorized that the yellow metal would explode to the upside due to the financial crisis and flight to safety. Nope.

Is the wolfewave on weekly still in play? We’ll see when the $650 level is retested. The only way a trigger will be pulled is if the gold lease rate indicates that the players see better days ahead signaled by a solid drop in lease rates. Give it another four weeks. Patience will be rewarded, and there is plenty of action elsewhere.

I’ve had a lot of folks asking me “what is wrong with gold?” My response is that it is simply swimming against a tide of US dollar repatriation. In actuality, gold is doing quite well when measured against international currencies.

As far as technicals, the last update I posted was in March 2008 as the daily charts showed overlapping structure in a last grasp for the $1000 mark and measured move target. Seven months later, the same weekly time frame chart has a wolfewave structure in place after calling for a retrace back to 650-700. Shift into the lower time frame (daily) to trigger entries and patiently wait for a similar structure to evolve as the spike lows are retested, ideally right around $650 in the next four weeks.  On the other hand, the speed with which funds are moving in world markets may  suggest the pattern is complete – keep a close eye on the dollar for clues.

Gold trades inverse to the US dollar, which has seen nothing less of a meteoric rise in the past 3 months as fast money parks their short-term cash in treasury bills. This flight to safety is reflected in the wild gyrations of treasury yields. Keep the measured move of 88-91 on the radar to signal either exhaustion (a-b-c retrace) or extension (trend reversal).