Is gold’s rally over?

long rally has been called into question lately as the Federal Reserve’s talk of possibly unwinding its four-year quantitative easing “experiment” has caused investors to tire of the yellow metal.

In addition to the QE unwinding, other explanations that have been offered include the relation between gold prices and Japanese government bond volatility as well as the general unwinding of dollar shorts as the U.S. shifts from an economy where consumption is funded by debt, to one where consumption is funded by income. We concern ourselves less with the theories behind gold’s decline and focus instead on the metal’s price/volume action.

Chart 1 — Gold weekly chart, 2001-present. The long-term trend is just barely intact.

Chart 1, the weekly chart of the gold index, reveals that this is the first time since the big bull rally in gold began in 2001 that gold has broken below the lows of a consolidation of “basing” pattern as it reaches a critical price point. We’ve drawn a long-term lower trend line on the gold index chart to show that gold is certainly at a crossroads as its long-term trend approaches a potential tipping point. A breach of this trendline could send gold back to major support at around the $1,000 price level.

The question most on investors’ minds is whether such a decline would set up a major buying opportunity for those who still believe that over the longer-term, holders of fiat currencies will move to seek a more reliable alternative. Given gold’s historical and cultural acceptance as money, gold is viewed as an alternative currency. Worries that an unwinding of QE will cause gold’s ultimate demise rely on the erroneous belief that gold’s price move has been driven solely by quantitative easing, which is not the case. Chart 1 shows that gold’s move began in earnest in 2001, long before the Federal Reserve’s creative QE liquidity machine was conceived and put into action in 2009, but well after the Fed’s easy money policy became well-entrenched during the Greenspan era of the late-1990s and early 2000s, leading to the longer-term devaluation of the dollar.

Chart 2 — Gold daily chart, 2001-present. A retest of the April lows may be critical for gold.

Our view is that investors should simply let the current decline in gold run its course, at least until a technical low can be discerned. Chart 2, the daily chart of the gold index, provides one example of a potential bottoming formation as the metal retests its April low, an area that also coincides with gold’s long-term uptrend line as shown in Chart 1. The question is what could trigger a recovery and rally in gold?

Aside from all the other theories that have been offered, we consider the fact that the paper gold market, consisting of futures contracts and exchange traded funds such as the SPDR Gold Trust GLD +1.93% , is about 100 times the physical market. Recent declines in the price of gold have been met by huge surges in demand for physical gold which has proven much more difficult to get ahold of than paper gold which has been figuratively tossed out the window. Thus the paradox of declining paper gold prices versus surging physical demand where steep drops in gold have not led to the wholesale dumping of physical metal. Rather the opposite has occurred. This has resulted in relatively high premiums for physical precious metals, in particular for the “poor man’s gold,” silver.

In pondering this, we have to wonder whether the selling in precious metals is due to the realization that when a currency dislocation occurs, whether in the U.S. dollar, the euro, the yen, or some other currency, paper metals will do you no good — you must have physical. Therefore, the current selling could simply be an unwinding of the paper precious metals trade in anticipation of this. We find some indication of investors looking to alternative, less “printable” currencies, such as Bitcoin and the phenomenon of some U.S. states and municipalities creating their own local currencies. Thus, in such a realm, investors may decide that paper gold is not the solution.

In our view, the Fed is in no position to begin unwinding QE as the U.S. economy remains much weaker than most pundits and government statisticians and number massagers would have you believe, and the Japanese have taken a stance we like to refer to as “Kamikaze QE” as they go all in on the ill-fated delusion that they can suddenly jumpstart their decades long economic stagnation with some sort of steroidal version of what they’ve been doing for about the last 30 years. Meanwhile, Europe remains between a rock and a hard place. This is illustrated when even a small dislocation such as was seen recently in Cyprus, finds no other solutions other than the rote financial engineering and money-printing as bailouts persist as the rule of the day.

Our general view is that a major buying opportunity in gold may be at hand, but because we rely on price/volume action, in other words, market facts, we shun a reliance on theories of all stripes. If gold is able to successfully test its April low and mount a rally from here, then the yellow metal may be able to shine once again.

Gil Morales and Dr. Chris Kacher are both principals and managing directors of MoKa Investors LLC and Virtue of Selfish Investing, LLC, cofounders of and co-authors of “Trade Like An O’Neil Disciple: How We Made 18,000% in the Stock Market” (Wiley, August, 2010) and their newest book, “In the Trading Cockpit with the O’Neil Disciples,” (Wiley, December 2012). Both are former internal portfolio managers for William O’Neil + Co., Inc., where Dr. Kacher also served as a senior research analyst and co-authored an in-house proprietary book “The Model Book of Greatest Stock Market Winners”, while Mr. Morales also served as Chief Market Strategist, Vice-President and Manager of the firm’s Institutional Services group, and co-authored with William J. O’Neil a book on short-selling, “How to Make Money Selling Stocks Short” (Wiley, 2004) .


Gold and Silver

Update 2nd of June 2013

Weekly Gold Chart

Daily Gold Chart

COMEX Gold Shorts Chart

Arguments for lower prices:

  • Despite increasing intraday volatility gold continues to behave weak. Friday’s monthly close was below US$1,400.00.
  • Still valid MACD sell signal on monthly chart.
  • Gold still in well defined downtrend.
  • If gold moves below US$1,340.00 we should see a test of US1,320.00 followed by a break of the multiyear uptrend. Already hourly close below US$1,359.00 would be critical.
  • Although gold and silver performed contra-cyclical in recent months (when compared to stocks), a very likely correction in equities could push down precious metals as well (risk off..).

Arguments for higher prices:

  • Gold seems to be working on some kind of double bottom. Confidence in a new rally is still very small therefore every attempt to rally is quickly being sold.
  • So far US$1,340.00 has not been violated. Gold is producing first series of higher lows and higher highs…..
  • Potential W-formation shaping in gold. Confirmed if gold closes above US$1,480.00.
  • Strong positive divergences in HUI Gold mining-Index increases chances that the bottom indeed is in place.
  • COT constellation for gold and silver has strongly improved again. Commercial short position at lowest level last seen during deflationary crash in 2008. At the same time the non-commercial & small trader have built up the highest short position ever …
  • Sentiment continues to be at oversold extremes (Gold Public Opinion & Hulbert Gold still at multiyear lows).
  • IWF predicts that central bank gold demand could increase up to 550 tons this year.
  • Physical gold market seems to be detached from paper speculation. Premiums especially in asia are high. ETF sales responsible for falling gold price while worldwide physical market is strong.
  • If gold & silver should continue to move contra cyclical towards stock-markets, a recovery is in the cards as the stock-markets are starting to correct.


  • The last two weeks have been pretty volatile but gold managed to climb higher towards US$1,420.00. On Friday gold gave back all the previous gains.
  • As long as gold manages to hold above US$1,375.00 the positive outlook remains valid. Gold should then be able to challenge the lower down trendline around US$1,440.00 soon. As well US$1,485.00 and even US$1,525.00 are possible targets within the next two months.
  • Any daily close below US$1,375.00 shifts my focus towards US$1,340.00. If this support fails the correction will continue and gold will break down below US$1,300.00.

Long term:

  • Nothing has changed
  • Precious Metals bull market continues and is moving step by step closer to the final parabolic phase (could start in autumn 2013 & last for 2-3 years or maybe later)
  • Price target DowJones/Gold Ratio ca. 1:1
  • Price target Gold/Silver Ratio ca. 10:1
  • Fundamentally, Gold is still in 2nd phase of this long term bull market 1st stage saw the miners closing their hedge books, 2nd stage is continuously presenting us news about institutions and central banks buying or repatriating gold. 3rd and finally parabolic stage will bring the distribution to small inexperienced new investors who then will be acting in blind panic.

Tinapa is gold mine in waiting

Frank Umeh a lawyer and Managing Director, Tradewinds Duty Free Market, Tinapa Free Trade zone, Calabar, in this interview offers insights into how the Tinapa free trade will be successful. He said he believes that Tinapa is a viable project and everyone should be thinking of how to make it do better than it is doing presently.


How would you describe doing business in Tinapa?

Tinapa is a relatively new chapter in business in this clime. It is like a breath of fresh air. Tinapa is the only free trade zone in Nigeria today that is engaged in trade in finished goods. The trade in Tinapa involved importing goods from outside the country for onward distribution to either the local market or outside Nigeria. If you have customers from other countries outside Nigeria coming into Tinapa to buy, it becomes a form that Dubai takes. You have Nigerians going to Dubai to import goods into Nigeria.

In Tinapa, we have customers from different countries like Cameroun and even from the Equatorial Guinea coming in to do shopping. Then for the local economy, Nigerians come to Tinapa to make their purchases. Anytime you visit Tinapa, it is assumed that you have left the country. Trade in Tinapa has been good; it has been wonderful but it could be better.

What is your take on the operation of free trade zones in this country?

I have been a keen observer of the development in Tinapa free trade zone since it was commissioned. And my training as a lawyer is a leverage in the essence that one understands the legal framework involved. I have read several gazettes of other free trade zones within and outside this clime. I have travelled to Dubai and I have also heard much about the operations of the Dubai free trade zone.

When the Tinapa law was signed by the late President Umar Yar’Adua in 2009, I took time to read through the law and I saw the enormous potential and opportunity that Tinapa has for any serious trader that really wants to excel beyond the identified hiccups and difficulties in logistics in the importation of goods into the zone then.

I have read the law of Tinapa back to back and, therefore, conversant with the procedure. So, it’s been more of learning and practice. I believe that one needs to constantly update his knowledge in any field of endeavour he is into because when you stop reading, you start dying.

What informed your uncommon optimism that Tinapa free trade zone would be viabe?

I have studied the Tinapa project and I have come to the conclusion that it is a sound concept. The Free Zone was actually created to meet a need that had been identified.

Government didn’t just set up this zone for the sake of setting up a zone. But like every new concept, there are bound to be challenges especially in a unique environment like ours. For me, failure is not an option in this matter. Instead of asking if Tinapa will succeed or not, we should be thinking of how to make it successful even beyond the expectation of those behind it.

The targeted issue should be on how Tinapa can meet the needs for which it was established. And when you talk about those needs, you talk about the quality of goods, the manufacturers’ interest to look into the Nigerian trade, the image of the country, the collateral interests of the investors, the businessmen and the customers.

It should also be noted that there should be a three-fold approach to it: short-term, medium-term and long-term goals. So, I believe that Tinapa is a viable project and we have what it takes to make it do better than it is doing presently. And one step of ensuring success is through structural funding.

I’ve said it elsewhere that it’s not the kind of loan that you get from the bank. It’s a long-term funding plan; fund plan that that will make it attractive for the manufacturers to turn Tinapa into the primary market. From importing goods, manufacturers will come into Tinapa.

One advantage Tinapa has is that unlike UAE, which is all desert, and people must fly in to do business in Dubai, Tinapa is easily accessible. Tinapa is gold mine waiting to be tapped. I am passionate about getting the place to work because it will address the vicious cycle of economic, social and moral distress plaguing the country.

What is the attraction of doing business with you in Tinapa?

Some of the things we flaunt include capacity, integrity, knowledge, experience, quality and price of our goods. Our operation is beyond mere buying and selling. To start with, I have integrity to relate with you as a business person or customer. We have a commercial sales space of 10,000, an equivalent of two football fields put together. We know where those goods can be sourced. We provide logistics administration for all transit clearing services. We offer 24-hour trade services 356 days in a year.

In other words, Tradewinds do not sleep. We bring in goods that we consider to be of good quality and sell at a cheap price. In fact, we do discount sales on daily basis.

We believe in turnover rather than profit margin; we are content with marginal profit. Again, if you have problem with those goods, you have a window of returning it and we take it back from you. We offer efficient after – sales support framework, goods transport/ haulage deliver services, comprehensive insurance on all inland container haulage services from Onne Sea Port, Rivers State to Tinapa; trained and equipped security service staff; warehousing facility in Tinapa with storage capacity of over 300 tons containers; international subsidiary offices in UAE, China, Turkey and USA; highly experienced and dedicated management team; rescue operation vehicles for containers on inland transit; trade academy and practical training and mentorship for young people coming into business. Being where we are and doing what we are doing, we are operating at such levels that we can be compared with any other international entity in terms of how they do their business – the efficiency and know-how.