Gold hits magic $1000, Stock indexes reverse back up

Gold hit the magic and much anticipated round number of $1000 today. It fell back a bit mid-morning, then rallied up through it one more time, and then settled back about three dollars under that level. CNBC kept reporting how the back months held up above $1000, therefore traders must be anticipating higher prices in the future. I guess they don’t understand carrying charges over at CNBC. Maybe I should send them an email and explain it to them. This market, along with oil and the commodity bubbles in general, seem to be entirely driven by the falling dollar and fueled by traders chasing momentum. There is a price where fundamental supply and demand are in balance. There is a point beyond that price where momentum feeds on itself and bubbles can grow larger than anyone thinks possible. It is very difficult to know when to take profits when inside a bubble. One doesn’t want to miss out of the much higher promised prices and the news seems to be the most positive at the tops, thus reinforcing the higher price projection. We all think because we were smart enough to get into this uptrending market that somehow we’ll be smart enough to get out before the trend changes. The problem is that the trend can change very quickly and without warning or an announcement from someone on CNBC. When the first pullback happens it is normal to think we can exit on the next retest back up. But on the next upswing it looks like the next leg of the bull market is about to begin, and that swing will be larger than the last. We certainly don’t want to miss out on that. But the next swing quickly turns back down and the next leg is down. But the news and fundamentals still support holding the position. And on it goes. I’ve held on too long on many occasions and given back much or all of my gains. I try to learn from past mistakes. I try to force myself to sell on the way up when everyone wants to buy rather than wait until after the top when everyone runs for the exit at the same time. The downside is that you can leave a lot of profits on the table. But my experience has been that more profits are untimately given up by trying to get out on the trip back down. It is psychologically difficult to get out on the upswing when the trend is down. Elliot Wave Theory does a good job of explaining the human psychology of the impulse moves and their reactions, although I haven’t been successful in applying the technique to market timing.
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The above chart shows the gold etf in the upper half, and the market vectors gold miners index in the lower half. The indicator line on the bottom is the spread between the two. When the spread is falling it shows that the gold price is stronger and the gold mining shares are weaker. The mining shares made a new high today for this move, but you can see the price trend for gold itself has been stronger. I also indicated the triangle that I referred to a few months back that shows the upside breakout that started this latest move. I’ve been skeptical of the last bit of this move as I feel that momentum is the main driver, or more accurately the negative momentum of the dollar is the driver, and that trend is getting a bit old. However, I still have to respect the charts and not try to pick a top. As tempting as it is to probe the short side I will wait until the trend changes. Meanwhile, I’m sitting on shares instead of the actual metal, with the metal having been the better trade so far. I have no projection of where the top of this move will be. Nobody knows where it will end, or when the dollar will stop falling. But when the change comes it could be quick.
Paulson responded to questions today about the falling dollar and just kept repeating the same talking points as he’s been saying since he’s been in office about the official policy of the government to to favor a strong dollar. They need to follow up with some action. The Fed action so far has only been to destroy the dollar.
The stock indexes sold off hard in the morning but had a nice turn-around, at least from the lows, later in the day. Not a big gain, but better than closing down another couple hundred point. Barney Frank was credited with some of the turn-around as he introduced some plan on the mortgage mess. Imagine my surprise. Must be some big spending government bail-out plan, but I haven’t read it yet so have no idea what he said. No change in the stock index charts. Trend still down and momentum still up. The indexes on an intra-day basis seem very nervous on every little impulse up. It seems sellers are still anxious on every upmove. It still feels like a counter-trend bounce rather than a trend change, but that could change.