As most of you know by now I believe we are going to see a big surge in inflation this year. As I've noted in my previous articles the first leg up in the CRB has run its course and broken the 3 year down trend that's been in place since 2011. I think it's time for the second leg up in that inflation.
The two-week dip in the CRB has cleared the overbought conditions from the initial surge and I think we will now get one more push to test that 2012 high before commodities experience a more significant pullback this summer to set up the big inflationary spike that I am anticipating to occur during the second half of the year.
And don’t forget, any move above that 2012 high will turn this three year cycle right translated.
The previous three year cycle was also right translated. That is confirmation that the secular bull did not expire in 2009 as some analysts suggest. I believe we still have two more big legs up before the commodity bull is done. One should top at the end of 2014/early 2015 and the last leg up should top sometime around late 2017 or 2018.
Those that want to trade hard assets should probably stick with general commodities for the next few weeks though and leave the metals portfolio alone for now. As far as I can tell, virtually all of the other commodities are trading naturally and I don’t foresee a 5000 contract dump in the middle of the night to knock the sugar market back down.
Precious metals on the other hand are being heavily manipulated right now. When gold was turned back down and lost the breakout above the September FOMC manipulation top, that was a warning flag for me to take profits in our metals portfolio. The pre-market attack last Monday to break the intermediate trend line confirmed, at least for me, that the precious metals were again under attack and the forces at work in this market were going to try to extend the bear market.
Notice how gold is now deviating from the rest of the commodity sector. I don't think this would happen in a natural market.
I believe the metals are being set up to take a massive beating when the CRB drops down into its summer correction. During that correction gold will be moving into its yearly cycle low (YCL's are the most damaging correction of the year for any asset). I fully expect the forces controlling the gold market will try to break that double bottom and take gold down to $1050.
Notice that gold's yearly cycle is left translated. Left translated cycles more often than not make a lower low. You have to hand it to these guys; they have played the metals market perfectly over the last year and a half. They managed to manufacture a completely artificial bear market, and now that they have turned gold's intermediate cycle back down they have set the stage to take gold down to $1050 this summer which has been their goal all along.
And I think the motivation for this is the same that it has always been. The profit potential after releasing the gold market is much greater from the $1000 level than it is from the $1800 level. Make no mistake the entire purpose of this year and a half long bear raid has been to manufacture a lower D-wave bottom, thereby increasing long side profit potential. In the process they’ve managed to also make some good money on the short side. I think they’ve also intentionally damaged the physical supply side of the metals market knowing that that would exacerbate the rally once the manipulation was released, and the secular trend allowed to resume.
Not only are these guys having a banking cartel manufactured lucrative short trade, they have damaged the physical market enough that we will likely see a huge move from $1050 back to $1800-$2000 over a 4-6 month period once the manipulation is removed at the yearly cycle low.
I think over the next three months J.P. Morgan, HSBC, and Goldman Sachs are going to stretch the rubber band so tight in the metals market that when they finally release it it’s going to generate a surge comparable to what we just witnessed in the coffee market. Unlike the coffee market though, the metals market is big enough that these players can take large positions and make serious money off of that move.
On a more short-term time frame, and confirming my big picture outlook, notice that the bearish engulfing weekly candlestick was confirmed by a strong downside push this week.
I’m up in the air as to whether or not gold is ready to bounce out of its daily cycle low on Monday. Now that I am convinced the manipulation is back in control of this market I just can’t trust anything to happen naturally. Heck they already broke the natural daily cycle low that occurred last Thursday and have stretched this cycle way past its normal duration. There’s no telling how long they can make this cycle stretch. $1280 is a logical support zone but they may very well break that just to take out all of the buyers that will likely come in at that level. And while the miners did bounce on Thursday and Friday signaling a possible impending cycle bottom, it’s also conceivable that the bounce over the last two days is nothing more than an oversold bear flag that will breakdown quickly.
Despite the partial reversal in the GDX weekly candle, the big picture tells us the rest of the story. As you can see any time over the last year and a half that the miners have dropped below their 10 week moving average, especially if it occurs late in an intermediate cycle, it has almost always signaled that an intermediate degree decline has begun. So I wouldn’t get my hopes up that the banking cartel is going to release this market and a third daily cycle is going to recover to new highs. I think these guys are intent on pushing gold to $1050, and I think they probably have it set up to accomplish that this summer. Notice how the mining stocks are still making lower intermediate lows, and lower intermediate highs. The sector needed to move above last August’s high in order to confirm that the bear market was over, and the cartel aborted that move before it could happen.
Once gold does get a bounce out of the impending cycle low I intend on taking a large short position in mining stocks to play that move into the yearly cycle decline. For now though I continue to recommend staying on the sidelines in this market, and I would strongly discourage trying to catch the bounce out of the impending cycle low. We simply have no idea when the cartel is going to allow that to happen. It may start on Monday, or it may begin once gold tags $1280. Or the cartel could even drag gold all the way back to $1250 before they allow a short-term bottom to form and gold to generate a dead cat bounce.
Predicting where this market is going to go in the short term would require inside information as to the banking cartel's intentions next week. Unfortunately I doubt they are going to send us a memo on that. However I think we can probably assume that the third daily cycle once it rolls over, is going to be devastating to the precious metals market. And I expect we will also have a fourth daily cycle before the yearly cycle low is complete. That fourth daily cycle will probably take gold back down to $1050 and a final bear market bottom if the cartel has its way.
So while I know this is tough to hear, as most of you are gold bugs, I am confident that the banking cartel has a purpose, and that purpose is to set up what will probably be one of the most lucrative long side trades in the metals of this entire secular bull market. Our job right now is to be patient and wait for that yearly cycle low later this summer. I think that low is going to drop at least down to retest $1200, and if the cartel has its way, they will push gold back to $1050 before this is over.
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Toby Connor is the author of Gold Scents, a financial blog with a special emphasis on the gold secular bull market. Mr. Connor's analysis skill of the markets is largely self-taught, though he admits to being an avid reader of Richard Russell and Jim Rogers, among several others. Toby is an avid rock climber and world class weight lifter (for his age). Toby's premium service includes daily reports and an extensive weekend report.