Q: What effect will the recent devaluation on the Chinese Yuan have on the price of gold? I expect that since the USD increased in value relative to the Yuan that it would be bad for the price of gold in USD terms. Am I thinking correctly?
A: The devaluation is of no predictive value. It changed the relationships of currencies on the day of the devaluation. That is now a given. It will have no future influence. It is never the event but the human reaction to the event that will determine future effects. This is a subtle but critical distinction. This rule is a corollary to the principal that all value is subjective. In the strictest sense fundamentals are irrelevant. It is the human subjective reaction to the fundamentals that determines the course of future price action. Contrary to your expectation, the USD price of gold rose upon the devaluation of the Yuan.
Q: Could you give us an update on timing the bottom in the gold market.
A: Sure, but nothing new yet. I stand by my prior comments. We have not yet had a chart pattern that would indicate the bear market in gold is over in USD terms. Nor have we had the erratic trading we normally have at major market turns. The sentiment indictors are at all-time lows. We are getting close but not yet.
Q: What can you say about how you would call the low in the gold market? I am not asking you to give away any secrets but would appreciate anything you can do to add to my understanding.
A: There are no secrets to keep. The bottom will happen when the subjective expectation of the market participants changes from a negative to a positive expectation about future prices for gold and gold shares. The prices will be bid up to the expected future prices less the cost to carry. The difficulty is in how to measure the subjective mental states of the market players. This is impossible to measure except with ordinal numbers. No mathematical computation such as adding, subtracting, dividing or multiplying is possible because all you can determine objectively is that A is preferred over B. There is no way to measure the distance between A and B. This is why your entire Keynesian macroeconomic forecast, which relies on mathematical computations, is a complete waste of time. The central bankers that rely on these forecasts almost always get it wrong. Man is not a Pavlovian dog whose future conduct can be predicted based on a stimulus response formula. What you can securely predict is that all who rely on these forecasts will get it wrong. That means you now know that about 97% of what is written and relied upon will be wrong. That is saying a lot. It only leaves you with 3% that you need to figure out.
Q: Can you enlighten me on the 3%?
A: I have four criteria that I use and I do not rely only on my own judgement. I have help. One criterion I have discussed before: wave count. This is very subjective and has no predictive value standing alone. Another is sentiment indicators and it also cannot be used in isolation as sentiment can get and stay worse longer than you can stay solvent. The third criteria is when there are no more stop loss sell orders for the specialist to pick up by dropping the price. This requires you to have good information concerning the specialists’ order books. This was easy, for the specialist, when all trades went through one specialist on one exchange. It requires a lot more work now. The fourth criterion is a basic economic A over B or B over A ordinal number analysis. Since 2008, investors have been investing into the general market shares. They have preferred the S&P 500 over gold shares. When that switches decisively we will be able to confirm the bottom in gold. This is a lagging indicator. If you can get all four about right, you might be able to pick the week of the low.