Q: I understand why you don’t make predictions: it is unnecessary and ineffective. You only need to know that the low for the gold market happened when it happens. And, you don’t want to divide your attention unnecessarily as that decreases the quality of your analysis. These are all very good reasons. However, you have expressed probabilities in percentage rates. Could you do so now for the probability of reaching the low in the next few months?
A: Yes. It is 80% within the next 3 months and better than 50% within the next month.
Q: If it’s that close, perhaps I should start positioning my exposure to the gold market now?
A: If you’re an investment bank managing a large portfolio, it would be prudent to start a dollar cost averaging buy program for gold and silver shares now.
Q: Do you recommend that I do that?
A: No. This blog is not intended for investment advice. The subject here is speculation.
Q: Do you see any signs that we’re getting closer to the completion of an ending wave pattern in the gold shares?
A: Yes. Take a look at the Gold Bugs Index (symbol HUI) weekly chart for the last two years. This index appears to have the formation of a diagonal closing triangle made up of five waves, each dividing into three ABC waves. I count the last three weeks as a final C of the 5th wave starting from, at this point, almost two years ago. However, three weeks, in my opinion, is too short; it needs more time to complete. But wave counts are not by themselves predictive. In time, the entire pattern could form a double zig zag. If we were to complete the triangle pattern and get the specialist short covering, I would call the low.
Q: Do you see any signs of specialist short covering now?
A: It may have already happened with ABX. The stock has been basing over its low now for five months while bullion has made new lows. There isn’t just one specialist on one exchange with one order book making the market. There are numerous specialists on multiple exchanges.
Q: The gold market breaks down into many different segments. Does this help analysis?
A: It’s a fact, so it needs to be taken into consideration. We know that, as a rule, less sophisticated investors – working class investors – buy the riskiest segment; the weaker hands buy more junior silver mining shares; and upper class investors, the strong hands, buy more gold bullion. So at a bottom, we should expect the junior silver miners to be sold down while bullion holds steady. That’s happening now. Market segmentation gives us more ways to check for specialist short covering. The difference in segments and timing between lower, middle, and upper class financial activity is inherent in human action. It conforms to knowable economic law that doesn’t change with time and can therefore be a reliable predictor.
Q: Any other observations?
A: If, using the 2 year chart, you do an overlay of SILJ with GLD, you will see that the last month price action is the only month out of 24 that the junior silver miners have been going in a clearly opposite direction to gold bullion. In market segment terms that means that, in the precious metals market, for the last month, the working class has been selling and the middle and upper-class have been buying. Interesting no?