Why I’m desperate to place a huge bet on gold
Dominic Frisby Nov 07, 2012
I don't like spreadbetting or contracts for difference (CFDs). I appreciate that you can make a lot of money if you get the call right. But I don't have the temperament for them.
Once I make a bet on something, even if it's a tiny position, I find it very hard to concentrate on anything else. I have to keep following the progress of the bet. I'm constantly checking my phone or logging into the spreadbetting website to see the latest prices, when I should be doing something more productive.
But this week I am very close to doing something I haven't done in a long time.
And that's placing a massive bet on gold…
Gold is nearing the end of its latest consolidation phase
Let me start by reminding you of my ongoing, big picture theory on gold.
I've been saying since September 2011 that gold is in a consolidation phase. That phase would last at least a year, I said, and we wouldn't see new highs until autumn-winter 2012 at the earliest.
I base this theory on a repeating pattern that gold has followed since this bull market began around the turn of the century. Gold tends to make a move up, which might last several months. It then enters a phase of consolidation. The magnitude of this consolidation phase tends to reflect the previous move up.
This phase usually begins with a nasty correction - think September 2011, March 2008, May 2006. Gold then trades sideways with a slightly upward bias. It eventually re-tests the old high and - after a few attempts – goes through it.
Gold enjoyed a long and protracted move up which ended in blow-off fashion in September last year, when it peaked at $1,920 an ounce. You can get all academic about it, and argue that the move began in November 2008, in February 2010, or February 2011. But none of this changes the fact that the move was big. Therefore the consolidation would be big - at least a year, probably longer.
In the chart below, I point out the more obvious phases of consolidation since 2001.
I'm of the mind now that the current period of consolidation is coming to a close. First, we have meandered for over a year - we've done our time. Second, gold is playing out according to its typical seasonal pattern. I said a few weeks back, when gold was at $1,750, that $1,700 wouldn't hold, but that we would find support in the mid- to high-$1,600s.
That's what has happened and, so far, support has held. These corrections always seem to happen in October. It is a bad month for gold. November, however, is a good month.
In this next chart, I show the seasonal patterns of gold based on its action over the last 30 years (thanks to Dimitri Speck of seasonalcharts.com).
And here, I show gold's action so far this year.
You can see how January, February and March are virtual replicas. April and May - normally good months for gold - were down months this year. But since the June correction, gold has mapped out the seasonal patterns - we had a strong July, August and September, and a horrid October. The set-up is for a strong November, typically one of the best months of the year for gold. Any such rally would likely have us flirting with the $1,800 mark again.
I also showed a few weeks back how gold - and particularly gold stocks - do very well in the year following an election in the US. Gold made a major low at just below $700, a week after Barack Obama was elected in November 2008. It hasn't looked back since. The gain is about 240%.
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Why gold bugs should be rooting for Obama
Obama has now won a second term. But I had noticed a lot of gold bugs cheering on Mitt Romney. I can't understand why. Gold likes the Democrats.
The chart below was created by Jan Skoyles of the Real Asset Company. It shows the change in gold price during presidential terms since Richard Nixon’s time. The average is for a 358% gain under a Democrat president. I guess it's all the deficit spending. A 358% move from here would take us over $6,000.
Here’s to Obama, that's all I can say.
It gets better. The chart below shows the relative performance of gold during first presidential terms and second presidential terms since Ronald Reagan was in charge. The tendency is for gold to outperform during a second term. A 240% gain during Obama's first term - what's in store this time around?
The fundamentals for gold are strong, we all know that. The long-term consolidation pattern looks good. The seasonals are right. The election cycle is right. Finally, the technicals look good.
On the chart above, the blue trend line (which I have drawn off the 2008 lows), looks like a strong line of support. In addition, the two moving averages I have drawn - the 144-day in green and the 252 (1 year) in yellow - should also be supportive. They have been in the past.
I have also circled gold's recent lows in red. You can see there is a tendency for a "spike low" - which is just the kind of low we saw on Friday.
All in all it looks very bullish. Of course, that in itself might be a bad sign. Perhaps there are too many investors looking for a post-election rally. The COT report - which shows the commitments of traders on the futures exchanges - is not particularly bullish either.
But, even so, I think we're getting ready for one of gold's big moves. I'm hoping for new highs by next spring. You can see why I am so tempted to place a massive, leveraged bet. Somehow I need to find the will-power to ignore the lure of those flashing numbers.
• This article is taken from the free investment email Money Morning.
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