Bill Cara: Extreme volatility in the copper and gold markets, Mon., Dec. 12, 2005, 1:53 PM

« Is gold just a stalking horse?, Mon., Dec. 12, 2005, 12:18 PM | Main | Research In Motion to be discussed, Mon., Dec. 12, 2005, 4:54 PM »

December 12, 2005

Extreme volatility in the copper and gold markets, Mon., Dec. 12, 2005, 1:53 PM

Early this morning, the Asia Pacific metals markets were very hot. I called them red hot. Suddenly when America woke up on the East Coast, copper turned south. Gold too, for a while, before rallying. Then, just like copper, the gold price caved.

Here are the charts for copper with the overlay (in blue) of Phelps Dodge (NYSE: PD), and then below that is the chart of Gold with the overlay (in blue) of Newmont (NYSE: NEM).

The metal futures turned down first and then the stocks. The trading was extreme. Traders are nervous, and with the FOMC to report tomorrow, they ought to be. There will be a lot of spin from the talking heads immediately prior to and following the release of the Fed report. Then depending on which direction the TH community wants this equity market to go, I expect the hype to become extreme.

Obviously I think they want to take the market up, and would prefer to do the launch from an over-sold condition, which seems to be the way the Dow is going today, and without the specter of rocketing metals prices, which would lead to counter-attacks by bears who believe that high commodity prices are and for financials and tech stocks the bulls need to push the rally further. So this is a classic struggle.

That's fine by me. I just wish I had been watching more closely to report to readers what was going down this morning. However, there is only so much time, and part of mine was spent learning how to produce better digital photos, which I have done below.

I went back to a few shots I took this month and recaptured them in jpg format. It doubles the bytes required to save the file, but the clearer photo is worth it.

Now that is an attitude adjustment.

Do I think that gold and copper will trade higher? The answer is yes. The prices will likely be choppy through into Wednesday, but by the end of the week I think they will be higher.

I suspect that the FOMC may infer they are nearing the end of the 13 rate hikes. That will take equity prices higher, in particular, the metal miners like PD and NEM. So I think any pull-back here is a buying opportunity. Should the USD go into a bear phase any time now (it may already have started), then the metals will boom.

Sector rotation students are aware that the typical ending of secular bull markets in equities is when metal prices collapse. After that, interest rates will fall, and then the financials, consumers, and techs, will typically lead the market back higher in the next bull market.

Posted by Posted by Bill Cara on December 12, 2005 01:53:30 PM | Category: 15 Materials , Bullion , Gold , Goldminer Producers

Discourse

Bill,
The metal stocks sure feel like they did the week before options expiration last month--extremely heavy in the beginning of the week. During the first 2 days of that week, if I recall correctly, the XAU dropped about 4%, bottomed and by the end of the week was up a like amount. You then put out a weekend piece that guaranteed a strong Monday for gold stocks. That call was very prescient. While I don't remember you divulging the basis for that call, I assume it had something to do with trapped options players. Do you think we see a similar scenario unfolding this week? I appreciate your thoughts.
Regards,
Josh

Posted by: josh at December 12, 2005 2:19 PM [link]

Frank Barbera, a gold bull and technical analyst, discusses in detail the possibility that "a sizeable correction in Gold and Gold Stocks lies directly ahead" in his Dec.12 editorial at Financial Sense online http://financialsense.com/editorials/barbera/2005/1212.html

He writes:

"In summary, I expect a medium-term correction to begin at once in Gold with a corrective target most likely in the $470 area over the next two to three months. Under that outcome, if Gold can hold $470 support, then the argument will remain for a very strong year to the upside in 2006. However, there is some risk that the current peak could be more substantial than we currently believe and any move below $470 in coming weeks would argue for a more extended correction. Under this outcome, the downside action in Gold could persist into late 2006 and see Gold prices decline as far down as $410 to $420. While I believe this is the less likely outcome, an alternate count if you will, it is worth mentioning because some of the technical extremes, which we are seeing in this market right now are so off-the-scale that that the top in Gold could turn out to be more important than I would have imagined."

His views are worth considering as he accurately called a bottom on gold stocks in May within a few days of the actual low, see his May 19th article at http://financialsense.com/editorials/barbera/2005/0519.html

Posted by: bytime at December 12, 2005 10:36 PM [link]

bytime/others-
I don't think Bill or the others who hang out here would be surprised at a correction here or in the near future. What goes up.... Stockman and others have been advising great care in the general market as well. Spring is usually the most logical time to see this decline but this feverishness makes things a little more dicey.

I do think however that Barbera's technical analysis is worth a look and I appreciate the complete view he gives using various measures. I believe he also subscribes to Elliott Wave theory so Bill will discount that aspect of his analysis. But generally yes things have gone parabolic and that doesn't last forever. Taking some off the table can't be criticized or even removing all if very nervous. The shorters have more chutzpah than I however.

Posted by: MarkM at December 13, 2005 8:54 AM [link]