First off let's go over the key cyclical points from today's action. Today gold broke above the cycle downtrend line, thus confirming August 7 as a daily cycle low.
Again I expect some short-term profit taking once gold reaches the previous high of $1348. This is the most likely resistance level for day traders and short-term traders to take profits. It's also the level that should deliver the most bang for the buck for options expiration manipulation to begin. So I continue to think we are going to see some kind of minor pullback between now and Friday. At this point I don't believe that pullback is going to succeed in pushing gold below $1300. This is going to be a "buying opportunity". It's going to be a tough opportunity to seize because it's going to appear like the bears are back in control of the market. But as I will explain later, I think it will just be one of many short-term manipulation events to allow big-money high-volume entries into the gold market.
For those of you waiting for a breach of $1425 before re-entering, the confirmed daily cycle low has now revealed a lower price target. Gold no longer has to move above $1425 in order to make a higher high. Now it only has to move above the recent daily cycle top at $1348 to initiate a new pattern of higher highs and higher lows.
That being said, you don't have to wait for gold to move above $1348. Now that we have a confirmed daily cycle low on August 7th you can enter full positions at any time with a hard stop below the August 7th intra-day low of $1272. If that level is breached it would signal that the daily cycle has failed and the intermediate cycle has rolled over and is again in decline.
Now I want to discuss what I believe was the motivation for the bear raid that the metals have undergone over the last eight months.
At first I thought it was solely about pushing physical gold back into the market, and to move that physical gold from west to east. Let's face it, anyone with half a brain understands that global QE is going to end badly, and countries are going to need physical supplies of gold to eventually back their currencies. I'm absolutely sure that Germany, China, and Russia understand what is coming. So I think the initial manipulation after the QE4 announcement was mostly about driving physical gold back into the market.
In the chart below I have indicated the highly unlikely series of events that followed Bernanke's QE 4 announcement at the December FOMC meeting. To start with gold was driven back below the key psychological $1700 level during an unnaturally high volume hit in the middle of the night. No normal trader seeking to maximize returns would dump that kind of volume in the thin overnight market.
Equally strange was the intense selling pressure that would emerge any time gold approached that $1700 level over the next two months. The fact that the dollar was moving down into an intermediate bottom during this period makes it even more unlikely this was a natural move.
The next event, and a personal highlight, was Goldman Sachs coming out with a public recommendation to sell gold short the day before the stops were run below $1520. Since when has Goldman Sachs ever been interested in making the public money? It seems much more likely that Goldman Sachs traders were already short the gold market and were looking to juice the downside as they already knew a stop run was coming.
Again the hit came with a massive futures dump, the equivalent of 500 tons of gold, in the thin premarket trading where it would have the most damaging effect.
Then in late May and early June it was called to my attention that unusually large positions were being accumulated in GDX June expiration puts. At this point it wasn't surprising that gold was repeatedly prevented from closing, and holding above $1400 and miraculously by the June expiration gold had collapsed by another $125 sending all of those puts deep into the money. Coincidence? I hardly think so.
Now let's assume that I'm not the only one that understands that global QE is going to have serious consequences down the road, and that those consequences are going to drive, at the very least, another large leg up in the secular gold bull market, if not the bubble phase. Let's also assume that there are at least a few traders that are not only blessed with common sense, but also with the means to temporarily influence market direction, especially in thinly traded markets like gold and silver (I suspect it's considerably more than a few, and I think we can be pretty confident in assuming that most of the big banks are included in this group).
So for the moment let's just assume that the last freely traded intermediate cycle low (bottomed in November) had been allowed to function as the springboard for what should have been another normal C-wave advance as QE ∞ got underway. Based on what transpired during the last C-wave, we would probably have seen gold rally over the next two years to somewhere around $3000-$3200. Roughly a 100% gain from the October low of $1675.
But let's assume that we aren't the only ones that recognize QE ∞ is going to eventually drive another huge leg up in the secular gold bull. Let's also assume that these big players have the means to create a bear raid in the sector and push price to artificially lower levels.
Assuming that the eventual end game is that same $3200, look what a bear raid does to ones profit potential if you know the raid is coming, and can enter close to the bottom. Instead of a 100% gain you are now looking at a 200% gain. And that's not including any profits one might make by participating in the raid on the short side.
Next look at the massively increased profit potential that has been generated in the mining sector by this same bear raid.
I think we can expect continued small manipulations from time to time to manufacture minor sell offs and artificial daily cycle bottoms, similar to what happened last week with the Tuesday take down that stretched the daily cycle and temporarily drove gold back below $1300.
In fact I think we are probably going to experience some kind of manipulation this week as we move towards options expiration. But from now on I think these will just be brief to tangle cycle counts, or run short term stops, and allow big money insiders slightly better entries. The major manipulation is complete. It has accomplished it's goal.
In my opinion, the last eight months had nothing to do with the Fed trying to suppress the price of gold, and only a little bit to do with moving physical metal from west to east. As usual this was mostly about big-money insiders manipulating the market to generate maximum profit potential during the next leg of the secular bull market (which in my opinion will probably turn out to be the bubble phase of the bull market). They've managed to lower the starting point considerably below the natural bottom in October of $1675. The bear raid has massively increased the upside percentage potential during the next leg of the bull market, along with generating some pretty decent short side gains as they set up what I expect will be the trade of the decade.