Market Inconsistencies
In Futures Market Forecaster, I recommended a long position in August gold on June 9 at $426.20, and we sold at $441.00 on June 24 for a gross profit of $1,480.00 per contract traded. I’ve since been asked why I recommended taking profits in this position.
I like the gold market–technically and fundamentally–for the long term for a number of reasons. I anticipate an eventual repeat of what happened in the 1970s; crude oil increased five-fold from $2.20 a barrel in 1971 to $11.50 a barrel in 1974, and gold also increased five-fold, from $35 an ounce to $180, in the same period. Since the 2001 lows, crude oil has quadrupled, while gold has moved in the same direction but at a slower pace. From the 2001 low around $250, gold has not quite doubled.
The per-ounce price of gold has a long way to go and the trend remains up; open interest (the number of outstanding contracts) continues to increase, also with a lot of room to climb. This is bullish.
So why did I recommend liquidating the position?
August Gold
One of the reasons for my buy signal on June 9 was the fact that gold began to rally while the dollar started to firm up versus the euro. The price of gold and the dollar typically move in opposite directions because gold is seen as a “safe haven” investment in uncertain times. The fact that gold was strengthening with a strengthening dollar was a leading indicator that gold prices were ready to surge.
September Euro
On Friday and again today, I’ve observed the opposite dynamic. In other words, the dollar has started to weaken versus the euro, yet gold has refused to move higher. I look at this as a potential leading indicator that gold prices are a bit tired–with the Relative Strength Indicator (RSI) for gold in overbought territory, a correction would not be out of the question. The euro bounce could certainly be of the dead-cat variety, and if gold merely moves sideways in the coming week or two this will alleviate the overbought RSI. This would be quite bullish. However, “When in doubt, get out” is a tried and true trading adage to which I subscribe. We can always get back in when the doubt is erased.
While on the topic of inconsistencies, here’s another.
November Soybeans
On Friday, November soybeans closed at a new contract high, yet open interest (OI) dropped by 5,000. This is a potential danger signal. According to Open Interest Rule #3 from my book Trading Commodities and Financial Futures: A Step by Step Guide to Mastering the Markets, “If prices are in an uptrend and OI is falling, this is a bearish sign. The old longs, the ‘smart money’ (after all they have been right to this point), are taking profits; they’re liquidating. They are replaced to some extent by new buyers who will not be as strong on balance, but the declining OI is an indication the weak shorts also are bailing. They will be replaced to an extent by new shorts who are stronger than the old shorts were.”
When in doubt, it’s better to get out. We can always get back in.
Finally, at the end of this week we’ll have a new “voice from the tomb” (VFTT) signal in the wheat market. VFTT has been perfect this year: three profits in the last three trades, and six in the last seven trades. The details of this program are provided in a special report available for new Futures Market Forecaster subscribers. If you’d like to learn more about Futures Market Forecaster please click here or visit http://www.futuresmarketforecaster.com.
George Kleinman is editor of Commodities Trends.
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