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A sovereign debt crisis Is brewing

The western financial system appears to be destined for a financial crisis of epic proportions.  The governments of Europe, Japan, and the United States have become flooded with debt, and these debts levels continue to rise to more unmanageable levels every single day.   The United States has incurred over $18 Trillion dollars of debt. If one considers future unfunded liabilities such as Medi-care, Social Security, and a vast assortment of entitlements promised to American citizens, then the number owed by the U.S. Federal Government is well over $100 Trillion.  With this is mind, a sensible person must begin to question: What is the viability of this amount of money every being successfully and honestly repaid?  Furthermore, contemplating the viability of a successful debt repayment against the backdrop of relentlessly unsuccessful sovereign debt negotiations in Europe should leave a person with a pretty concrete conclusion:  Western governments are going to drown in the sea of debt they have accumulated.

One of the greatest ironies that exists in the financial arena is the fact that the yield on U.S. treasury bonds are often referred to as the “riskless rate” or “risk-free” rate of return.  What makes this terminology so ironic is that that virtually every single government in the history of the world has defaulted on their debt.  There are very few exceptions. More specifically, from our preliminary research, GFC has identified a cyclical pattern of sovereign defaults that occur globally every 70-90 years on a large scale.  It should be noted that during WWII, almost all the industrialized nations of the world defaulted or came dangerous close to default.  This led to the creation of the Bretton Woods monetary system in 1944 where the United States assumed the leading role of managing the reserve currency of world.  That was 71 years ago,  and despite a clear history of cyclical defaults, financial professionals look at yields trading in the U.S. Treasury bond market and refer to them as “risk-free” implying there is absolutely zero risk of default.

Proponents of today’s sovereign debt levels contest that everything is manageable because we’ve successfully managed similar debt levels before.  It is true that during WWII, the last time the U.S. came dangerous close to default, the United States debt-to-GDP ratio exceeded 100% as it does today.   However, there were some stark fundamental differences between the debt accumulated during WWII and debt the U.S. government is on the hook for today.  GFC believes it would be beneficial to highlight these differences to the reader who may be unaware.  The differences are as follows:

  1. The debt sold by the U.S. Treasury department in the 1940s was predominantly sold to American citizens in order to finance and win the war. During the war the Treasury developed an incessant marketing campaign directed towards Mom and Pop investors urging them to buy war bonds.  Many patriotic Americans bought as many war bonds as they could afford in order to help do their part in financing the great conflict.  Today, very little of U.S. debt is held by average American investors.  Instead, much of the debt has been sold to foreign central banks, financial institutions, and foreign government creditors.  Therefore it is equally important to understand that the interest expense that is being paid on today’s $18 Trillion of debt is not necessarily being recycled into the American economy the way it was after the conclusion of the war, but rather the interest coupons are being exported out of the American economy. The debt used to finance WWII literally paid dividends stimulated the American economy until the 1970s as Americans collected a stable interest check for 30 years and were able to reinvest that money back into the American economy in whatever way they chose.
  2. The maturity duration of the bonds sold to finance WWII was long-term paper, generally close to 30-years which provided a great deal of stability for the Treasury. Today, much of the U.S. debt has been continually rolled over into shorter and shorter durations at lower and lower interest rates to where today the vast majority of U.S. debt resides beneath the 7-year mark on the yield curve.  This makes the debt we are carrying inherently unstable and highly sensitive to a change in interest rates.   If interest rates were to rise significantly, the Treasury would have to roll over a disproportionate share of the total debt in a relatively short amount of time which would drastically raise the cost of financing the existing debt.    To put that into perspective, it could be argue that today’s U.S. treasury debt is tantamount to the mother of all adjustable-rate-mortgages.
  3. The debt accumulated in the 1940s and the debt accumulated in the last 30 years were put to use in remarkably different ways. To win the war the U.S. invested heavily in industrial capacity, which later after the war was converted to commercial use. The U.S. became the largest producer in the world and subsequently became the largest exporter of manufactured products in the world.  The trade surplus achieved after the war undoubtedly helped reduce the national debt.   Today, the majority of the debt has gone to finance government largess, undeserving corporate bank bailouts, and general economic consumption.  The manufacturing capability of the U.S. economy today is a shell of its former self.  Service sector jobs now define the U.S. economy as the trade deficit continues to widen. The United States today has extremely little to show for all the debt that has been borrowed.

Even with interest rates near historic lows, the U.S. Treasury still paid $230 billion dollars in interest expense to foreign creditors last year, which represented just the annual burden of carrying this monstrous amount of debt. In reality, that $230 billion is the annual bill that the American tax-payer had to cough up in order to pay for fiscal profligacy in Washington.   If the 30+ year trend in bonds ever reverses course, the annual interest expense for American tax-payers will definitely get a lot bigger.  The baby-boomer generation collectively entering retirement represents a tectonic shift in the relationship between Washington and its historic tax-base.  The boomers are in the beginning stages of transferring from productively employed members of society who pay income taxes, to people who are retired, pay no income tax, collect social security, and now healthcare benefits from the federal government.  In short, America’s largest demographic asset is in the early stages of transforming into a massive liability on Uncle Sam’s balance sheet.  The implications of this for the Treasury bond market are utterly disastrous as this will be occurring on top of an already over-indebted fiscal situation.  The politicians in Washington will soon be facing a nearly unsolvable challenge where kicking the proverbial can down the road will no longer be an option.

One well known economist who has impressively tracked the evolution of this crisis in detail is Martin Armstrong.  Armstrong is famous for building proprietary computer software based off the number pi which is allegedly capable of tracking global capital flows in real time.   The defining aspect of his computer model that it is widely regarded as superior to other economic forecasting models in its ability to incorporate historic market cycles and then make market timing forecasts to a precise degree.   Recently (for at least the past 5 years) Martin Armstrong’s economic confidence model has been highlighting the date of September 30th, 2015 (or 2015.75 as his model says) as being of extreme importance for the global economy.   Martin himself seems to think this could represent the high in sentiment in sovereign debt markets and sentiment shifts away from public assets to private.  We at GFC find this date to be extremely intriguing to say the least. Armstrong believes this time period could represent when the change in trend pertaining to global bond yields is likely to occur.  We thought it would at least be beneficial for our readers to be aware of this date so they have the opportunity to monitor sovereign debt markets closely as the date approaches.  If Armstrong is correct, being short sovereign debt is likely to be a very prosperous proposition in the years ahead.  A financial crisis of epic proportions is undoubtedly brewing in global bond markets. The only question is: when will all this debt spiral out of control?

Positioning for (intermediate-term) dollar weakness

By now, almost everyone throughout the financial landscape is aware of the relentless rally in the dollar that has been taking place since early May of last year. During the past 10 months the US Dollar Index rallied from 79 to over 100! To help put that into perspective that’s an increase in the value of the dollar of over 25% in less than one year. The dollar strength that we at GFC have been witnessing over the past year has truly been remarkable. Recently however, technical developments are indicating a higher probability of the dollar taking time to catch its breath before the bull-trend in the buck is ready to fully resume.

As you can see in the chart below. The dollar spent the month February in a consolidating triangle pattern. It broke topside out of this patter in early March to close over the 100 level for the first time since April of 2003, the highest the index had been in almost 12 years. It was indeed a major accomplishment for “King Dollar”. An important guideline to remember in Elliott Wave Theory is that thrusts from triangles are often terminal, and the subsequent bearish price action since the dollar reached the 100 level has reinforced this belief held by Elliotticians. We at GFC are expecting additional dollar weakness to resume over the next 3-4 weeks with the 94.00 area as an initial downside target with additional dollar weakness possible.

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Recently, GFC has been monitoring bullish developments within the precious metals markets, particularly in gold and silver.   Admittedly, both gold and silver have lost a lot of their luster as they have each experienced a continuous bear market since late 2011. Both markets saw re-tests of their previous lows in March and have each subsequently staged nice rallies against the backdrop of the aforementioned dollar weakness.  Sentiment towards gold and silver remains at a bearish extremes with very few people expecting gold to rally.

Taking a closer look at gold, we can see that prices successfully tested gold’s previous low around $1,141 from back in early December.  It then rallied strongly up to $1,219, experienced a 50% pullback, and resumed its bull-trend with conviction yesterday.  Gold seems to be tracing out a corrective Elliott wave pattern known as a flat correction. Flat corrections are A-B-C patterns that have internal wave counts of 3-3-5.  We have labeled the chart accordingly to help readers visualize the pattern.  Sections A, and B, are miniature a-b-c structures with wave C developing into a traditional impulsive 5-wave Elliott wave sequence.  We are expecting gold to make a sharp run towards the wave A high of $1307 an ounce in the weeks ahead.  How prices behave in this target area will help determine any additional bullish potential for gold.  (Please be aware that the bullish setup and price pattern in Silver is strikingly similar) Dollar weakness should play a contributing role to the rise of both of these metals in April.

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Oil is a commodity which, relative to last year’s dramatic price decline, has stubbornly stabilized over the last 3 months.  As you can see from the chart below, the trajectory of oil’s drop since early January has noticeably slowed.  Similar to gold and silver, oil displays a strong bullish engulfing candlestick pattern from around the 50% retracement level of its most recent rise.  Additionally, notice the volume earlier this week as the volume contracted during the 3 day retracement and seems to have resumed yesterday despite it being a light trading week because of the Easter holiday.  Negative sentiment regarding oil is at an extreme.  With most trend following traders and hedge-funds having shorted oil, it seems as though we could see a sizable short-covering induced rally.

The financial press has been quick to rationalize a continued decline in oil.  Particularly, the Wall Street Journal has been running front-page stories about the pending Iranian-nuclear deal which would reduce economic sanctions and enable Iran to sell significant amounts of oil to the world.  If this were to occur, it would add to an already overwhelming oil supply surplus.  Astute market observers should be able to look at the recent price action and conclude that the potential of additional barrels of Iranian oil being brought to market is already fully priced in to the market.   Therefore, any fundamental news related to the delay, or potential cancelation of this agreement should talks dematerialize, will likely produce a bullish reaction in oil prices.  Just today, we saw that the deal is likely to be delayed further into the future as U.S. Secretary of State John Kerry extended the duration of his stay in Switzerland with tired hopes of being able to reach a deal.  The oil market traded today as though the deal will fail or at least be delayed.  A weakening dollar is also likely to contribute to a rise in oil prices.  GFC maintains its previous cited price target above $58.

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One industry that is projected (almost universally) to reap significant benefits from depressed oil prices is the aviation sector.  Our curiosity regarding this widely held belief led us to conduct a stock screening of some of the leading domestic airline stocks. One stock that captivated our attention by appearing particularly vulnerable at this point in time is Delta Airlines, Ticker Symbol: DAL.   As you can see in this chart, Delta has been consolidating from its highs having used the $43 area as support multiple times.  Each time Delta’s stock price touches this area it becomes more and more likely to break.  Additionally, Delta has two gaps sticking out like sore thumbs waiting to be filled beneath this support area.  Finally the high volume swing point from the middle of October last year around $30 is likely to get tested eventually.  High volume swing points such as these tend to get tested eventually. They act as a magnet for the market to revisit over time.   It is GFC’s strongly held belief that DAL is likely to come under considerable selling pressure if/when prices close substantially below the $43 area.  Additionally, the intermediate bounce in oil we are forecasting isn’t likely to provide shareholders of DAL any favors.  GFC recommends shorting DAL with an initially price target of $36 with a stop loss at $46 (further bearish potential exists).  At this time we recommend investors positions themselves for the overall effects of dollar weakness and adjust their portfolios accordingly over the intermediate-term.

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January 2015 Market Recap

Significant volatility characterized the first month of the year as financial markets displayed significant instability across a broad spectrum of asset classes.  The decline in commodities has been relentless, specifically in oil.   After observing the decline in commodity prices, GFC must conclude that the specter of global deflation is becoming a reality.  Additionally, the month of January witnessed extreme volatility in the foreign exchange market as many different currencies underwent severe price fluctuations; most notably the Swiss Franc as the SNB severed it’s peg to the Euro.  Furthermore, interest rates around the world continued to grind lower with some even going negative!  U.S. equities faced strong headwinds this month as multinational corporate companies had to account for an exceptionally strong dollar as they repatriated capital earned overseas.  With so many economic indicators (particularly in Europe) signaling economic contraction, GFC considers it best to limit risk exposure at this time.

The dollar surged higher than we originally expected last month.  We currently view the US Dollar Index as overbought and are expecting a correction to imminently occur.  Additionally, our bullish stance on gold remains intact.  Gold has displayed extremely favorable price action in the face of a strong dollar.  We believe that when the dollar starts to correctively weaken, it should help sustain gold’s current countertrend bounce.  On Thursday of this past week, Gold spiked down $30 only to see the move almost fully retraced on Friday.   The spike down was a mean reversion move to the middle Bollinger band (20) line and also represented a test of the 200-day moving average.  The price action on Friday saw gold move swiftly higher.  GFC is expecting to see gold push higher above $1300 to the cited target range depicted on the chart.  We will keep you abreast of any significant developments related to this forecast.

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Finally, GFC is proud to report that on 29 Jan 2015, our proprietary Crude Contango Index indicator appears to have successfully triggered a buy signal in crude oil.  We subsequently entered into a long position inside our proprietary trading portfolio.  On that day, the Crude Contango Index spiked to a level of $18.33 which implies that banks are keeping oil stored on shipping vessels because they are hoping and waiting to sell at a higher price in the future.  So far, our long position has performed VERY well.  Friday’s price action saw a 7% increase in the price of crude oil.  The decline had become oversold and the RSI was displaying a bullish divergence.  Since the “short oil” trade has become so crowded in recent weeks, GFC expects a classic short squeeze to occur over the coming weeks.  As shorts unwind their positions by covering and taking profit, we expect oil to rebound rather sharply.  The initial target in our intermediate term long position is $51, followed by $59.  Longer term we expect oil to continue its trajectory lower to below $30 an ounce.  The low price of oil is undoubtedly going to have a negative effect on the North American labor force as mass layoffs are just starting to be announced.  Most of the job losses relating to this massive shift in oil prices are likely to be high quality, high paying, middle-class jobs.  Losing these types of productive jobs will be very detrimental to the economy overall, and independently, it will represent yet another notable aspect of the American economy failing to achieve economic viability.

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On the collapse of oil

Speculation regarding the price of oil has been the #1 topic of discussion within financial circles over the past few weeks, and for good reason! Since June of this past summer, the price of West Texas Intermediate Crude Oil crashed just over $107 to $53.60. Oil has experienced a monstrous 50% drop in less than six months! A price drop of this magnitude, especially when occurring in a commodity with such a global importance as oil, is intriguing to say the least. Moreover, drops like these leave many market participants asking hard to answer questions such as “What is causing the price of oil to fall so dramatically?” “How come nobody predicted this?” and “How much further will the price of oil fall?” The goal of this article will be to provide reasonable explanations to all of these questions, and more.

Question #1).  What is causing the price of oil to fall so dramatically?

There are a wide variety of fundamental reasons used to explain why the price of oil has fallen so relentlessly. A few of these explanations hold more credence than others and we will highlight them now. One justification has to do with America’s own oil boom. The Shale oil production in the United States has reportedly grown by 4 million barrels per day (mbpd) since 2008. This has allowed the U.S. to drastically cut its imports from OPEC which has led to OPEC losing considerable revenue and market share. Recently, the Kingdom of Saudi Arabia’s oil minister Ali-al-Naimi went on record saying “It is not in the interest of OPEC producers to cut their production, whatever the price is.” This is an interesting statement considering almost all of the OPEC countries have estimated break even oil price of $90-$120 to finance their 2014 government budgets. Today’s low oil price is undoubtedly negative for governmental finance of OPEC countries, so why is Saudi Arabia’s oil minister so averse to cutting oil production and limiting the market supply? The easiest to explain this is that 75% of the Shale Oil producers in the U.S. are only viable as long as the price of oil remains elevated above $55 a barrel. This means that almost all the oil drilling operations going on in the Bakken shale wells of North Dakota are flirting with economic disaster. As these U.S. shale producers face the challenge of financial viability, OPEC stands to gain back considerable market share as they are able to meet demand by selling cheap oil and still garner profit. This is the most popular fundamental storyline propagated by the media as it fits into a simple “Supply & Demand” storyline template.

More ominous explanations of why oil is falling have to do with realities that are far less palatable to the general public, but are probably much closer to the underlying truth. It is worth remembering that oil is often referred to as a political commodity. It is the one commodity in which many nations around world have staked their independence, wealth, and subsequent influence upon. These nations have come to be called Petro-States because their prosperity stems from the sale and exportation of petroleum. From this lens, it is easy to see how the price of oil can be the ideal tool of leverage (or economic war) when sorting out diplomatic differences with powerful petro-state nations; i.e. Russia. Switching to a macro-view of recent geopolitical developments, the ongoing economic sanctions against Russia over the annexation of Crimea has led to Russia being left economically isolated and more dependent than ever on its oil export revenues.

The recent drop in oil prices has effectively paralyzed the Russian economy and greatly reduced President Putin’s chips at the bargaining table. The US, EU, and NATO have all displayed immense public displeasure with Russia’s annexation of Crimea. Additionally, Saudi Arabia has been outspoken against Russia’s backing of Syrian President Bashar Al-Assad and is in favor of regime change. The Royal House of Saud views Russia as the only entity preventing Bashar Al-Assad from losing power in Syria. In light of these geopolitical circumstances, it is plausible to conclude that this drop in the price of oil represents a coordinated economic hit against Putin, in order to weaken Russia, and arrive at various desired foreign policy objectives.

Question #2) How come nobody predicted this?

You may remember that a year ago almost all Wall Street analysts had been forecasting a gradual increase in the price of oil for 2014. The prevailing rationale was that oil would be supported by ongoing global demand and that oil prices had reached a “New Normal” above $100 a barrel. The main reason Wall Street analysts could not predict a declining oil price is because to do so would be a complete anathema to the general ongoing “Global Recovery” consensus storyline. After all, how could oil fall this much if there truly was a global recovery inherently involving increasing demand for energy? This price drop caught most people off guard because the growing possibility of global deflation hasn’t yet been conceptualized by most economists and forecasters. So predicting a price drop of this extent and magnitude was not even on their radars.

Questions #3) How much further will the price of oil fall?

From both a technical and fundamental perspective, we at GFC believe oil has considerably further to fall. The current prospects for an OPEC cut in production look extremely grim. Again, here is another quote from Saudi Oil Minister Ali al-Naimi; “As a policy for OPEC, and I convinced OPEC of this, even Mr al-Badri (the OPEC Secretary General) is now convinced, it is not in the interest of OPEC producers to cut their production, whatever the price is, whether it goes to $20, $40, $50, $60, it is irrelevant.” So, there you have it from the world’s most powerful oil man, he fully intends to keep producing a lot of oil and seemingly doesn’t care about effect it might have on price.

Collaps of oil

From a Technical perspective, we can see that the price of oil broke a significant 5-year trend line in September and has been in a steep decline ever since. This portends an eventual retest of the 2008 low oil made at $33 a barrel after collapsing from $147. It is important to remember the last drastic collapse in oil prices preceded the worst financial crisis since the Great Depression. Does this decline carry similar implications? Time will tell.
This recent decline in oil has occurred with increasing volume and implies that $33 support level will give way new lows into the $20 handle in the future. If that decline unfolds, then it will be a mind blower to most market analysts. Indeed, it could be the beginning of the real “New Normal” landscape in commodities where global demand and subsequently prices remain suppressed for years to come.

Imminent top in the dollar

For anyone who’s been in possession of the world’s reserve currency, 2014 has been an awesome year!  Since bottoming out near the 79 handle in early May, the dollar has staged a relentless 8-month rally.  Some of the big fundamental storylines that contributed to the relentless surge in the US dollar index were weakening economic data from the Eurozone, the collapse of the Japanese Yen due to Japan’s extreme (and verifiably insane) monetary policies, and general geopolitical developments concerning regional instability in places like Ukraine and Iraq.  All of these precarious developments served to send capital from around the world rushing into the U.S. dollar due to its perceived status as a safe-haven.   Recently however, the dollar has been signaling that the strong bull trend that has characterized much of the past year is reaching a point of exhaustion.

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As the above chart shows, the US Dollar Index has recently encountered long term resistance in the 89.63 area dating back to March of 2009.  The dollar has initially backed off upon reaching this area 3 days ago.  Additionally, there is a secondary long term resistance level 3 handles higher at 92. 63 which dates all the way back to November of 2005.   If the dollar is able to break through the 89.63, the 92.63 would most likely cap any additional gains.  From a very long-term macro-view, GeoFront Capital believes an eventual retest of the 120 area is possible, but the dollar first needs to catch its breath here in the short term

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Drilling down onto the daily chart, the 2014 rally is prominent displayed.  As shown, it is possible to count a completed 5 wave Elliott-wave-sequence which began back in early May.  Since Elliott wave theory is fractal in nature, these 5 waves are together the first initial wave of an even larger wave sequence.  According to the Elliott wave model, once 5 waves are complete, a corrective retracement of the previous wave will commence.  Wave 2 will be a partial downwards retracement and will likely bring prices back to at least the 84.50 area which is the “previous 4th wave of one lesser degree” which is a common location for waves to retrace.  Additionally the 50% fibonacci retracement level resides in this area as well, making it a compelling target zone.

The Relative Strength Index, which indicates price momentum, is showing what is referred to as a bearish divergence.  The price of the US dollar index has continued to make higher highs, but the RSI has been registering a series of lower highs since September, with each high since then registering lower the previous one.  This says that the advance has grown tired and is due for a reversal.  Another item of note is the fact that the RSI chart itself is getting close to breaking its own upward sloping support line. Breaks of this kind on RSI charts can be indicative of significant trend reversals, and should be taken into consideration, especially when the RSI support line is well defined like it is here.

So how and more importantly when, will we know for sure that the US dollar index has topped?  Well, when analyzing the USDX, it is important to know that the USDX itself is composed of nothing more of a basket of difference currencies.  Knowing what these currencies are, how they are weighted inside the index, and where they are trending can provide solid clues to the future direction of the USDX.  The Euro accounts for a 57% weighting. Over half of the index is tied to this one currency!  So, it behooves savvy currency traders to look closely at the Euro to get an idea of where the dollar is likely headed.  Now let’s take a look at what the EURUSD has been doing lately.

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Unsurprisingly, this chart is almost an exact mirror opposite of the USDX.  The EURUSD pair has been in a severe downtrend since early May of this year.  It has also completed a 5 wave Elliott Wave sequence and it is already showing signs of having put in a potential bottom.  Contrary to the USDX which is showing a BEARISH divergence, the EURUSD pair is showcasing a textbook BULLISH divergence.  This is a strong warning that the lower lows the pair has been making since September should be considered suspicious because they have gone unconfirmed by momentum. Furthermore, it is probable that this entire stretch from September will be fully retraced which would amount to a 50% upward Fibonacci retracement of the previous 8 month decline. Additionally, RSI looks like it is breaking through its downward sloping resistance line.

Finally, speaking of downward sloping resistance lines, EURUSD is sporting a very, VERY, well defined downward sloping resistance line dating back to the 15th of October.  Even though it is drawn on the chart, it is important to keep in mind that we at GFC did not draw this line, the market did. This resistance line has 6 separate touch points.  This many touch points dramatically increases the validity and the implications of what this line portends.  A solid daily close above this line today would provide strong confirmation that the downtrend has ended and a substantial upward retracement has begun. One should expect additional upward follow through in the weeks ahead.  To conclude, it is extremely like that U.S. dollar index is topping at this specific juncture.   The recent price action in the foreign exchange markets is signaling a significant trend reversal that will consequentially produce a tailwind for bullish price behavior in the precious metals.  If you haven’t seen GFC’s latest analysis on Gold,  be sure to check out “A Nice Time to Be Bullish on Gold” now.

A nice time to be bullish on gold

One of the most intriguing assets that you can trade right now is gold.  It order to have a proper perspective on where the price of gold is going, one should possess an acute awareness of where the price of gold has been.  It is important to know that gold WAS in a virtually uninterrupted bull market from late 1999 to 2011 where it rose from below $250 an ounce to an intra-day high of $1,921.  You may remember a few years ago when many Wall Street pundits and commentators were saying gold was going to cruise to $5,000 an once and that easy monetary policies instituted by central banks around the world would surely drive gold to $5,000 per ounce.  As it turns out, ALL these pundits were wrong.

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Since 2011, Gold has been in a consistent downtrend which saw the price drop from $1,921 to 1,130.   A drop of over 41%! Over the past 3 years many gold bulls have been flushed out and many analysts have finally recognized the bearish trend in play.  Right on cue, they have linearly extrapolated this downtrend and put forth bearish calls like “Gold to $800 before $1,500”  and  “Gold for sure on its way below $1,000”.   The main problem these analysts have is their assumption that they can confidently extrapolate linear trends.  Markets are not linear, but in fact non-linear, dynamic, and fractal in nature.   Gold prices are most likely in a multi-year “A-B-C” correction and retracing a fraction of the previous 12-year bull run.

Gold has recently completed the initial 5 waves down in the Elliott Wave sequence which represents wave A of a multi-year A-B-C structure.  The sentiment readings (consisting of overwhelming bearishness) toward gold in the previous months has been congruent with an intermediate term bottom.  Gold day gold hit $1130, the market was full of short positions and almost everyone in the market was expecting gold to continue lower.  Since that time, some very interesting technical and fundamental developments have occurred.

In November, the price action in the gold market was characterized by much speculation of the Swiss Gold Referendum which was a vote taking place in Switzerland which would have forced the Swiss Central Bank to back the Swiss currency by 20% with gold reserves.  More importantly if this referendum would have passed, it would have restricted the Swiss Bank from selling its current supply of gold reserves.  As you can imagine, the prospect of this legislation passing generated a very bearish backdrop for gold.  And as such gold traders bid the price of gold up consistently for most of the month in the hopes the gold referendum would pass.  On Sunday, Nov 30th, the gold referendum failed spectacularly with 78% voting against the gold referendum.  This sent the price of gold crashing Sunday night down to $1,140.  Technically this price action served as a ‘test’ of the November 7th low at $1,130.  Since this price action occurred outside of London and New York market hours, the accompanied volume on the move was relatively light.  Prices did not have enough energy to break to new lows and immediately reversed on Monday from the $1,140 low and surged above $1,220 an ounce on monster buy volume.  This price action also created a massive bullish engulfing pattern on the daily candlestick chart which closed at $1,212 above the previous swing high of $1,208.

To a market technician, it is fairly obvious that there is a significant short squeeze going on right now in the gold market and should continue indefinitely.  If wave “A” down in gold is over, then this is most likely the start of a significant wave “B” up in gold and it should be an enduring multi-month move.  GeoFront Capital is expecting the price of gold to eventually move into the $1,400-$1,500 area some time in 2015 to complete wave “B”.  It is in this area where we will be looking for signs of a wave “B” termination and potential opportunities to go short.