In early December when gold was at about $1175 I wrote about buying it at $1135 and I did just that and have made a nice profit on that buy as gold is now at $1215. I am still a long term bull and still love the fundamental case for gold (as much as ever), but in the near term I expect a washout to hit gold as the dollar looks close to finishing its "rest and refit" stage to borrow a military phrase.
Living in beautiful Northern California gave me the opportunity to become a gold prospector, enjoying some placer mining in the rivers of the Sierras. I lived in Placer County, named after the mining practice, and most often prospect in the postcard gold town of Auburn California. I learned how to find gold in the American River just outside of lovely Auburn and it taught me a lot of lessons, even about fool's gold my first time out.
One of the features of successfully finding gold in a river is the use of a sleuth box which is placed in the river, using the flow of the river to wash away the sediment, leaving just the gold behind in the box. Sounds easy enough, but getting the flow just right is actually quite difficult. Let the river run through your sleuth too forcefully and it will wash the gold out with the dirt. Not enough flow and your box will never separate the gold from the dirt and rocks. Sometimes you get it just right but then the level of the river changes and you have to readjust. We even put a bucket on the back end to occasionally test the dirt tailings to see if we are losing any gold. It is almost like a prospecting stop loss.
Sounds just like investing...no? Gold is still a great investment, but in the days and weeks ahead, the dollar is going to allow too much water into gold's sleuth box creating a washout and some lost profits. I am not selling any long term holdings of gold, but I am trimming up some speculative excess I added at $1135 as well as some miners, hoping to add the miners back when the coming washout looks like a flood to the untrained eye. There is no flood coming, but the dollar is about to open the dam and let a lot of water rush down the river. A lot of gold investors are going to let some gold wash out of their sleuth. This washout will create the perfect conditions to buy gold at a lower level with bottomed out sentiment and positioning.
This entire thesis is based on just one thing - my take on the technical setup in the dollar - so let's take a look.
As you can see by the zone I drew out, I believe we are about to hit a key level in the dollar index. I expect a strong move out of the 99.17 - 98.17 range. This level could also coincide with the trend line, making it more powerful. As you can see this level is previous supply with a nice basing action before the break higher post election. I am preparing to press my long dollar FX plays as well as my oil shorts in addition to trimming my gold exposure. Sentiment is starting to finally shift with the recent struggles of the dollar which could lead to a nice shakeout of dollar bulls just in time to move much higher.
While this thesis is driven by dollar strength technically, I see some painful overhead supply on the gold charts which I have posted below. These levels look ugly to me and roughly converge with my dollar zone, adding to the odds that this gold washout will in fact take place.
I am not selling my core gold position, but I am taking my sleuth box home to clean it out and get ready to catch more when the waters calm.
Below are some pictures from some of my trips to Auburn. Whether you are a gold bug or you hate "pet rocks" - you should try your hand at finding some yellow metal if you are ever in gold country. Nothing better than a hike, a picnic, and some hard work in a beautiful setting.