Long term Gold Chart

In attempting to discern a stopping point for this decline in gold, the best we can do is to take a look at the longer term chart. The extent of the selloff has been so swift, so severe, and unprecedented in terms of my own experience based on the percentage decline, that one would expect the selling to have played itself out for the time being. This does not mean that we should expect one of those "V" bottoms and an immediate resumption of the uptrend. Rather, I think what we will see is an intermediate bottom followed by a trading range as gold trader/investors attempt to ascertain what we can expect next.

From all the reports that I have been reading last evening and today, gold coin and bullion demand is soaring. A report on Dow Jones last evening remarked about the surge in demand from some of the bullion dealers in Singapore. Further stories about gold coin demand continue to appear today. The break in price has attracted a significant number of purchases by those scooping up what appears to them to be bargains.

Also, some industry analysts have been tossing around the number of $1300 as a sort of breakeven cost for the general gold mining industry. The thinking is that if prices were to move down below that level, mines would be sold off, closed down, etc. which would eventually begin to impact supply moving forward. Of course that is a much longer term perspective for short term oriented traders but it does go to show that at some point, the best cure for low prices, is indeed, low prices.

What remains to be seen is whether or not this strong physical demand can offset money flows of hedge funds out of gold and gold related items such as mining shares which are managing only the most feeble of bounces in today's session. The result has been that the ratio of the HUI - Gold price is now down to levels that it has not seen since April 2001, almost at the very beginning of the decade + bull market in gold. That is simply stunning.

My contention - until these pathetically weak gold mining share stocks begin to show some signs of life, it is going to be difficult for bullion to mount any sustained rally here in the Western trading session hours. Too many people here look at these shares as a forward indicator of where gold prices are going and trade accordingly. If they see sustained weakness and only the most feeble of bounces in price in the mining sector, they are going to sell gold rallies with impunity since in their minds, they have absolutely nothing to fear.

 Take a look at the following long term monthly chart of gold to get a sense of where we currently are. I have drawn in two different sets of Fibonacci Retracement levels, the first of which takes the entire rally beginning back in 2001 to the peak up near $1900 into account; the second which uses as its starting point, the 2008 level made during the depths of the credit crisis.

Note that gold has moved down very near the 50% retracement point of that entire rally off the 2008 low that came in close to the $700 mark. The HALFWAY point on any rally, is a major chart technical level. On this chart it hits at $1310. Gold made an overnight low near $1320 which is close enough for dirt work.

It makes some technical sense that it held at that point. 
If you look closely, you can see that BELOW that level, there is the 38.2% Fibonacci retracement of the rally that began in 2001. That level is near $1280. If gold were to be unable to hold above $1310, odds would favor it dropping down to this level.

I have also drawn in an Andrew's pitchfork. I know some guys like to use them on an intraday or shorter term basis; I personally do not. However, they have some value in my view for the longer term, bigger picture charts, particularly if their various lines happen to coincide with the Fibonacci points or horizontal support and/or resistance levels.

If you look at that big ugly black bar sitting on the chart for this month, you can see that the median line crosses it very near the 38.2% retracement level of the 2008 low (the dotted line in purple). That level is $1454.

What I would need to see to indicate at least the chance of some sort of turning point in this market, is a combination of strength in the mining shares AND a push through at least the $1454 level. That is doable but only if we see something to spark inflation fears on the part of market participants. The notion du jour is that the Central Banks have killed inflation in spite of their money creation binge. That will need to change, and we need to see some data that suggests it is changing, namely VELOCITY OF MONEY, to dissuade the broader investor world that inflation is upon us.

I was looking at some data on the wage growth today that pretty much sums up what the problem is for gold right now.... REAL EARNINGS, that is, wages adjusted for inflation rose a paltry 0.3% in March from a year ago. While that is up a tad the data revealed that they are down from 2008! In other words, real wages have gone nowhere since the credit crisis nearly FIVE YEARS AGO.

Some further analysis by Dow Jones on this data reveals something even worse, the peak was way back in 1973! That is a GENERATION ago! 

This is the problem - consumers are not gaining any purchasing power in real terms. They are being forced to raid their savings or retirement accounts or use their credit cards and head deeper into debt to try to maintain their standard of living. Some were once using their houses as virtual ATM machines by refinancing at successively lower and lower rates and taking the cash saved and spending that on "stuff". How long can a generation continue to do that, Fed policy or no Fed policy?

This is why I think and will maintain, no matter how high this equity market eventually goes, that it is nothing but an enormous bubble pumped up by reflation efforts of the Central Bankers. It is not build on a solid foundation but on a shifting house of sand. Again, as a trader I have to go with the tape and play the cards dealt me, but as someone watching this lunacy unfold before my eyes, I have to speak out against it as monetary madness.

Wall Street currently cares nothing about any of this. All it knows is that $85 billion a month is being alchemized out of air and fed into equities. Nothing else matters - terrorist attacks, increasing poverty, falling real wages, soaring food stamp participation rate, mediocre job creation, increasing government indebtedness, IMF reports about predicted slower growth in 2013 for the Euro zone in general, slower than expected growth in China, etc. Nothing!

Pavlov's dogs were so well trained that they salivated every single time a bell rang, food or no food. The Fed has so well trained the hedge fund community that they salivate every single time they see any dip in price, whether it is large or it is small; in they come with the buy programs. And why not? They keep getting rewarded for their behavior so they will continue to do so until they stop getting rewarded. Case in point - the S&P 500 has now managed to take back 2/3 of the losses from yesterday... Meanwhile, the gold stocks keep moving lower and lower and lower....

Oh by the way, don't forget, that we will also need to see the action in the bond spread market along the curve to suggest inflation concerns are mounting. So far, nothing doing there either.

What I am saying is that while it is certainly nice to see at least one day in which the enormous selling has finally let up some, gold has some serious obstacles ahead of it to convince those who have been very badly burned by this metal, that it is okay to come back into the water and get wet once again. For now, it is a spurned lover with competition from the younger, hotter, woman - the US equity markets.