Gold has fallen through psychological support at the round number of $1300 surrendering its "13" handle and replacing it with a "12". This will add to the already bearish sentiment towards the metal which once again has failed to act as a safe haven during a time of crisis. For that matter, neither are US bonds providing any kind of haven right. With the US fiscal condition being at the heart of the current crisis, it would certainly be counterintuitive to see US bond prices moving higher.
Additionally, gold has also broken technical chart support down at the recent low at $1290. Bulls must quickly take prices back above this level and preferably above $1300 if they are to avoid suffering deeper losses. Bears are growling today and flexing their muscles having picked off downside sell stops and that has turned the momentum negative. Hedge fund computers will certainly notice that.
There is some additional downside support coming in near $1280 extending to $1270. Should that fail, losses will accelerate. Bulls need some help and they need it quickly.
Losses in the soybean market have also worked to pull the rug out from under silver, which still maintains a connection to this market, even though that link has weakened a great deal in recent times. Many traders tend to look at soybean prices as a sort of proxy for food prices in general and if the former are moving lower, they tend to discount any inflation fears and thus sell silver.
The link was much stronger back in my early days of trading however. Silver is one of those markets that takes its cues from several inputs and right now, those inputs are negative.
The physical market can stem the bleeding in these precious metals but that buying in and of itself cannot push prices higher without momentum based buying and right now momentum is trending lower.
I have also included a longer term weekly chart of gold to illustrate the problem with this market from a technical analysis standpoint. Start at the beginning of 2013 and look at the bottom indicator, the old, very reliable and familiar RSI, or Relative Strength Index. For the entirety of this year, this index has not moved above the 50 level for this weekly time frame. As a matter of fact it has oscillated between 50 on the top and 20 on the bottom. By definition, this is a market that is in a BEARISH posture. If gold were able to at least push high enough to take the RSI above 65, I would feel more comfortable about its prospects for the immediate future. It cannot even accomplish that in spite of the recent FOMC press release stating that there would be no letup in the bond buying program. What is it going to take to get this metal to have anything to the upside if it cannot push higher and remain higher on that sort of news?
Forget all the chatter about BACKWARDATION, DWINDLING COMEX STOCKS, etc. None of that matters. As stated before the only thing that matters is PRICE ACTION. Why is this so important? Simple- because in today's markets Hedge Funds are the drivers of trends and they are not buying this market except for bursts of short covering after which subsides, they promptly return to selling. Translations - they are currently missing in action from the buy side. Until they return, price will move lower. If any of those aforementioned issues were indeed so significant, the price action would reflect it. It is not.
Also, the largest gold ETF on the planets, GLD, continues to experience drawdowns of its reported holdings. How in the world can that be considered anything but bearish as it indicates a lack of sustained speculative interest in the yellow metal?
Back to the chart however - if you note those Fibonacci Retracement levels provided on the chart. I displayed only the 38.2% level for the sake of clarity and to avoid cluttering the chart. Note that the rally higher that began in late June/early July off the spike low below 1200 only managed to reach the 38.2% retracement level off last year's high near 1800 before the metal began moving lower once again. It thus failed to extend above the psychologically important $1400 level. That attracted additional selling.
It is now trading within the confines to the pitchfork with the upper line acting as resistance. If the line is valid, the market has the potential to drop towards the median line again which unfortunately is now below $1200 based on this time frame. Also, since the RSI has been mired in that trading range between 50 and 20 and is now headed lower, it is conceivable that we could see it begin moving lower until it nears that same level once again.
With all the money printing occurring across the planet, it is difficult to conceive of gold moving lower again but from a purely Technical Analysis perspective, it is quite feasible. Only time will tell if Asian demand for the physical metal is strong enough to overcome Western oriented selling and finally put a LONG TERM bottom in this market.
It would certainly help matters if the Indian government would lift that ill-advised and senseless import curb on gold. After all, a 10% tax on gold coming into the country will only do one thing - kill demand, at least it will kill "legal demand". The festival season will soon be upon us so perhaps saner heads will prevail over there. We will see.
While it would be most unpleasant for the gold bulls, I would personally like to see this metal move lower in order to set up a RETEST of the $1200 level and perhaps that summer low itself to see how the metals acts. If it bounces from there, that would tend to indicate that we finally have a final, lasting bottom. In that case, I believe buyers would be quite active and very vigorous. But the truth is the bulls thus far have had very little conviction especially as indicated by the continued poor performance of the mining shares. We need to see solid bottoms in that sector and in the bullion before there is another chance of a solid up-leg in price.
Also, please keep in mind something I suggested mining companies to do some time ago now.... hedges must be put in place to secure profits. Any mining company that refuses to lock in profitable prices on mined metal is basically taking the role of a speculator with its shareholders' wealth on the line. If you can mine gold at a profit, and fail to act to lock in that profit, exposing your shareholders to the vagaries of the market, that is foolish. Mining companies should be in the business of securing profits; not running a pseudo hedge fund out of their risk management division. Leave the risk to we speculators; that is what we do by profession.
This is also one of the reasons that we are probably seeing rallies being sold so heavily. I believe some miners are indeed using those to secure solid hedges for some of their production and to lock in those profits.
It will take a complete shift in sentiment towards gold and of course, silver, from one of bearishness to one of bullishness in order to dissuade me from seeing hedging as a sound practice at this time. While it is tempting for any mining company to remain unhedged in a rising gold price environment however, it should be obvious that management has no more clue as to where the price of gold is headed over the short term than any other informed market participants.
"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat
Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput
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