Long term Gold Chart

This monthly chart reveals possible downside targets IF critical support just below the $1180 level gives way.

Notice the median line and how price is pivoting around this line as it moves lower. This month's price action is especially ominous for price has barely managed to poke its head ABOVE the line before succumbing to selling. Upon closer inspection, one can tell that the selling is picking up tempo. That is why it is imperative that support at $1180 NOT GIVE WAY. If it does, $1155 will be hit in short order, followed by a test of the $1100 - $1089 level.

Gold Mauled as Bears Growl

Yesterday's late session plunge in gold, during the Bernanke press conference, was a harbinger of things to come for the yellow metal. It dawned on investors that the Fed still had enough concern about deflationary pressures that they were willing to leave interest rates at extremely low levels for a long time. That reinforced the idea that the mild inflation which the Fed wishes to show up, has not yet made its appearance.

Were it not for the fact that crude oil prices rose sharply today, one would have to think that the fall in the gold price would have the Fed concerned. Crude took off however on ideas that the early tapering by the Fed was enough evidence that the economy is going to be on a steady mend next year and that will result in a pick up in crude demand as gasoline and heating oil prices rise to meet that.

Also helping crude rally was further confirmation that the pipeline from Cushing to Port Arthur will be moving oil down to refineries and alleviating any glut in supplies which had been weighing on the market of late.

With yesterday's FOMC actions and the subsequent Bernanke comments, investors seem to believe that they now have the best of all possible worlds - ultra low interest rates for the foreseeable future, no signs of inflation and an economy on the mend. Translation - buy stocks. That is the message of the market.

In this sort of environment, investors simply see no reason to own gold, which throws off no yield and depends solely on capital appreciation to return on investment. If inflation pressures remain muted, and if confidence is high, ( the VIX SANK EVEN FURTHER TODAY providing proof that it is), gold is a pariah at this point.

People can talk about Chinese demand for gold all they want but it makes no difference as far as Western sentiment goes. Here in the West - gold has few friends. Until this confidence in the Fed and the economy is shattered, gold is going to struggle against strong headwinds.  At some point it will get beaten up badly enough to move down into the cost of production and remain at those levels long enough to perhaps force some mine closures, etc,. Maybe then it will finally bottom out.

Keep in mind something I wrote last Friday when the Commitment of Traders report was released - there can be NO CAPITULATION in gold and thus no end to the selling as long as speculators REMAIN AS NET LONGS in the gold market. Too many keep pointing to the building hedge fund SHORT position as some sort of bizarre rationale that gold prices must now stage some sort of rally. I read this sort of thing and ask myself if those who advocate such nonsense have ever really traded anything besides baseball cards and comic books. When the trend is lower and speculators are making money by being short, they have no reason to buy unless upside resistance levels are taken out. If the price moves into those resistance levels and then fails to extend higher, it is a signal to every hedge fund on the short side of the market to sell even more, not buy and get out!

This is what happens when too many self-anointed "experts" give us one prediction after another based on their tea-leaf reading of the Commitment of Traders report without understanding market sentiment and price action.

That brings me back to gold - the failure to hold at what had been shaping up as a secondary bottom at $1220, followed by a primary bottom at $1210, was a huge technical failure. What is worse however is the market's inability at this point to even hold above psychological support at $1200. Losing the "12" handle is a big deal because it deals another psychological blow to the bulls and emboldens the bears even more who are now trying to press their advantage. Every bear on the planet now is salivating over the prospect of reaching that mountain of sell stops sitting just below the $1180 level. If they can reach it, and that is unclear at this point whether they can or not, we will see an avalanche of selling hit the gold market which will easily carry it down to $1150 for starters.

I have put up a Daily Chart to illustrate how tenuous gold's position is right now. It has effectively worked its way lower into a band of EXTREMELY CRITICAL CHART SUPPORT. I would say that this level has almost as much significance as did the $1530 level some time back. When gold fell through that level, we saw wave after wave of selling as hedge fund longs, and other speculative longs, bailed out in large numbers and fresh shorting was established. We would see the same thing occur in my view if this level were to give way and PRICE BE UNABLE TO CLIMB BACK ABOVE IT SWIFTLY.

If you look at the ADX indicator, that line is beginning to turn back up again, after having moved lower. That move lower indicated that the bearish trend was halting and that a range trade was forming. Now that gold has broken below the bottom of that range, the indicator is suggesting that a new leg lower in price could be forming. For that to be confirmed, this chart support level that I have noted would have to give way.

Bulls need some help from somewhere and fast. That the HUI is holding up a bit better than the actual metal today is some consolation. Bellwether Barrick is down nearly 2% as I type these comments but gold is down over 3% so that is a positive, although I will be the first to admit, not much of one on a day like this for the gold bulls. ABX is still holding above that chart gap it made Tuesday of last week; however, it had better not close that gap or it will more than likely retest its recent low.

With rising interest rates here in the US bolstering the Dollar, the precious metals need some Asian buying to keep things from getting even uglier. This rise in rates, which I think is being closely watched by the FOMC, in conjunction with POSITIVE REAL RATES  ( due to the official low rate of inflation ) is not helping gold demand here in the West. Remember, traders will view a strong currency as inhibiting inflation.

The question I still have in my mind is how the Fed is looking at this fall in the gold price and whether it is becoming a concern to them at this point. I do not think it is UNLESS it breaks chart support and REMAINS BELOW THAT SUPPORT for an extended period of time. Spikes below support followed by rebounds in price that occur quickly will not disturb them whatsoever as that can be rightly attributed to market volatility. Low prices however that remain are a more serious signal. Gold is signaling no fears of inflation currently exist. If it sinks further and will not pop back, it will be signaling the potential return of deflationary pressures. That will be a problem for the Fed.

Time will tell.

One last thing about crude oil and gasoline prices. There are two ways of looking at a sinking crude oil price and by consequence a sinking gasoline price. It could be interpreted as a deflationary signal, evidencing a sluggish economy in which demand for energy is weak as a result. It could also be interpreted as having a STIMULATIVE effect in the sense that it acts as a sort of "tax cut". It puts more money in the pocket of both consumers and business as their energy costs drop off. I personally think the Fed welcomes a lower crude oil price more in the latter sense although I am sure that were it to rise too much in their estimation, it could have a deleterious effect on the overall economy. What I am trying to say is that just reacting to a rising crude oil price by saying it is inflationary is not quite as easy as it might sound. It requires a bit more nuance to sort the implications out.