The U.S. Mint has resumed
selling its 2013 American Eagle One-Tenth Ounce Gold Proof Coin at a hefty
$195 per coin as of last week. The Mint has set a 20,000-coin production
limit for the coin. Sales of its smallest gold coin was suspended by the Mint
in late April as year-to-date demand had increased by more than 118% until
inventories could be replenished.
Here are some interesting
statistics. So far at close to the half-way point of the year, the U.S. mint
has sold more one-tenth ounce gold coins than it did in all of 2012. About
50,000 such coins have been sold thus far for this month, with a total of
350,000 sold so far this year. This compares to total sales of 315,000 such
coins sold for the entire year of 2012. The U.S. Mint will continue to limit purchases
of the American Eagle one-ounce silver coins. Sales were suspended earlier
this year due to record-breaking demand.
Reuters reported
Wednesday that the appetite for U.S. American Eagle gold and silver bullion
coins is still at unprecedentedly high levels almost two months after the
historic sell-off in gold. The U.S. Mint’s acting director told Reuters that
the mint is buying all the coin blanks they can get their hands on to fulfill
the pent up demand for gold coins unleashed by the decline in price.
The facts above suggest
that there is fundamental strength in the gold market. On the other hand,
some developments this week hint at its short- and medium-term weakness.
Let’s move on to today’s chart section to see how the situation looks like.
We’ll start with the USD Index short-term chart as we believe that what has
happened on the U.S. currency market is the most important event this week
(charts courtesy by http://stockcharts.com).
The reason for this is
the price action seen on Thursday when the index declined sharply, pulling
back a bit before the session closed to end the day very close to the level
of the May low. In fact, it is possible that we have seen the final bottom
for this correction. The breakdown which we see here below the rising support
line was so dramatic that it just might be the decline that the breakdown was
supposed to generate.
The most important and
interesting implications are seen when we look at the reaction of the
precious metals to Thursday’s decline in USD Index. Specifically, it is the lack
of reaction in these markets that is most striking, even though the
dollar index declined by about 1.5 index point and closed the day about 1
point lower. A huge rally in gold, silver, and the precious metals
mining stocks would normally accompany such a significant move in the USD
Index (say, a $30 - $50 rally in gold), but barely any move to the upside was
seen. This is a very bearish indication for the precious metals sector.
Let’s see how the euro
reacted to Thursday’s developments in the USD.
In the short-term Euro
Index chart, recall that we have had a head-and-shoulders pattern underway and not yet
completed. The question now is “Was this pattern invalided on Thursday with
the decline in the USD Index and the move to the upside which was seen here?”
Quite simply the answer is no. The move higher did not take the index above
the final Fibonacci retracement level. Drawing parallel lines based on
the local bottoms, we see that the upper line has not been reached and it
emphasizes that the shape of the head-and-shoulders is still intact.
The index level is not
too high above the last shoulder as the formation is skewed. This is due to
both higher lows and higher highs. The last shoulder (September-October) has
a double top pattern so it’s really not so striking that the right shoulder
just formed a second top. All-in-all, this pattern could still be completed
and if it is, it will have bearish implications for the euro and the precious
metals and bullish implications for the dollar.
Now, let us take a look
at the yellow metal to see whether any reaction to the dollar’s weakness was
seen.
We see that gold has
rallied a bit more than $20 this week, really not much of a rally at all. The
outlook continues to be bearish and the trend remains down. Gold could still
decline heavily based on the long-term cyclical turning point, which is due
approximately next week. In both 2008 and 2009, local tops formed slightly
after the cyclical turning point, so it is possible that the
reversal in the downtrend won’t be seen until after the cyclical turning
point once again, leaving a number of days in which further declines could be
seen.
Summing up, the most important development
in the currency markets was the heavy decline of the USD Index on Thursday
and the striking lack of reaction in the precious metals sector. The
implications are bearish for gold, silver and the precious metals mining
stocks and we think that this sector will need to decline once again before
another big rally begins.
Thank you for reading. If
you'd like to read the full version of today's analysis including price
targets and direct suggestions for trading and investing in gold, silver, and
mining stocks, please subscribe.
Sincerely,
Przemyslaw Radomski, CFA