It seems that collective
memory is becoming shorter and shorter. We just celebrated two important
holidays in the Judeo-Christian traditions that commemorate events that took place
thousands of years ago. Yet, now, in the age of Internet, people seem to
forget major events after weeks, or even days. Given this weeks’ performance
in the precious metals, people have forgotten that only two weeks ago Cyprus
was on the brink of unraveling not only the European union, but the
sacrosanct foundations of fractional banking, with the crisis highlighting
the fundamental fault lines of both.
On Wednesday silver for
immediate delivery slid as much as 1.3 percent to $26.9175 an ounce, the lowest
since July 25. Gold is now trading below the pre-Cyprus crisis level and is
challenging the two-month low.
There is a difference
between a bear market and a correction, which is a short-term trend with a
shelf life of less than two months. In a bear market, widespread pessimism
becomes self-sustaining. Many consider a downturn of 20% or more over at
least a two-month period to be an entry into a bear territory. We disagree
with this definition in case of precious metals. The secular bull market
remains in place as long as fundamentals remain in place – and that is
clearly the case with silver.
According a Credit Suisse
Group AG report Wednesday, global government stimulus has cut the likelihood
of further banking and liquidity crises and reduced the need for a protection
of wealth. The bank cut its 2013 gold forecast by 9.2 percent to $1,580 and
lowered its silver estimate by 11 percent to $28.50.
We can only guess that
the folks at Credit Suisse have forgotten as well. It was only last Thursday
that Cyprus cautiously opened the doors of its banks but tightly rationed
withdrawals. People could only withdraw 300 euros of their own money,
couldn’t freely cash checks or use their bank to pay suppliers who use other
banks. In a few short weeks Cyprus lost its status as an off shore banking
center with a banking sector 7 times larger than the annual GDP.
The restrictions are
meant to keep Cypriots from emptying their accounts in the wake of the
bailout deal announced last Monday that would drastically prune Cyprus’s
oversized banking sector, bloated by deposits from Russia and other former
Soviet Union countries. Although the deal scrapped the highly controversial
idea of a tax on bank deposits, it would still require forced losses for
depositors and bondholders, with the amount to be yet determined. The ink has
not even dried on the Cyprus story. We have gotten the message loud and clear
that gold and silver are the ultimate monetary assets. Now we need to wait
for everyone else to get it without losing our shirts in the process.
We have gotten the
message loud and clear so let’s have a look at the yellow metal’s technical
picture – we’ll start with its the very long-term
chart (charts courtesy by http://stockcharts.com.)
We saw a significant
price decline this week.
Even though the situation
is still bullish, as gold is above its long-term support lines, it seems that
it could be the case that the next long-term turning point in gold may be a
major bottom as opposed to a top.
At the same time,
although prepared and looking to the downside target level, it does not mean
that the situation is bearish for the medium term. RSI levels are still
oversold, so gold may not decline significantly.
As we discussed in
Thursday’s Market Alert sent to our subscribers:
Gold could actually
decline to $1,350 or $1,100 and still remain in a secular bull market (in mid-70's this gold retraced almost
50% of its earlier high). Don't panic - this is not a likely outcome. The
consolidation is already almost 2-years long (2-years long in case of
silver), investors are already very discouraged and the fundamental situation
(QEs among other things) is in our opinion more favorable than it was in the
70s.
Let us now see how the
situation looks like from the non-USD perspective – we’ll use a GOLD:UDN
ratio as a proxy here.
Here we see mixed
short-term signals this week. The breakout above the declining resistance
line has been invalidated, but the declining support line has held. Even if
broken, another is just a bit lower. The situation is mixed for the short
term but the medium-term outlook remains positive.
Let’s have a look at the
yellow metal priced in Japanese Yen now, as some important bullish events
took place on this market.
We see there was a sharp
decline on Wednesday followed by a quick pullback on Thursday when the Bank
of Japan announced a huge round of quantitative easing. This is indeed a very
significant move and a very positive long-term factor for gold. Gold reacted
immediately and in terms of the yen remains quite bullish.
Finally, let us turn to
gold priced in Australian dollar.
This is our most
concerning chart today. Periods of consolidation over the past six years have
not resulted in gold’s price moving below the previous low until now.
Summing up, if we see a repeat of this week’s
price declines, we will likely need to consider hedging long-term positions
in gold. So far, no breakdown has been seen except for gold priced in
Australian dollars and at the same time we have a breakout in case of gold
priced in the Japanese yen. The medium and long-term outlooks remain bullish.
Thank you for reading.
Have a great weekend and profitable week!
Sincerely,
Przemyslaw Radomski, CFA