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Although we
had described the fall in precious metals prices, we can understand the shock
for those who had gotten used to the idea that gold prices only go in one
direction—up. A good metaphor here would be gold taking the stairs to
go up, but the elevator to do down. Last Friday it was more like gold falling
headlong down the elevator shaft with the worse one day drop in five years.
It definitely got ugly, but that’s normal. It’s part of the game,
part of the ride. Investors fled to the U.S. (fiat) dollar and to U.S.
Treasuries (that just got downgraded last month by Standard &
Poor’s.) Go figure! They have to settle their debt in dollars. The sharp
decline was difficult to digest especially since we had come off a period in
August where it seemed that gold could do no wrong. It shot up when markets
plummeted, and shot up when markets soared.
On September 16th, 2011, we wrote the
following regarding the following gold and silver correction:
(…) the situation in gold is
bearish for the short term and is certainly more bearish than it [has] appeared
[before]. Such a sentiment is now confirmed by the gold market. The
current situation for silver is very much the same as it is for gold, which
is quite bearish for the short term. Additional confirmation comes from the
recent action in both the Euro Index and in the U.S. Dollar Index.
So just how far did gold fall? The high
earlier in the month was $1,920 and on Monday morning gold touched $1,530,
almost a $400 drop. Let’s keep in mind that at the beginning of July
gold was at $1,480, so even at the drop we were higher than we were at the
beginning of July. Gold is still up about 14% YTD.
The plunge brought the “Gold
Bubble” crowd out of the wood work and with much joy, glee and
self-satisfaction they proclaimed that they were right all along and the gold
“bubble” is over.
They have said this every time that
precious metals corrected.
There is no doubt that like everything
else, the bull run in gold will eventually come to an end, but we’re
still a long way off. We see the sharp decline as an opportunity rather than
a warning. It is a good time, for those who wished all along that they
had bought gold, to do it on dips. Nothing that has taken place over the past
weeks lessens our long-term optimism about gold. The same fundamentals are
still in place. The situation in Europe continues to deteriorate daily.
Greece is on the cusp of default and larger EU members look sure to follow.
Meanwhile, political gridlock is the situation in Washington and QE III is
coming, and with it, further decline in the purchasing power of the dollar
(not necessarily right away, of course). The Swiss National Bank just
instituted a peg with the Euro to slow down inflows of global investors
seeking a safe haven – costing franc holders 25% of their position in
the course of a week. Central banks are still buyers and not sellers of gold.
So to see what kind of a roller coaster
ride we can anticipate in the near future, we will now take you to this
week's technical part. We will start with analysis of the long-term Euro
Index chart (charts courtesy by http://stockcharts.com.)
 
In this week’s long-term Euro
Index chart, we clearly see that drastic declines have taken place in the
past few weeks following a failed breakout attempt. Now the Index has paused
and the breakdown below several support levels is likely to be verified.
These levels will then provide resistance.
The intraday pullback that we’ve
seen a few weeks ago does not appear to be enough to cool the emotions of
Investors and Traders given the size of the previous decline. It seems likely
that the index will retest the previous support levels and a rally to the 138
to 140 trading range is possible.
In the short-term USD Index chart, we
see that a consolidation has begun and lower values will likely be seen over
the next week or so. This appears particularly likely if we study the
cyclical tendencies of this index. With a turning point in play, the
suggestion is that the dollar will likely move lower for a short period of
time before moving higher once again.
Concerning the rising short-term support
level, we see a breakdown which is now being verified. Again, if and when
this verification is complete, further declines could be seen for a short
time with a likely downside target level close to 76. A continuation of the rally then appears
probable.
In the medium-term S&P 500 Index
chart, the situation remains unchanged. For the past few weeks, we’ve
seen the main stock indices basically trade sideways and at this time it is
uncertain if the final bottom is in. This does appear likely to be the case,
but even if it’s not, additional declines from here will not likely be
major.
In this week’s Correlation Matrix,
we can see that stocks do not appear to have much influence on the precious
metals sector in the short term anymore. The long-term impact of the USD
Index with respect to gold, silver and the gold mining stocks is beginning to
be seen in the short term section as well. This tendency is visible in the
coefficient values. Consequently, what we stated in the currency section this
week is quite important for precious metals Investors and has bullish
implications for the sector overall.
Summing up, a short-lived
correction in the dollar is likely to be seen. This would likely have
positive implications across the precious metals sector. The situation
appears slightly more bullish for stocks than not, although this does not
have to negatively influence precious metals as the correlation between
stocks and precious metals is rather weak at the moment.
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Thank you for reading. Have a great and
profitable week!
Przemyslaw
Radomski
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