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Recently,
investors have suffered an average market decline of 6.5% in the equity
portion of their investments, the largest fall since the dark days of October
2008, with $1 trillion of paper wealth evaporating in the process. Speaking
of October 2008, it was then that gold prices tumbled 18% as turmoil in
global financial markets led to losses in global equity and commodity
markets. The precious metal rallied 23% in the next two months.
So why did precious metals take such a
fall? As our correlation matrix showed, over the past few weeks gold had
decoupled from stock markets and every time stock markets sold off, gold
would rise as investors would seek it out as a safe haven. However, the
Chicago Mercantile Exchange (CME) began raising the amount of margin it
required to buy a gold future with three raises since July. In total, margins
have risen by $5, 400. (You had to put more money down to invest.) If you
recall, the same thing happened with silver when it went parabolic in the
spring. The CME raised margin requirements four times, amounting to an 84%
hike. At that time silver also sold off. Then again, historically,
margin hikes are known to be much more important for silver than they are for
gold, so it seems there must have been more to the bearish case than just
margin hikes.
Another factor influencing the drop was
selling by investors to meet margin calls on other losses, or by investors
anxious to lock in some profits and gold and silver is where the profits were
to be found. This effect was particularly strong since gold moved so high
recently and so many momentum players were aboard. It is important to
remember that violent sell-offs in equity and other asset markets can spill
over into precious metals, but after an initial selling wave, gold tends to
disassociate itself and rebound.
To see if this might be the case now we
will now take you to this week's technical part. We will start with the
analysis of the yellow metal (charts courtesy by http://stockcharts.com.)
Let’s take a look at the very
long-term chart. Gold plunged very dramatically, but stopped close to the
$1,600 target level. This level is based on two rising support lines. Clearly
significant levels have been reached in both price and the RSI indicator (as
seen in the upper part of the chart).
The long-term RSI, which is based on
weekly closing prices, moved to the 50-level after being previously extremely
overbought. Similar price actions where previously oversold RSI declined
along gold prices have been seen eight times previously during this bull
market. In seven of the eight times, gold’s decline stopped when the
RSI reached the 50-level and a sizable rally soon followed. Each of these
important local bottoms has been marked with a red ellipse in our chart.
In some cases, the bottom was final but even when an additional decline
was seen a short time later, significant rallies ensued. The RSI is close to
the 50 level and it appears likely that gold will rally from here.
In the long-term chart for gold from a
non-USD perspective, we also see that a strong support line has been reached.
The previous breakout above the resistance line created by previous tops has
been invalidated, but the technical damage has already been done and it seems
that a rally from here is quite probable.
Looking at gold from the perspective of
the Japanese yen, we also see RSI levels now oversold. Recently we have seen
a decline that was much sharper than in the past. Each time the upper border
of the trading channel was surpassed, index levels quickly moved to the lower
border and this marked an important bottom from the USD perspective as well.
Such has been the case once again, as the index moved below the lower border
of the trend channel and quickly reversed. It is now right at this level.
Similar price action patterns have been seen in the past and a rally
generally has followed. The implications are bullish for gold.
While we will leave the short-term
details for our Subscribers, we would like to feature one more important
factor that is currently in play - the SP Gold Stock Extreme Indicator.
The SP Gold Stock Extreme Indicator moved
above the upper dashed line, which was very close to a local bottom each time
(!) since 2008 and in most cases before this date. As we can see, not each
and every bottom was indicated, but when we have actually seen SP Gold Stock
Extreme Indicator flashing a buy signal, each time a short-term rally
followed. What we have seen right now is a very strong buy signal.
Does it mean that gold / gold stocks are
guaranteed to move up from here? Of course not - there are no
sure bets in any market. However, it does mean that it's very likely. What
price action precisely can you expect given this particular signal?
The best way to estimate the size of the
move of any indicator (including our own) is to simply take a look at the
chart and see what happened previously when analogous signals flashed.
In this case, we are looking for at
least a 1-3 week rally that’s visible from the long-term perspective.
Please take a look below for details (if you're reading this essay on our
website, you can click this chart to enlarge it).
Summing up, based on
multiple factors, including charts and indicators, it appears that we are
close to or have already seen a major bottom in gold.
To make sure that you are notified once
the new features are implemented, and get immediate access to my free
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Thank you for reading. Have a great and
profitable week!
Przemyslaw
Radomski
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