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Whatever
glow there might have been from last week’s European summit turned to
gloom as markets turned downwards Monday. Global investors drove down
everything in sight, including gold which dropped nearly 3% to a seven-week
low to trade under $1,660 an ounce. Gold got lumped with other assets
considered risky (we live in interesting times, as gold was known to be the
“safe asset” for millennia and now it’s a “risky
asset”). European indexes
were down: Germany 3.4%, France 2.6% and Italy 3.8 %.
Everyone seemed worried that the
steps taken by the EU last week fell short of what is required to stabilize
Europe's sinking bond markets.
Stop-gap measures such as the coordinated international injection of
liquidity only buy time. Can they buy a lot of it? Likely a few more years.
Is the situation “taken care of” in the short term? Yes.
What’s making the price move lower in the short term? Emotions. And in
this case? Worries.
At the bottom of all this anxiety
is fear of an imminent demise of the eurozone and extreme
fear is something that we see around bottoms, before a rally starts. Whether
the fear is currently extreme is a different matter.
Tuesday, U.S. stock futures edged
temporarily higher after encouraging economic-sentiment data from Germany and
ahead of the U.S. Federal Reserve’s announcement on monetary policy.
In a knee-jerk reaction, as is the
case in previous downturns in the price of precious metals, the anti-gold
faction had a field day this week. Mark Gongloff in
The Wall Street Journal wrote rather sarcastically:
Time to check back in on how
precious metals are working as safe havens: Yep, still not working. Gold and
silver getting absolutely pounded today, doing much worse than the stock
market, providing not one quantum of solace for anybody who’d bought
them assuming they’d hold value amid a global credit apocalypse.
Although it is true that we did not
get much “solace” from Monday’s market action, we beg to
differ on Gongloff’s assessment of gold as a
safe haven. He himself said in his article “the global credit
apocalypse still has some time to play out.”
Having said that, let’s see
how the situation might play out for precious metals in the short-term. Let's
begin this week's technical part with the analysis of gold itself (charts
courtesy by http://stockcharts.com.)
This week, we begin with a look at
the very long-term chart. With the breakdown being in place, we now must
consider downside target levels. If the current decline stops fairly soon,
the likely target level is around $1,550, which is a bit more than 5% below
Tuesday’s closing price. A continuation of the decline could bring
prices down to $1,400, which seems to be a long-shot but is still a valid
maximum downside target level at this time based on technical analysis of
this chart.
The bearish trading pattern was not
expected, since triangle patterns normally are followed by a trend in the
same direction as the one which preceded it. This is not what happened this
time, however, although the recent breakdown could still be invalidated.
However, with prices having declined significantly on corresponding high
volume, the bearish scenario is more likely, and an invalidation of the
breakdown does not seem very probable on Wednesday.
In the past, post-bottom rallies
(bottoms are marked with red ellipses on the above chart) frequently resulted
in prices rising at least to the 61.8% Fibonacci retracement level (and gold
has in fact moved to this level). In many cases the rally took gold even
higher – to previous highs or even higher. Consequently, that was the
expectation as we looked ahead last week. Instead, we have seen a breakdown
from the triangle pattern and the move to the upside is no longer a likely
outcome.
In the past, when price levels did
not pursue the level of the previous high, declines generally stopped close
to the level of the original bottom and then rallied. This would coincide
with our $1,550 target level from the bottom seen earlier this year, so there
is a good chance that gold will rally if the decline takes it down this far.
Two exceptions to this rule have
been seen in recent years. One was in 2008 (gold moved significantly below
its first low), which does not seem likely to repeat as overall market
conditions are much different today. The general stock market also plunged at
that time, and there is no sign of this on the horizon this time around. In
2004, gold’s price went slightly below the level of the previous low
and this is why we have a not-too-likely worst case scenario of $1,400 on the
downside. Although the outlook based on this chart alone is bearish today,
the next rally could still bring gold as high as $1,900 or even to the$2,200
price range.
 
In the short-term GLD ETF chart, we
see that a short-term support level has been reached. Also, an ABC correction
is seen which may be an indication that we have seen the final part of this
move down. Based on the breakdown below the rising support line, the
situation is not as bullish as it was a few days ago but this chart is not as
bearish as the long-term gold chart presented earlier.
Please note that the recent move lower
took place on significant volume which is a bearish confirmation.
Summing
up, the
overall analysis of the gold charts this week shows a more bearish bias than
it was the case just a few days ago. The situation for gold can best be
described as mixed at this time, with more declines being possible. We will
leave details i.a. regarding probabilities of up-
and down-moves to our subscribers.
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Thank you for reading. Have a great and profitable
week!
Przemyslaw
Radomski
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