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Failure of gold’s key support at
$1500 - $1550 triggered a stunning plunge as masses of stops were triggered.
We can see what happened on the 6-month chart below. The plunge was the most severe
since 1980 and was accompanied by colossal record volume, which is strongly
bearish. It quickly lead to gold becoming critically oversold and it bounced
later in the week as cheerleaders advised their readers to buy this
“opportunity of a lifetime”. Is it? In this update we will
consider the implications of this extraordinary breakdown.
In the first case a plunge of this nature has
shattered confidence, which in the best of circumstances will need time to
recover, so any premature rally attempt can be expected to fail. What was
strong support at $1500 - $1550 is now strong resistance, as all those
“hung up” in the top area will take any opportunity to sell onto
a rally that approaches this price level. The second important point to note
is that a dramatic breakdown on heavy volume such as this is normally a very
bearish development that kicks off a longer-term decline. Worst case now is
that a bear Flag forms for a short time, perhaps a week or two, which allows
the short-term deeply oversold condition to unwind, before another brutal
plunge ensues – and it looks like this is what is happening. At the
time of posting this (Monday morning) gold is continuing to creep higher and
is starting to look like a good short.
In the last update we opined that Big Money, aware of the mass of stops
beneath the key support, was conspiring to trip them in order to trigger a collapse
which would enable them to replenish their run down gold inventories at a
relatively low price, but there is a darker explanation for their earlier big
inventory rundown, which is that they had seen “the writing on the
wall” and were offloading their inventory at top dollar in the large
top area as fast as they possibly could ahead of a collapse. Many are now
protesting “How could gold collapse when its fundamentals are so strong?, overlooking the fact that that is precisely when bearmarkets start, because all of the good news is known
to the market and priced in.
On its 7-year chart we can see that not only did
gold crash key support when it plunged, but it also simultaneously broke down
from its long-term uptrend in force from 2008, or longer if you take it from
its top channel line. This was another strongly bearish development and while
the plunge suddenly stopped at the support approaching its early 2011 low,
the decline looks set to resume once the massively oversold condition has
eased somewhat. There is no serious support until it gets down to the $1000
area, which is where it looks like it is headed.
Another reason for gold’s plunge to halt where it did was the fact that
it had arrived at another long-term uptrend line which originated back in
2005, as we can see on gold’s 20-year chart below. While going on price
alone it looks like this line could hold and generate a reversal to the
upside, the massive down day last Monday and enormous volume on the plunge
strongly suggests that this trendline will fail and
that gold will drop steeply to the $1000 support level at least.
We had assumed that the huge drop on Friday - Monday and going into Tuesday
would result in a significant improvement in the COT structure, as it seemed
highly likely that Commercial short and Large Spec long positions would ease
substantially, which would have been a positive development for bulls, but it
was not to be. Instead, despite the massive drop in price, the COT structure
is little changed. This is viewed as strongly bearish.
Meanwhile the dollar index rallied last week from an oversold position near
to its rising 50-day moving average, as we had expected. The dollar COTs remain
bearish and thus we have also been looking for a dollar rally to be contained
and turned back by the Distribution Dome shown on its 6-month chart. However,
the rally last week started with a quite pronounced “bullish engulfing
pattern”, and this fact combined with the way the gold charts look,
suggests that the dollar may be starting another upleg
that will break it above the Dome, which would mean that the recent reaction
was just a correction to the impulse wave (move in the direction of the
primary trend) that occurred in February and March. We should know quite soon
as the dollar is now approaching the Dome boundary.
If gold did enter a bearmarket now, which is what
the action last week appears to be signaling, it would of course have
profound implications for just about everything. It may be the harbinger of
an impending liquidity crunch and skyrocketing interest rates that would
bring the world economy to a dead stop. Given that the debt and derivatives
mess is orders of magnitude worse than in 2008, due to that which caused the
problem being use to fix it, or more accurately to paper over the cracks and
buy time, we could see a commodity and stockmarket
meltdown that would make 2008 look like a walk in the park. Given that gold
and silver have just started to crater, are there any other major warning
signs flashing out there?
There are – the long-term copper chart looks
absolutely terrifying. With gold’s plunge on Monday last week it
largely went unnoticed that copper broke down from a giant 3-year plus
Head-and-Shoulders top on massive record volume. We can see this development
on the 20-year copper chart below, and how this Head-and-Shoulders top forms
the 2nd high of a giant Double Top whose peaks are separated by a deep ravine
the deepest recesses of which lie in the 2008 crash lows. Copper is believed
to be breaking down, and if it should now plunge back towards its 2008 lows,
it will have the direst implications for the world economy.
It is hard if not impossible to reconcile the latest copper COT charts with
the bearish look of the copper price charts, for the latest copper COTs look
strongly bullish, implying that copper will pull back from the brink and
stage a rally, perhaps to drop later on. However, we should remember that the
silver COTs looked bullish too, but that didn’t save it from plunging.
If copper follows gold into the abyss there won’t be any prizes for
guessing what will happen to “the market that thought it could go up
forever”, regardless of the state of the economy – the US stockmarket. If players gets the
slightest whiff of rising interest rates, stocks will crater, as shown on our
admittedly rather dramatic 20-year chart for the S&P500 index shown
below. This market has been rising for a long, long time, has not got clear
of the strong resistance near to the 2000 and 2007 highs, and looks set to
roll over and plunge.
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