Commodities | Apr 18 2013
After US1525 it was all history. The downward momentum in the gold price accelerated as each bastion of support gave way. In a market that looked to have solid fundamentals behind it, the moves over the 24 hours to Tuesday suggested this was simply not the case. It is interesting to dissect the moves, as it just looked like a perfect storm or a well-engineered maneuver by a few large traders. An indication that a correction was on the way started when Cyprus issued a statement that it was intending to sell 10 tons of Gold, most of its gold holdings in order to help its bailout strategy. Then the US Fed Minutes revealed that growing numbers of Governors had agreed that the stimulus programs at some stage this year needed to be wound back, and then Goldmans issued a sell recommendation to its clients. It just so happened that the sell recommendation was on critical weekly support. Then the collapse of the gold price started. This was only Friday night.
Trading opened Monday in Asia and what was thought to be a large order, reportedly for 3 million ounces (30,000 Comex contracts,) by one large US brokering firm hit an illiquid Asian market, further exacerbating Friday's move. From then on it was "stop loss" city. The selling continued throughout the night and as of Tuesday buyers were few and far between and scared about entering positions. In the carnage, a few questions need to be answered. Is this the end of the great bull market or just a cheaper level to enter new positions?
We think the latter. Support for the metal comes in at US1320 and the cash cost of producing an ounce of Gold is approximately US1100 to 1200. Fundamentally nothing has changed so essentially this is just a cheap level to buy. Why? The simple reason is that with close to US170 billion dollars of stimulus being added to the system by two of the largest CBs in the world something has to give. Inventory levels for primary inputs (metals and energy) around the world are rising at an alarming rate indicating that consumption on the front line is stagnate. Which is questioning the worth of the stimulus measures. As Newton’s third law states" for every action there has to be an equal and opposite reaction". At some stage the stimulus will start giving rise to new orders. As traders scramble to meet orders price pressures to the topside will emerge. Enter a healthy does of inflation. Our stop losses are the producers who will cut back production as it becomes unprofitable to mine. At these levels it is cheap.
Our opinion is that gold is still correcting, however getting close to a major low. We feel that as stimulus continues there is a reasonable chance that accompanying it should be a weaker USD and an uptick in inflation. After all there has to be some reaction to US$160 billion a month in stimulus. Both are supportive of the price. At the moment it is not 100% clear, however, from a technical point of view, that we can be sure we have just bounced off significant support and as such a low is in place. Or at least an area from which we can strategize.
We had been stopped out of our positions at US1545 and US1525, however added at US1485 a bit too early. The position is small and manageable and we will probably look for another entry, as at these levels we like it.
Chart Point – Gold:
Technically, we decided to put up the weekly chart, as the move doesn’t look that big, however US200 is a large move in anyone’s language. We are reading this move as the final part of the consolidation of the market from the highs at US1900, which could now be considered as completed. This is figured out from measured and a timing bases. If US1320 holds for the next week then it will be complete. The overall structure we feel is not bearish, rather conciliatory. Sadly this will only be confirmed on a break back above US1620. If US1320 breaks then US1240 is the next level. Momentum indicators are right on their lows so expect some support to came back to the market. Some form of overshoot and bounce is what is needed to support a low of significance.
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