Originally published by Chamber of Merchants
I'd like to briefly discuss what exactly happened with the Gold price. I've been hearing plenty of reasons for the fall. I think it's important to get a good grip on what was behind the price action so that the next few decisions can be based on sound logic.
Briefing
Pullbacks are a very healthy action for any asset class. Without a pull back no new ground can be gained. Those who purchased at low levels must be able to offload to others on a higher level on high volume. Those investors/traders/banks that have offloaded then seek a repeat of the successful trade with a lower entry, with a higher appetite for risk since a profit has been banked.
That is currently the issue with the S&P 500, the Nasdaq 100 and the Dow Jones Industrial Average: The stock markets are so propped up with free and cheap money, as well as several interventions from the PPT, that it becomes exceedingly difficult to gain momentum powerful enough for a strong rally. So back to Gold: It is a good and necessary action for the next leg up. In the chart I posted this morning, one can deduce that this is a repeat of history, with an expected retracement as discussed.
This pullback was powerful and swift and left many panicked investors clicking sell sooner than you can say "stop-loss".
Rumors
I've heard a number of interesting reasons why Gold dipped the way it did. Some of them are entertaining. Some of them are nonsensical.
1. Gold was always going to fall, once everyone realises it's just a metal with no real usefulness - I will dedicate an entire article to this ridiculous statement. If I could scowl through the interwebs I would. *single eyebrow raised*. Briefly: Reach into your wallet or purse and pull out a bank note. Does it feel good? Yes, paper feels good. It has many uses. You can wipe something with it. You can burn it for warmth (don't burn bank notes, that's illegal), you can also redeem it for an item or service by a business or person that will take that piece of paper to do the same elsewhere. But what is a bank note worth? It's only worth what we all believe it's worth. You see, a bank note used to represent a piece of Gold in the Federal Reserve/Bank. Literally, in the past, you were entitled to a piece of gold up to the amount that was stated on your Bank Note. Since the world discarded the Gold standard, the Bank Note itself became a thing of value, representing nothing except the value we assign to it. So is gold worth less than a piece of paper? It's harder to mine, is rarer than paper and therefore can be assigned more value. But I digress. I also want to save some discourse for another post on the same topic.
2. "India!" Yip, Bloomberg today reported we may likely assume that it was India's economy and interest rate rise that caused a drop in the Gold price. (WTF? As in What the Finance?!) My eyes glazed over trying to contort that into functional economic theory. I can get there, but it's rather contrived and not worth a paragraph. Concisely, it's not India's fault.
3. "Crisis mode in Europe has come to an end, so no need for Gold anymore.", Oh okay. Let's close the Gold mines across the globe. "The jig is up people! They found us out. Let's wrap it up" - No.
and the list goes on...
The reason for Gold's plunge | A Merchant's Insight
Let's get to the point then.
I previously demonstrated that we would most likely receive a manufactured break below the trend line by the big boys in order to set bears and liquidity on the wrong side of the trade. So here goes the finer details:
1. Gold was around the $1303-$1308 support level, where many, many , many stop losses are set. (Did you know that brokers and tier traders can see where the stops are set? Now you do. The big boys and smart money can literally see all the orders sitting there waiting to be sold just below the support line. Scary stuff. Now you know.)
2. Around that deciding time for Gold to bounce up or break down we had FOMC member Lacker state during a televised speech that the Fed could very shortly raise interest rates and that November (November?!) is a live meeting, following on from FOMC member Mester who had said the same thing slightly earlier. In a flash the next rate hike went from a 0% probability for November to 25%. December raised to around 65%. And all this at the support level which Gold was crawling up against. This was also a necessary move by the FOMC to portray that they are not political, as accused by Donald Trump. Yet, common sense spells out that raising rates will cause a stock market plunge just as voters go to the polls. So my opinion? No rate hike November. 100% certainty for me.
3. Reports emerged around the same time (coincidence?) that the European Central Bank will wind down their Bond Asset purchases from 80 billion per month, down by an amount of 10 billion per month until the program is wound down to zero...At some stage....in the future..which may or may not be next year...or the year after...or the year after... So the dump on gold received an extra nudge from comment referring to something that won't be happening for years. The trade however ,was bearish, since an end to quantitative easing means lower inflation expectations which lead to less of a need to hedge with Gold etc What will the trade be when the ECB extends their program till 2018? 2019?
4. "China!" : China's market is shut until next week Monday, we have a Western world playground where the price of Gold can be punted around with very little consequence. This was the perfect timing for a final squeeze before the next leg up.
5. The DXY has been strengthening, weakening commodity and gold prices. This is due to the 30 year low in GBP/USD. You see, the US Dollar Index measured against a basket of currencies got flipped on its head due to the record low of the British currency. Remember the relationship between the value of the Dollar and the value of Gold? The DXY consists of:
- Euro (EUR), 57.6% weight
- Japanese yen (JPY) 13.6% weight
- Pound sterling (GBP), 11.9% weight
- Canadian dollar (CAD), 9.1% weight
- Swedish krona (SEK), 4.2% weight
- Swiss franc (CHF) 3.6% weight
Pound Sterling comprises 11.9% of the U.S Dollar Index. Here is the Pound Sterling chart for 30 years, just to illustrate why the U.S Dollar seems stronger than what it should be:
So with a crashing British Pound, we have a push which is inflating the U.S Dollar which appears to be strength but is simply a symptom of the Brexit uncertainty in the British currency. Subsequently we have additional downard pressure on Gold.
Where to next?
Well, who can call the bottom? Who knows where the last lowest trade will be? No one does. So I have peace knowing that I'm all in. My drawdown was 30k at some stage which I tweeted, but my accounts closed off at a $23k drawdown from where I was yesterday. (If you would like real-time updates and comments from me then follow me and turn on notifications from me on twitter).
We could see it touch $1250 , maybe, but I'm basing my trading on the premise that a lower break will be short lived.
I honestly think that the Jobs report, the Election, the return of China and the Euro Banking sector will have us back and beyond $1300 in a few days once everyone is convinced that Gold is easy money to short.
My take is that within 4-9 days we will see a recovery in gold price above $1300+...then rally into the election.
[Disclaimer: I’m not a financial advisor. Your wealth is at risk. Seek professional advice and do your own research. You’re reading the thoughts of a trader that has put his own wealth at risk. Don’t base your trades on this information. This entire site is for educational purposes only and a financial professional should be consulted before making any financial decisions]