16th May - Sell Gold: it wants to go weaker
20 May 2013
TECHNICALS:
Gold MONTHLY CHART
Once the market broke down through the succession of lows in the medium-term chart, the building blocks of a sustained bear trend were in place.
Notice too, that the Prior Lows are coincident with an important Fibonacci retracement support – now broken.
On the long-term chart the is little support of consequence until the 1000 level.
Gold DAILY CHART
Here is the detail of the emergence of a classic bear trend.
Once the market struggled to get back through the Prior Lows around 1700 in January and February this year the momentum developed.
Note the continuation Triangle that was the catalyst for the break of the the band of Prior Lows around 1530 which led to a precipitate drop.
The rally from the lows at 1321 has been a classic reaction – a faltering bounce that failed at the classic Fibonacci retracement level of 61.8%.
A small multiple top formed to achieve the reversal and now the market is well on the way to testing the recent lows and below.
FUNDAMENTALS:
The long Bull market in Gold began as early as 2000, but became recognisable as a serious trend in 2004. But for several months now the market seems to have stalled. Initially we thought it was correcting, but after the recent sharp move lower and failed attempt to claw back the losses, we now think sentiment in the market has changed.
Many of the conditions that have driven this market have changed or simply no longer exist.
After several years of global financial crisis/recession the major economies are still struggling to establish growth, with deflation once again looming on the horizon.
In the Euro zone, the debt crisis continues with several economies weighed down by tough austerity measures. This has been the painful price paid for rescue those who suffered a collapse of confidence in their governments ability to service their debt burden.
No country has been immune, with France, Spain and Italy, facing many of the difficulties endured by Greece, Portugal and Ireland. The remedy has delivered a well-entrenched recession to virtually every Euro zone economy with the exception of Germany. And here too growth is slowed to a crawl.
In the US the recovery is once more in question despite massive monetary stimulus and Japan is only just starting to show signs of life after the recent change of government brought about a new policy approach.
Although each economy has its own unique set of problems, they all share extremely low inflation..
Until recently a major part of the argument for buying gold has been the fear of future inflation, fuelled by almost zero interest rates in the US, Euro zone, Japan and UK together with the flood of money pumped into those economies via QE. But instead of a robust self-sustaining recovery taking hold, presenting policy makers with an inflation headache, growth is at best anaemic and inflation has collapsed.
In Japan the two-decades-old deflation still exerts its grip with CPI standing at around -0.9%, in the Euro zone CPI stands at 1.2% and in the US CPI is a mere 1.1%. Clearly the worry should no longer be about inflation, but about deflation.
Another driver of Gold has been the US deficit and the inability of Congress and the administration to work together to place the US on a sounder fiscal footing. But even that imperative has started to evaporate as the tax hikes and spending cuts of the sequestration have led to higher tax revenues and a shrinking deficit.
Moreover the energy revolution currently taking place in the US will not only ensure the US become energy self-sufficient, but as the US moves from being the world’s largest energy importer to a net exporter over the next few years, US trade balance should alter significantly and the budget deficit should shrink too.
So aside from the usual geopolitical concerns that still dog global relations, many of the supports in the Gold market are no longer there. In fact, many of the geopolitical tensions centred in or around the Middle East that have occupied US foreign policy will become less significant due to the US energy revolution.
In short, we think Gold is ripe for a serious sell-off. So, unless economic activity suddenly explodes and inflation leaps, the question is not if, but how far can gold go...
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15th May - Copper Rally Hits Resistance