Gold’s woes won’t last – we’re heading back to $1,800

Ugh.

Monday was another one of ‘those days’. Gold was hit for $40 – over 2%.

The bulk of the losses (as they always seem to) came during New York trading. The hard selling began quite gently – but punctually – shortly before 10am, with gold just below $1,700. It got aggressive after the mid-morning latte at about 11.20am and, in just over two hours, the price was taken from about $1,693 to $1,660.

Then it was time for a pastrami sandwich.

‘Those days’ are becoming a little too frequent for my liking. We’ve had about five of them since the beginning of November. Somebody doesn’t like gold …

Something’s got to give

I am surprised to see gold under so much selling pressure. I had expected the opposite.

I’m not entirely sure what’s driving it. Perhaps there is some unwinding of the long-gold/short-euro trade. This is where people bet that gold will rise against the euro. This trade is no longer tempting given the relative calm that has fallen on the area – for now.

Whatever the reason, this selling pressure has not come at a good time, technically at least. We are now in an intermediate-term downtrend.

I’d like to share a chart with you that I have been working off in recent weeks. It shows gold since 2008. Let me try and explain the various things I have drawn on it.

Gold price chart since 2008

(Click on the chart for a larger version)

Here’s the close-up view:

Gold price chart since 2008 closeup

(Click on the chart for a larger version

Underneath the price, I have drawn a red trend line off gold’s 2008 lows. Gold is sitting just on the trend line now, ‘on support’. I would not like to see this trend line breached, as that would indicate that a near four-year trend is broken.

The green line is the 144-day moving average – the average price of the previous 144 days. For some reason this worked beautifully in the 2009-11 period catching gold’s lows, as indicated by the lilac arrows. Since late 2011, it has stopped working. Gold is sitting just below it by a few dollars now. It’s a convenient place to find support.

Of late, gold has shown a tendency to make ‘spike lows’. I have pointed these out these with the red circles. I am hoping this week’s action is typical of this. If it is, we should see a rebound as soon as today or tomorrow.

The blue and amber areas indicate the range which has bound gold over the last 15 months, as it has gone through this consolidation phase. Three times it has tried to get above $1,800 – the blue area. Three times it has failed. Three times it has tried to test $1,520 – the amber area. Three times it has held.  Sooner or later, one of the two has to give.

I would say the chances are fairly high for a reversal here and now. If gold continues this downward trend, there should be some support around $1,600. Who knows, we may have to re-test $1,520 again – trends do build momentum, particularly given that so much trading is now by computer programme – but I’m not betting on it. And I’m certainly not selling any of my gold.

Why I expect gold to hit $1,800 before $1,520

By the way, if any reader fancies a little bet: I’m happy to wager a silver ounce with the first reader who feels so inclined that $1,800 is breached before $1,520 – do it via twitter, is best I guess. My handle is @dominicfrisby.

For gold to go through $1,520, we’re either going to need the world’s monetary and financial woes to be suddenly fixed (nah); or there really is a conspiracy to impoverish gold investors (hmm); or there’s some kind of 2008 liquidity event (doubt it); or the end of the world, as supposed to have been predicted by the Mayans, does actually start to unfold (gulp).

Five times since early November large amount of gold have been dumped on the market. This is not the action of a disciplined seller trying to get the highest price for his or her gold.

Rather, it is the action of, off the top of my head, somebody who has just had a margin call. Or maybe somebody who is trying to get the price down, so he/she can buy and go long, or cover their shorts.

Finally, I have taken Dimitri Speck’s seasonal gold pattern and underneath I have put gold in 2012. Speck’s seasonal charts (seasonalcharts.de), using the data from the last 30 years, show gold’s seasonal patterns – ie, what gold is likely to do at any given time. 

Charts of gold's seasonal patterns

(Click on the chart for a larger version)

You can see how from January to March, gold went the seasonal script. In April and May it deviated – this year it fell when it normally rises. But then, from the June slump and rally right through to the November rally and the early December correction, it got alarmingly back on track. It’s only in the last week or so it’s gone off-script again.

We’re still in consolidation mode, folks, after that 2008-2011 run from $700 to $1,920. It looks like we stay in consolidation mode for a while longer, with patience and resolve continuing to be tested.

As a final word, if the world does end tomorrow, may I say what a pleasure it has been writing these Money Mornings, and what a terrific bunch of readers you are. 

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