Gold is still looking good – but watch this price level closely

Just before New York’s opening bell on Monday somebody dumped 14,000 gold contracts onto the market.

That’s 1.4 million ounces (a contract is 100 ounces), or $1.8bn worth – around a 65th of annual global production.

And it followed a 6,000-contract dump earlier in the day as markets opened in Europe.

Is somebody trying to get the price down?

Big sellers have been hitting the gold price

Gold ended last week at $1,340 an ounce. Then, on Monday afternoon, it touched $1,302. That near-$40, 2.5% drop was its biggest daily plunge since December 2013 – the nadir (so far at least) of gold’s bear market.

At first glance, it seems that those who sold had a pretty good day of it. But closer inspection reveals that the gold price was already sliding in Asian trading (early in the day). By the time the massive European sell order came, gold had already slid below $1,330. And when the American order came, it was below $1,315.

Dumping all that gold in one go, particularly before the market open, does not seem to be about getting the most buck for each ounce of gold sold. Either a big position wanted out, or somebody wanted to spook the market.

Gold spiked last week over fears that the troubles surrounding Portugal’s Banco Espírito Santo would spark yet another crisis in the eurozone. By Monday morning, investors had realised that in fact the world was not about to end, fears were alleviated and this meant some rapid portfolio re-adjustment – hence the gold dumping.

But selling often leads to more selling. On Tuesday morning, the gold ship seemed to have steadied, when another succession of sell orders came in – again just before the New York opening bell. First, 4,000 contracts; then another 4,000; then 11,300 – over 19,000 contracts (1.9 million ounces) in total.

I make that almost $2.5bn in the hours of 6-8am EST.

We don’t know if it was someone trying to spook the market or if it was simple repositioning, as I have suggested. But there’s nothing we can do about it either way. As the simple sports psychology goes – only worry about what you can affect.

The outlook for gold in 2017

Gold began 2016 at £720 an ounce...

When Trump won the US Presidential election it hit £1078...

It’s now sitting just below the £1000 mark.

So should you enter the market now?

Our new report examines the forces likely to drive the price over the coming months...

Click here for your free copy

The outlook for gold seems positive – but don’t get over-excited

A few weeks back, I recommended caution in gold. With the rapid gains we’ve seen since the June low, it’s too easy to get over-excited and feel the need to get aboard at all costs. I suggested we would see a correction that would take us to the $1,290s – and that’s where we are now.

What’s more, the price action we are seeing fits in with the typical seasonal price patterns. A June low, followed by a rally into mid-July, then a sell-off is common and normal. There’s nothing to be too frightened of in that regard. What often follows is a nice rally between late July and October.

There is also a confluence of moving averages (the one-year, my favourite the 144-day, and the 55-day) all in the low $1,290s. So, again, a pullback to these levels is quite healthy.

At present, my theory is that $1,180 (seen last July and then re-tested in December) is the low of gold’s bear market. What we have been seeing since is a basing process, before a gradual move into new bull market territory.

The action in the gold miners – where the pullback has not been nearly so dramatic – adds some meat to this theory. In recent gold sell-offs, they have fallen much more dramatically.

But now a lot of the detritus has been flushed out of the sector, the better companies are starting to move up again, mergers and acquisitions are happening, rumours are flying about and financing is not so dead in the water. Mining is not the death valley it was a year ago.

That bodes well. For a bull market in gold to happen, the miners need to be strong, ideally to lead – and that is what we seem to be seeing. (If you are interested in gold mining stocks, you can learn more about Simon Popple’s Metals and Miners newsletter here).

So I don’t know why I am feeling so doubtful. This seems to just be ‘healthy’ corrective action. Perhaps it’s just seeing a seller with such deep pockets that has given me the heebie-jeebies.

I can envisage another 10% or so downside in the miners (as measured by the US-listed GDX exchange-traded fund). That might seem like a lot, but it’s not abnormal volatility for the sector. Should such a continued pullback occur, it would mean lower gold prices as well. These waterfall sell-offs tend to last more than just a few days.

This is the gold price level to watch out for

For now, $1,275 is my ‘line in the sand’ price, though I’d rather see $1,290 hold. Above $1,275 and my ‘setting up for a new bull market’ theory is just about intact. Below and it starts to look dodgy.

If you missed the June run and you want to take a position in gold or gold shares, the next couple of weeks may well be your opportunity. Some steady accumulation ready for an August to October rally might prove beneficial to your portfolio.

But you must manage your risk.

If gold goes to $2,000 in the next three years, it will look extremely obvious after the event. But the same goes if it declines to $1,000 or $700 – that will look obvious in hindsight too.

I know you want to hear a strong opinion – but I can only be honest and admit that I feel ambivalent. I have put my money where my mouth is. I’m net long – very much so – but far more important than strong opinion is risk management. And I think the next week or two is one of those decisive periods.

Above $1,275 and this is just a so-called ‘healthy’ correction in a bottoming process, laying the foundations for a new bull market.

But below – it may be that the bear market is not over yet.

• This article is taken from our free daily investment email, Money Morning. Sign up to Money Morning here.

Our recommended articles for today

How one marketing specialist makes money in a warzone

This newly listed marketing company could be an interesting long-term prospect for investors who like frontier markets, says David Thornton.

Why the English should care more about losing Scotland

There is a lot of complacency about the Scottish independence referendum. But breaking up the union will mean huge changes for the rest of the UK, says Merryn Somerset Webb.

On this day in history

16 July 1935: the world’s first parking meter is installed

The bane of many a frustrated modern-day driver, the first parking meter was installed in Oklahoma City on this day in 1935.

• Metals & Miners is a regulated product issued by Fleet Street Publications Ltd. Your capital is at risk when you invest in shares; never risk more than you can afford to lose. Past performance is not a reliable indicator of future results. Please seek independent financial advice if necessary. Customer Services: 020 7633 3600.