If you are a precious metals investor then you may be wondering why the price of gold and silver were absolutely massacred this week. Ask the expert pundits on financial media and you’ll get a swath of explanations for how the strength of the dollar or the improving health of the global economy are to blame. One could reasonably argue that dollar strength this week could certainly put downward pressure on the gold and silver prices. So, too, could one make the point that mainstream perspective is such that the economy is improving, which means investors aren’t in panic mode and have no reason to hold a safe haven asset. But neither of these arguments could realistically lead to the smack down in gold and silver we witnessed this week.
So what happened? Well known gold and silver analyst Andy Hoffman suggests the answer could be much simpler than we have been led to believe.
There’s no reason… there’s not even a propaganda meme of why [gold has been smashed]… there isn’t even a such thing as negative news for precious metals anymore…
The fact is, just like back in 2011 in May [when gold and silver prices collapsed], China is closed for the week.
Had you been listening only to the big financial news sites, you would have noticed that they made no mention of this very important fact. With China closed the markets were open for rampant manipulation, which is exactly what happened as several billion dollars in leveraged paper assets were dumped on the market.
Easy money for The-Powers-That-Be.
Hoffman explains in the latest precious metals update with Future Money Trends:
On Monday, China will be back in business, and that means the Shanghai Gold Exchange, which opened last year to counter Western manipulation of gold and silver, will likely help re-balance prices to where they were before this week’s takedown.
We could be wrong, but something tells us gold and silver prices won’t stay this low for much longer and that they could well see a complete turnaround next week.
What does that mean for gold and silver investors? This could be one of our last buying opportunities before the long-term bull market trend makes another move like it did in the first part of this year which saw precious metals rise amid market panic. – Mac Slavo
The latest commitment of traders (COT) report implies that we should all relax. Things are playing out pretty much according to a script that’s been in place for decades — and which points to happy times by early next year.
The quick and dirty COT story is that it’s a snapshot of what the big players in gold/silver futures contracts are up to. There are two main groups in this market: the commercials (mostly big banks and companies that buy metal to turn it into coins, jewelry and industrial products) and speculators who bet on price moves. The former consistently fool the latter into guessing wrong at turning points. That is, the speculators are usually way long at the top and very short at the bottom. So you can tell where prices are headed over next the six or so months by looking at what the speculators are betting on and assuming that if they’re excited, they’re wrong. The following chart illustrates the point. Ignore everything here except the red line, which represents the speculators. When it’s way up, they’re very long and prices are about to fall, and vice versa.
This year they’ve gone record long, which explains the fast recovery in metals prices and mining stocks: The speculators were piling in. This of course sets the stage for an eventual correction. So what happened last week was to be expected (though it was several months overdue, illustrating the point that the COT report is great for direction but dangerously unreliable for timing).
So now that we know why the beat-down is happening, let’s see what this indicator says about when (in very general terms) it might end. Here are the weekly COT reports for gold and silver through last Tuesday, courtesy of our good friends at GoldSeek:
Note that the speculators are cutting their long positions while the commercials are scaling back their shorts. Here’s the same data expressed in percentages:
The key conclusions:
– Both groups are moving in the right direction to establish a precious metals bottom. That is, if they keep this up, eventually the commercials will be long and the speculators short, setting up a situation where the speculators will be forced to close their shorts by buying gold/silver, thus sending their prices up.
– The commercials are moving a little more aggressively than the speculators to close out their positions. Not sure that that means.
– Neither group had done all that much as of Tuesday the 4th, which implies that the bottom is not yet in sight.
– Based on the brutality of the final three trading days of last week, next week’s COT report will probably show a much bigger move in the right direction — that is, the speculators will be a lot less long. So on Friday the 14th (when Tuesday the 11th’s results are reported) we’ll have a better sense of how close that bottom is.
– The carnage in gold and silver bullion and mining shares represents a great buying opportunity because eventually these paper games will stop working. The fundamental environment – negative interest rates, massive government deficits, steady increases in private sector debt, incipient banking/credit crises everywhere you look – is phenomenally good for real assets like gold and silver. So who knows? This might be the last chance to get in before the phase change.
The SPDR Gold Trust ETF closed at $119.74 on Friday, up $0.08 (+0.07%). The largest ETF tied to gold bullion prices lost 4.7% of its value last week, but has gained 18.02% year-to-date. – John Rubino
Gold and silver dropped sharply in the past week, with Silver prices outpacing losses compared to Gold prices to post a loss of 8.46% on the week. The decline came on broad-based strength in the Greenback, as the Dollar outperformed its currency counterparts among the majors, triggering a technical break in Dollar index.
The US Dollar index (DXY) broke above its 200-period daily moving average on Tuesday and posted gains in four out of five sessions this past week. Friday’s labor data triggered a turn lower, to erase about 40% of the gains for the week, but the index remains above the important moving average, posting a gain of 1.11% for the week.
Silver prices found some reprieve on softer labor data on Friday, bouncing from a critical support area. Non-farm employment figures were reported to increase 156,000 falling short of the expected 171,000 in September. Figures for the prior month were revised up to 167,000 from 151,000. The unemployment rate edged up to 5.0% from a prior reading of 4.9%, and average hourly earnings improved to 0.2% from a prior reading of 0.1%. The data triggered a broader turn in the Dollar, leading to a bounce in Silver prices.
XAG/USD is now seen at an important technical point as the 200-period daily moving average and a rising trendline are in play. The 200 DMA was seen residing at $17.10 on Friday, and while Silver prices made a marginal low below the indicator, two daily bounces have been seen from the indicator. A rising trendline that connects January lows with April lows has added support to the area. The trendline falls ahead of the moving average, but the daily close shows the trendline holding thus far.
In the upcoming week, minutes will be released from the September FOMC meeting. With the Fed shifting towards a more hawkish stance, stating that the case for a rate hike has strengthened, Silver prices remain at risk.
The decline in the past week sliced through several important support levels, as the drop carried strong momentum behind it. Prior support at $17.81 is now seen as the first level of resistance. The level references highs from late April, and a push back above the level could provide early indications of a broader reversal. The 200 DMA and trendline support confluence remain critical, as a break lower would reinforce bearish sentiment from the broader downtrend dating back to highs set 2011. – Jignesh Davda
Human nature is nothing if not consistent. I’ve seen this dozens of times. At every single intermediate cycle low traders begin to doubt. No matter how strong the bull signals are, when a correction occurs traders find, or make up reasons for why the bear market is still in force or a new bear market is starting.
Folks, bull markets have to have corrections. They don’t signal the end of the bull, they are just profit taking events when price gets stretched too far above the mean, or when sentiment becomes too bullish.
A couple of months ago I warned that the metals would need to either correct, or trade sideways for a while as the entire sector had just gotten too stretched above the 200 day moving average. Well as it turns out it did both. It churned sideways for 3 months and then corrected as well.
This isn’t the end of the rally though. Gold and silver just needed a profit taking event to cleanse the sentiment after the baby bull rally. That rally delivered a 180% gain in mining stocks. Seriously, after a rally that big there had to be some kind of correction. Gold also rallied enough to test its bear market trend line. Not surprisingly it didn’t make it through that on the first try. On the long term chart you can see that gold is just backing off to catch it’s breath. Nothing unusual is happening. Once the correction is over then gold will make another run at that trend line, and this time it will break through.
Now we are coming to the end of the correction. Sentiment has been reset. the 200 DMA has had a chance to catch up to price, and gold should be ready for the next leg up in this new bull market. As I’ve noted before the bloodbath phase of an intermediate degree correction usually lasts 4-7 days. Friday was day four. If the bottom didn’t form on the employment report Friday, then I’m going to say it will form by Wednesday of next week.
Once we have a confirmed bottom then gold will continue its A-wave advance. A-waves tend to be quite explosive and can test the previous C-wave top but don’t usually make new highs. I’m going to take a guess and say this A-wave will at least reach 1550 before topping and it may even come close to testing the all-time highs as the dollar is due for a 3 year cycle low next summer.
Don’t let the correction knock you out of your positions, or prevent you from buying the dip. This is a bull market, and bull markets naturally experience corrections.
I should also mention that this correction is the yearly cycle low. YCL’s tend to be the most vicious corrections of the year… but they also generate the most powerful rallies once they are over. The YCL in December last year generated a 180% rally in mining stocks… – Gary Savage
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