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Gold & Silver Slump – Bullions set for a Massive, Violent Reaction

Gold & Silver Slump - Bullions set for a Massive, Violent Reaction

Gold & Silver Slump - Bullions set for a Massive, Violent Reaction

Comex Gold extended declines amid heavy selling pressure & sharply slumped further to $1590 today, with Silver Prices following the slump to $29.13. MCX Gold Apr futures have declined sharply to Rs. 28,706 – a level not seen in the past 8 months. MCX Silver Mar futures too followed the downside trend & have hit Rs. 54,210 by the time of writing. Gold & Silver Futures trades on the Comex ended the session yesterday at lower levels on more technical selling pressure in the in Gold and Silver Market. Gold, used by investors as an inflation hedge and a safe haven against economic uncertainty, fell 3.5% last week for its biggest weekly drop since May 2012. Minutes from the US Federal Reserve’s FOMC meeting have been market-movers for the past few months & the Gold and Silver Market await the announcement of the minutes of the Jan 29-30 meeting today, looking for new cues. Gold may decline more if the minutes show the US Federal Reserve continued a discussion from its December meeting over whether Quantitative Easing may either slow or stop well before the end of 2013. The Gold and Silver Market seem oversold on the basis of reliable technical indicators & the downside too has been over extended for the short term. A bout of short covering or profits booking rally cannot be ruled out, which leaves Gold and Silver vulnerable to near-term consolidation and witness some modest upside correction. The resurgence of risk appetite over the past month has seen a general clearing out of net-long Comex Gold speculative positions to August 2012 levels, as investors seem positioned for ‘the-worst-is-over’ scenarios. Rising Equity Markets and a general “feel-good environment” in the US has led speculators to increase short positioning. The sharp extension in Gold and Silver short positioning increases the likelihood of a short-covering rally in the near term. Also some bargain buying may have returned as indicated by the all time high record Gold Trading volumes of over 22 MT on the Shanghai Gold Exchange Monday as market participants returned from Chinese New Year holidays. This bargain hunting could have enabled Gold Prices to stabilize around the $1,600 region.

Gold Charts show massive Damage:

As alerted of in my earlier articles, Silver has finally hit the strong support of $29.20 & this level seems to hold. But if breached, could drag Silver all the way to $25. Any further weakness in Gold below $1621 could lead to the strong flooring around $1540. Technically, an ultra-bearish formation on Gold Charts suggests a further pullback could be on the way as a steadier global economic outlook and fading concerns about inflation reduce the investment appeal of bullion. On Tuesday, spot gold was on the brink of forming a “Death Cross,” when its 50-day moving average broke below its 200-day moving average. The most recent death cross formed on April 12, 2012, and Gold Prices dropped $150, or nearly 10%, in the following 25 days. The need for Gold as a currency hedge, widely advocated by prominent hedge fund managers such as John Paulson, has significantly lessened as a chaotic break-up of the Eurozone appears less likely at least for now. The latest industry data showed that investors have turned more bearish. Managed money’s futures and options net length, or their bullish bets, fell to their lowest since December 2008, the CFTC’s Commitments of Traders report showed on Friday. For the day, Comex Gold could see a slump to $1589 & then $1578, while Comex Silver – only on a breach below $29 could crash towards $28 but finally to $25.

Gold & Silver Near Term Technically:

A large sudden upside may add to the chart damage incurred recently, especially in Gold. But modest rises with small & short daily movement range may just be the signs of consolidation leading to a massive & a violent reaction by the Gold and Silver Market on key events lined up anytime in the very near future. Strong trending markets can remain in oversold conditions for days or even weeks before exploding upside. Ironically, Rallies in Gold Prices to $1648 or further to $1687 may be seen as opportunities to sell by traders or investors influenced by the idea that Global Economy is actually improving & is set on the upside. Only beyond these levels will traders realize they have missed a huge opportunity.

Gold Trading, Market Facts & the Currency Wars:

The threat of Inflation is so far removed from investor concern, while deflation is more of a worry for investors and central banks, and that’s what’s hurting Gold and Silver. Did it occur to anyone that Crude Oil Prices have been rising steadily? That is one of the biggest factors which lead to higher Inflation eventually. Macro-economic fundamentals suggest potentially attractive entry levels in Gold and Silver, as global financial markets remain awash with liquidity while global interest rates are expected to remain extremely low for quite sometime to come. How much long do you think before Gold and Silver make a violent comeback? Physical demand for Gold and Silver has been on the rise since Dec of 2012 & Central Banks have bought their biggest ever chunk of Gold in 2012. Remember – Futures prices will eventually follow the Physical market trend & never the other way around. I had mentioned in one of my earlier posts that Gold imports into India surged 23% to 100 tons in January (the highest in 18 months), the head of the leading trade body here said, as traders snapped up supplies ahead of a hike in duty by a government struggling to rein in its import bill. Well – Indian traders are again rushing to buy Gold on worries the government may take more steps to curb soaring imports of the precious metal when it presents its budget later this month on 28 Feb. I have also alerted of expecting more import curbs in yesterday’s article: Will more Import Duty Hikes curb India’s Passion for Gold?

“Most people in the market are concerned about policy changes in the budget,” said a Mumbai-based dealer. “Some sort of measures to curb gold imports can be there, that’s why bullion players, especially jewelers, are increasing their stock levels.” Gold Market participants will closely watch India’s budget for fiscal year 2013 – 14 which could reveal more measures to discourage Gold Bullion imports by the top consumer. Gold Trading volumes hit an all time high record of over 22 MT on the Shanghai Gold Exchange Monday. China, the world’s second-largest gold consumer after India, has been actively buying since its markets reopened on Monday after a week-long Lunar New Year holiday during which gold dropped more than 3%.

There’s been a growing debate over Japan’s move to devalue its currency to stimulate growth, with reaction from the G-7 leaders stating that “domestic economic policies must not be used to target currencies,” reported Reuters. While the G-7 tried to legitimize the currency debasement with this statement, in reality, it is easy to be able to see through to the real motivations. Late last year,Japan’s new leader, Prime Minister Shinz? Abe, openly indicated his intention to drive down the currency to make the economy more competitive and increase Inflation. As a result of Japan’s policy changes, the yen weakened, driving up the price of gold in Japan’s local currency. A gold investor in Japan is likely to be ecstatic with his Gold Investment over the past few months. The chart below compares the percentage change of gold in the Japanese yen to the metal’s percentage change in U.S. dollar terms over the last six months. From the middle of August 2012 until about November, gold prices in both currencies closely followed each other. However, as a result of changes in government policies, over the six-month period, gold rose nearly 19% in yen, while only increasing less than 1% in U.S. dollar terms.

Gold in US Dollar & Yen Terms

During short-term gold corrections, it’s much more important to focus on the facts, including the fact that gold is increasingly viewed as a currency, said Frank Holmes. Emerging market central banks have been adding gold to their reserves, including Mexico,Brazil, the Philippines, South Korea and Russia. Over the past decade, Russia has accumulated a total of 958 tons of gold, making its gold reserves the eighth largest of all central banks, says the World Gold Council.

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