jueves, 23 de octubre de 2014

jueves, octubre 23, 2014
Gold Is Asleep - When Will It Awaken?
             
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Summary
  • A try of the downside.
  • A false breakout to the upside?
  • Platinum, silver and other commodities are not helping.
  • It takes more than physical demand.
  • A narrowing price range - is no volatility a signal?

It is easy to write about gold these days, but it is certainly very hard to trade the yellow metal.

The gold price has been frustrating bulls and bears for months now. Since summer, the price of gold has dropped. Relative to the action in many other markets, including other precious metals markets, gold's overall price drop has been mild. With volatility swirling all around - gold, the asset with perhaps the longest history as a store of value - has not done very much.

Gold is a paradox wrapped in an enigma these days, and maybe the lack of volatility in this asset is telling us something.

Gold tested the downside

On October 6, it looked like the bears were in control. In the early trading hours of a Monday morning and after a weak close on Friday at $1192.90, gold looked all set to break through December 30, 2013 lows of $1181.4 and June 24, 2013 lows of $1179.40, but the yellow metal only made it down to $1183.30. Bears scrambled to cover shorts as a rejected low gave way to a significant relief rally. In a period of less than two weeks, the price moved over $60 higher, toasting any stubborn shorts.

A false breakout to the upside

With the bears toasted, the bulls reasserted themselves. The powerful rally from yet another rejected low set the stage for a powerful breakout to the upside in the ultimate store of financial value, as bulls perceive gold. On October 15, the breakout arrived and it was not only a technical move to the upside, but also one of the strongest bullish signals on the daily chart for a technical analyst.

Gold put in a key reversal on the daily chart; it traded below the previous day's low and closed above the previous day's high on the biggest volume in months. That in itself was significant, but the fact that gold traded up to $1250.30 and closed and settled at $1244.80 above technical resistance at $1241.70 was a sweet signal for the bulls. That technical resistance was the level that gold broke down from in September as silver and platinum were also breaking through support. The night of October 15 was to be a watershed event for gold bulls as the technical move would surely give way to higher prices for their favorite investment vehicle. As the bulls rejoiced, the bears issued a mea culpa as I did in my piece on October 16: Gold Makes a Technical Statement.

Alas, both the bulls and the bears may have spoken too soon, for since that watershed breakout to the upside, the price of gold did not follow through. In fact, the price of the yellow metal died trading both sides of the all-important $1241.70 breakout level and closing on Friday, October 17 at $1238.50, below the level and in nowhere land.

Platinum and silver are not helping gold's cause

The bulls can take some positive comfort in that gold closed Friday almost $17 higher than the previous week. However, silver added less than 3 cents and platinum was actually down 10 cents on the week. The divergence between industrial precious metals and gold actually widened during the week, with the silver-gold ratio increasing to 71.70:1 and platinum's premium over gold decreasing to $22. Based on historical medians for these relationships, either gold continues to be too expensive relative to its industrial cousins, or silver and platinum are too cheap relative to the current price of gold.

The storm around gold continues to rage. Equity markets are highly volatile; the Dow Jones Industrial average is moving 200-300 points up or down in a day. The momentum and trend in stocks has clearly shifted to the downside over recent weeks. The price of oil fell out of bed, trading down below $80 per barrel on active month NYMEX crude oil and closing Friday at $82.75. NYMEX crude is down over 20% since June 24 and 12% in the past 3 weeks. Considering everything going on in the world, in markets and even in terms of other precious metals prices, gold has been very calm and trading smack in the middle of the eye of a global hurricane.

It takes more than physical demand

At lower prices, precious metals have attracted bargain hunting. Indian festival season has increased premiums for gold bullion. The premium for kilo bars has recently been as high as $18-$22 per ounce, but some Indian traders report that is the high end of the premium spectrum and many transactions take place currently at the $10 level. With the Hindu holiday of Diwali falling this Thursday, October 23, many traders in India are somewhat disappointed with current demand. "The price fall is still not leading to the big jump in demand that many had expected," according to Metals Focus' Chirag Sheth.

In order to get gold going to the upside, it is going to take more than the current level of physical demand, something that may not bode well for the gold prices in near future.

A narrowing price range

Clearly, a failed breakout to the downside and a failed breakout to the upside have bulls and bears pondering what is next for the yellow metal. Both camps have excellent arguments. The bulls point to easy money policies by Central Bankers that have discredited fiat currencies.

They point to gold as the ultimate safe haven and store of value that has been around for thousands of years. They talk of higher production costs that will eventually lower mine yields, making gold even rarer. I agree with their arguments.

The bears point to an overall sell-off in commodity and asset prices and deflation. They point to a technical pattern of lower highs and lower lows since gold peaked in 2011. I agree with their arguments.

It seems to me that gold may just be a game of financial tug of war - a stalemate, for the time being. If we strip out the price spikes up to $1250.30 and down to $1183.30 - gold has traded in a $40 range since all hell began breaking loose in financial and commodity markets in mid-September. That is less than a 4% range. Some assets are trading in a wider range these days on a daily basis.

The outlook - is no volatility in gold a signal?

There are many things going on in the world that will make markets move in coming weeks and months. There are bullish and bearish factors all over the place for many markets.

Volatility in equity, debt, foreign exchange and even most commodity markets is something that we can count on. I have heard a lot of talk about deflation lately and it is quite possible, may be even probable, that global deflationary pressures are causing the current market insanity. If it is deflation, the price of many assets will continue to move lower.

However, the price of gold will most likely outperform those assets, as gold does possess safe-haven qualities. If the price of everything goes south, gold's fall will be softer.

For now, I suggest remaining short gold with stop on close above the $1250 level. The market may close me out of my position in the coming days or weeks but at this point, I see it as a low-risk/high-reward trade from current levels.

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