Chart of the Day: gold correction

Given last night’s undollar crash included an immense correction in gold, which was called by House and Holes here, I thought Data Diary’s chart on gold vs the USD is timely and convincing.

First, here’s what happened in the last 3 days of trading gold, note the wild trading range:

Here’s my technical chart of how gold broke down – for the pattern traders out there, it was prefaced by a double top, a descending triangle (the base is the horizontal orange line, the angle the smooth downtrend from the 6 Sept high) and finally, a break of two support levels – the first at $1800, the next below the most recent low of $1741 in late August:

To Data Diary (whose blog I heartily recommend):

Note that prior periods of USD strength have taken the wind out of gold’s uptrend. With the 150 day moving average and the long term uptrend sharing the $1600 that area looks like the most probable target for this consolidation.

From Data Diary

I concur with his analysis – the $1600 level, which is the long term moving average and trendline from the GFC (Episode 1?) low, is the next major support level and target for a continued correction in gold. With a rising US dollar obliterating risk across all markets including currencies, equities and commodities – and gold is a speculative commodity, of that there is no doubt – in the short term, we still have to consider that the US and EU are not considering either further easing or raising interest rates in the medium term.

Consider the timeframe (and the premises behind) of your investment and hedging carefully.

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  1. The above effect is ameliorated in $A when ours is dropping like a stone. Less downside for us in other words.
    There is a nice J curve coming for us. Wish I hadn’t bought some at the last peak though, that’ll learn me. But I know from other trades that if I sell, the market will turn around the next day.
    Upside is based on the fact that no pollies are delinked from banker interests so monetary expansion is only temporarily reduced.

    • +1

      XAU’s low was 1702.90 at approx 7:30pm on 25th August. Close below that we have a Double Top confirm.

      In the Lehmann crash of 2008 Gold fell 25% in a month as positions were liquidated to fund equity margin calls (XAU as a hedge unwind).

      In October (TARP coincidence?) it bottomed at $707 as margin’s were cleansed and off she went adding 40% in 5 months as the stock market fell another 30%.

      • Avid can you draw a chart (pls?) for your blog showing what formation gold is actually in AND do another with an overlay of XAU vs SPXorINDU Sep to November 2008 (??).

        • I’ll have a go on the weekend.
          That said, I don’t think it is clear what formation Gold is in.
          There are two main potentials, either a flat correction (which would allow for a poke below 1700, before new highs), or a double top.
          Those trend lines on the charts I linked to should illustrate why I think $1700 is key.

  2. Well after what gold has done YTD and the 10 years before there is no real suprise. Let’s rememebr Industrials are also falling and without the decade of growth.

    As much as I am a bull I sold my US/Canadian gold miners days ago and am busy shorting America. There are no permanent friends.

  3. Prince, this really is uncharted territory, and anything is possible.

    My personal view is that we’re at the early stages of a big correction (call it what you will), and historically at events like this all asset classes drop (discount the USD), and after that gold goes markedly higher before any other class.

    However, I do think “this time is different”, and it’s clear that policy makers are out of step, not trusted, and have skewed the economies such that most are disadvantaged. You have to work harder than ever to protect your wealth, and the markets are there to take your money if you’re not skilled. Grantham had a good Market Place post on this a few days ago.

    With a shift of economic weight to the east, most of those central banks are net gold buyers, and look at Wiki to see the Chinese view on this.

    You never know what’s happening on the OTC gold market, and the CB’s will hide, if possible, the flow of gold.

    If you’re not aware even the RBA has ceased leasing out all it’s 90 tonnes (that’s a big change for these guys – but counterparty risk is behind it most likely).

    I don’t see any real solutions to the mounting debt, and gold is not the answer, but it’s likely to be a part of a solution eventually.

    I think you’re correct that in the near term gold could slip lower, and possibly a lot lower.

  4. Gold in USD for an aussie resid was always holding a really nice natural hedge. What the market really thought of AUD was shown in GFCI.

    The long term problems with the worlds currencies are showing no sign of easing – the race to devalue for export growth is under-way. The trading technicals certainly don’t look good in the short-term but the longer term outlook for the fiat world is even more confusing.

  5. Sorry, but I find your posts on gold to be uninformed and this post does not explain what is currently happening.

    I think a good explanation can be found here:

    This isn’t a commodity issue, it is a global currency issue.

    “and gold is a speculative commodity, of that there is no doubt”
    No doubt? Everything is speculative right now and gold is a currency.

    Look at the AUD Gold, it hasn’t moved. Therefore gold is working. Currently we are looking at demand for USD and currency depreciation in non-USD terms.

    So the non-speculative currency that is USD is safe. At 0% interest.

    “in the short term, we still have to consider that the US and EU are not considering either further easing or raising interest rates in the medium term.”

    Are they (FED, ECB etc) not getting the market fall that they needed in order to be able to justify further easing?

    I enjoy most of your posts, but your thoughts on gold are off the mark in my view.

    • Well perhaps, but this is actually the key debate at the moment, and i’m not sure any side has really hit a knock-out blow.

      • My point is that if you view gold as a currency, then what is happening at the moment is that we have a movement towards USD and away from other currencies. Therefore other currencies denominated against gold haven’t changed much.

        Obviously throughout this ongoing currency crisis there will be constant back and forward, but either way fiat currencies are constantly being devalued against gold. In the short-term, price movements are not going to be a one way street.

        • Marcos, I agree that gold is being used as a currency, but you could also see silver, rough rice, and heating oil for example as well being used this way. Cooper is another one, but silver has out performed all commodities over the last year. All this is happening as the US keeps debasing the USD. The flight back to USD for safety is a joke, but it happens as the sort of capital floating around can’t be accommodated by gold…yet. The global monetary system is screwed, and hence we have chaos.

          The CB’s have gold and use it as a currency I agree, and it’s why DM’s are buying gold if you look at the Chinese view see in Wiki. There is a battle going on, and IMO gold will be part of the solution, but I don’t believe all I read on ZH, GATA, etc. There is so little transparency in the gold market it’s had to know what’s going on. Most who say they do are guessing.

          • Adrian,

            We aren’t at a point where a solution has been found yet, so clearly we are in for an ongoing period of market chaos.

            I agree that gold isn’t the solution yet, but it is moving inexorably in that direction.

            History would also dictate that it is the case. Lack of transparency is only really based on the paper market for gold, which will gradually adjust and deteriorate as there is more demand for the physical.

            If physical currency is used as part of the mix, you don’t need transparency. You can determine what the price should be by denominating it against other assets.

            Isn’t everyone guessing at the moment? 🙂 Definitely uncharted waters.

          • The lack of transparency is in the paper and OTC. You can’t see the OTC trades, but you can see the CME to some extent (you don’t know who, but you can see the contract volume numbers).

            Anyway, gold will be volatile like everything else for some time to come.

          • I think while anything can be used as currency it is what people agree is valuable to use as a currency that is most worthwhile to have.

            And I think by the judge of most data sources gold seems to be the thing that most people think is a great backup. While any currency could win out in the end at the moment most are voting gold as the alternate currency particularly every time an event happens to undermine the faith in fiat.

    • This post is about explaining the current short term correction in gold. IF you had read my series on gold it explains my longer term view.

      Gold is part of the risk market. It is a speculative commodity – to say otherwise flies in the face of observable fact. Gold fell alongside all other speculative commodities – silver, nickel, copper, palladium at a delta approaching 1.

      There is a perception, a speculation, that it MAY become a reserve currency again.

      I’ve talked about this before – its is a long term meme that has been developing ever since risk markets around the world (except Australia) entered a secular bear market in 2000.

      As I explained, in the short term – i.e the next few days, the next week, easing is off the table. We might see the ECB announcing a re-capitalisation plan which could bounce risk.

      In the medium term – next month or further out, its on the table. For the reasons you state, which I agree with. The US banks will scream for stimulus…

      In the long term – 2012, and beyond, the Fed has said it will keep interest rates low – and other developed nations have abandoned inflation targeting – this keeps gold up and doesn’t affect its long term bull market.

      I remain a long term bull because that’s what I’m observing.

      • I disagree that gold is part of the risk market.

        I don’t think it is an observable fact.

        From my understanding of what is happening right now, everything is being sold against the USD – not just those commodities that you mentioned.

        Therefore it makes a lot more sense to me to think of the movement in currency terms as opposed to demand for commodities.

        Yes, there is a perception about reserve currency status. However for the debts outstanding to be resolved, it is unthinkable that the currency system as we know it will remain unchanged, after living for 40 years as complete fiat it has already reached its used-by date.

        Some may push towards a global or regional currency, but we have seen what is happening to the Euro. Without gold as a floating currency, I find it hard to see that confidence will return to the system – although it isn’t guaranteed of course.

        Also, on a technical point, if one were of the opinion that fiat currencies were to experience ongoing depreciation, why is a straight line chart used for technical analysis when a waterfall decline is more likely to happen based on other events in history.

      • “It is a speculative commodity – to say otherwise flies in the face of observable fact.”

        It’s not, it’s a manipulated currency– to say otherwise flies in the face of observable fact.

        And that’s why it’s going to get smashed below $1600. It needs to be punished for running too hard. and it will be. The gold bulls will stand aside and let it happen and pick it up at $1600 and below.

        It’s going to be a fun ride.

  6. One of the biggest factors in the gold market is India. As long as Indians see gold as their de facto currency and superannuation package, the demand will remain high and therefore the price will not drop as low as some suggest.

  7. Gold right now = $1790 AUD.

    Some correction, eh ?

    It was trading in the AUD $1350 – $1440 range for most of the last 12 months 🙂

  8. Gold at 1720ish now. Might not be long before we get a test of that key 1700 level.

    Trigger finger is itchin’. But better to let it keep itchin’ than have it lopped off by a falling knife.

  9. WOW! Could this original post have ben more accurate?? Posted yesterday and today we get:

    “By 5:00 p.m. EDT (7am AEST), bullion’s spot price was down 5 per cent at around $US1,643 an ounce, after trading between a session peak of $US1,754.71 and low of $US1,628.69. At $US126 an ounce, the intraday move was the biggest on record in dollar terms. It was also more than 5 standard deviations beyond the normal one-day change. On a weekly basis, spot gold fell 9 per cent, its biggest weekly drop since 1980.

    US gold futures’ benchmark December contract on COMEX settled down 6 per cent, or more than $US101, at under $US1,640 an ounce.”

    Read more:

    Great work Prince and Avid.