Gold's panic sellers could be sorry

A seasonal period of strength for the metal is right around the corner.

By MoneyShow.com Dec 13, 2011 2:26PM

 (© Stockbyte/SuperStock)By Tom Aspray, MoneyShow.com


Once again, the European debt crisis hit global stock markets on Monday, but share prices were trying to stabilize Tuesday.


The major U.S. stock market averages lost less than 1%. The gold market, however, was hit harder, with the SPDR Gold Trust (GLD) dropping 2.2% and February Comex gold futures tumbling by over $48 per ounce.


The stronger U.S. dollar got the majority of the credit for gold’s decline, while raising cash at any price to protect against the euro’s demise was also a popular explanation. This conflicts with the view that more aggressive European Central Bank action will increase inflationary expectations.


The demand outlook is also mixed, and while the world’s central banks bought more gold in the third quarter than at any time in the past 40 years, there were also concerns that emerging market demand has dropped sharply.


Technically, Monday’s drop looked more like panic selling. As mentioned in my recent seasonal report (see "4 Key Seasonal Trends for 2012"), gold prices typically top out in February.


Looking at the short-term seasonal pattern, gold often bottoms around Dec. 22, which is just eight trading days away. Although the short-term momentum is currently negative, traders should keep an eye out for sharp price moves.

Click here to enlarge


Chart Analysis: The PowerShares DB US Dollar Index Bullish Fund (UUP) gapped higher on Monday but is still well below the October highs (line b) in the $22.32 area.

  • The major 38.2% Fibonacci retracement resistance calculated from the 2008 high at $27.19 is at $23.30
  • The long-term downtrend, line a, is now at $24.50
  • Daily on-balance volume (OBV) looked reasonable in August when UUP long positions were recommended, but it dropped sharply over the past two months and now shows a well-established downtrend, line d
  • There is first support now at $21.90 to $22 with stronger support at $21.60

The weekly chart of the continuous Comex gold futures shows that these contracts are down just over 13% from the September highs. Judging by past corrections in the gold market, this decline has not yet been that severe.

  • There is next support in the $1,600 to $1,630 area and then at the September panic lows of $1,535, which correspond to the long-term uptrend, line f
  • The major 50% retracement support is at $1,300
  • Weekly OBV only formed a minor divergence at the recent highs, and more importantly, the monthly OBV did confirm the highs
  • This volume action is consistent with a positive major trend
  • OBV is below its weighted moving average (WMA) but shows major converging support (lines g and h)

The daily chart of the SPDR Gold Trust (GLD) shows that the flag, or triangle formation, is still intact even though prices stalled at the downtrend, line a. Monday’s low took prices back to the daily Starc-band as well as the support at line b.

  • A break of this support would not invalidate the intermediate-term bullish outlook but could signal a drop to the $154 to $156 area
  • There is further chart support at $153, which corresponds to the May highs
  • The 61.8% Fibonacci retracement support, as calculated from the early-2011 lows, is at $150
  • We can also calculate an equality target by using the decline from point 1 to point 2 and measuring down from the high at point 3, thus giving a target in the $143.50 area
  • Though I did not expect this severe a decline, it would certainly push the bearish sentiment to extreme levels

What It Means: Though the odds favor a further decline in gold before the correction is over, I am not impressed by the dollar’s rally. Further dollar strength could challenge more important resistance and trigger another drop in gold prices.


Though gold prices do not have to bottom before the end of the year, prices should be moving higher by mid-January. There is also a slight chance that the worst of the decline is already over and two consecutive 1% to 2% daily gains could reverse the trend.


How to Profit: Long-term position holders should use a stop in GLD under $140, but I would not advise new long positions until we get clear positive signals from the technical studies like the on-balance volume. Definitely do not be tempted by the gold miners at this time either.


As previously recommended, buyers should be long the PowerShares DB US Dollar Index Bullish Fund (UUP) at $21.18. Raise the stop on that position to $21.57 at this time.


12Comments
Dec 13, 2011 4:39PM
avatar
Ahhh, the ignorant rantings of the masses.  Yes, please sell off all of your gold and invest in multi colored pieces of paper, that makes so much more sense.  There is so little of the gold around and it is so expensive!!  I'd much rather have those pieces of paper that they can print more of at any time, they don't buy what they used to but they are much easier to get than gold!
Dec 13, 2011 4:37PM
avatar
...'cause the dollar is WORTH so much....... not!
Dec 13, 2011 4:49PM
avatar

A crash? I am smirking, although you cannot see it. I've been mining gold since the mid 70's! It was around $125 an ounce in those days.

 

Nine and a half years ago, it was at around $255 an ounce. Then it started to rally. It went up to over $1900 an ounce recently. I don't care if it loses a thousand dollars an ounce! Because I can produce an ounce for around $80 in labor and expenses.. You people that buy this element because you think it is valuable, compared to paper, are the best thing to happen to gold in my long lifetime!!

 

Thank you very much!!!

 

 

Dec 13, 2011 6:07PM
avatar
April of 2008, when I saw the USA was going to elect a quasi socialist, either Clinton or Obama, I cashed out and bought gold,
No taxes until it's sold.
It stays in gold until the inept lying quasi socialist in the white house now, is an esoteric historical footnote..
However, do take physical delivery of it, if the country is suicidal enough to reelect the megalomaniac in the white house, almost certainly he will try to make private ownership of gold illegal, gold will have too much potential to keep the parasite from his vote buying handout programs.

Dec 13, 2011 5:49PM
avatar
All the experts on tv are saying get out of gold and get into the dollar..sell sell sell turn those machines back on....the dollar backed by nada..... China loan the US more money we have more wars to start....this is great for China and the rest to pick up cheap gold.
Dec 13, 2011 11:32PM
avatar
I agree, gold doesn't make much sense in the modern world but it has a tradition and sadly i would much rather own gold over paper money which has no intrinsic value and can be manipulated to no end. 
Dec 13, 2011 7:40PM
avatar
Banks will do whatever it takes to make money.  They are manipulating the gold market to scare investors back into cash.  Keep calm and keep buying physical gold.  Pull all of your cash out of banks and buy gold if you want to get back at them.
Dec 14, 2011 10:47AM
avatar

Frankly, I'd rather own metals with actual value of use...like copper, iron, and aluminum.

 

If you're going to buy gold, why would you buy physical gold and not the miners?  The cost of digging up, refining, shipping, not to mention minting bullion, the metal are priced into the per-ounce price, and you won't receive quarterly, or monthly in the case of companies like GoldCorp, dividend payments owning bullion.

Dec 14, 2011 2:14PM
avatar
Frankly, I'd rather own metals with actual value of use...like copper, iron, and aluminum.

If global equity markets tank, so will those commodity prices.

 

The first reason is forecast demand usage will drop, secondly is those prices are elevated by speculation, third reason is demand for US Treasuries will surge again, the Dollar will get relatively stronger than other currencies, and that will add downward pricing pressure to almost all the commodities.

If you're going to buy gold, why would you buy physical gold and not the miners?  The cost of digging up, refining, shipping, not to mention minting bullion, the metal are priced into the per-ounce price, and you won't receive quarterly, or monthly in the case of companies like GoldCorp, dividend payments owning bullion.

Gold miners haven't been as successful as the metal itself over any of the periods of the last 10 years. In fact, this year, they are doing really bad despite the fact that gold surged in price.

 

________

 

When it comes to Gold, people fail to realize that fully 75-80% of the price is based on mostly what happens with the GLD ETF now. The pricing is almost all investor driven and emotional.

 

As to the article, looks like could be wrong. GLD may break 200-day support. If 2008 was an indication, gold could fall another 15-20% if it breaks that.

 

But it's also possibly a bad precursor signal. It's possible the global debt crisis has pushed enough institutional fund investment houses to start deleveraging more aggressively. Golds break of 200-day support in 2008 preceeded the market collapse by about a month. It broke in early August, the market turned over Sept thru Nov.

 

If it breaks now, I'd be looking for markets to take a tailspin, the US equities *might* not fair as badly as other markets, but they will get dragged down. Could be 20% down from here. As we enter a new bear market, technically, just resuming the correction that formed in 2008. My outside bet is that this situation will continue well into the Mid-2010s, as globally developed nations may finally react as situations become dire.

 

As debt gets written off, consumers cut back, and balance sheets globally shore up, it might be possible for a wave of new manufacturing to occur around 2016 or maybe a little after (specifically the advent of genomics and nanotechnology in the initial stages of practical application in business). These phases usually last 16or so years.

 

1929-1945 bear, 1946-1963 bull, 1964-1981 bear, 1982-2000 bull, 2000-? bear It could possibly be longer as that seems to be the trend in modern equity markets, time period has increased from 16 to approx 18.

Dec 13, 2011 5:24PM
avatar
I'm asking seriously, should I sell my gold jewerly and coins now or wait to see if the price goes back up?
Dec 13, 2011 4:22PM
avatar
Hahahahahahaha, the smart ones got out before you greedy butt heads. Keep the lies rolling! Hopefully, all the investors get out before the crash of gold. hahahaha theygot to your boys and now yoru trying to SUCKER others in so YOU CAN GET OUT before the crash. I smell it coming....
Dec 13, 2011 4:33PM
avatar
Yep...sell...sell...sell. Gold is heading south!! Nice while it lasted, but now is the time to get out while you can still take a boat load of cash!
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

125
125 rated 1
267
267 rated 2
455
455 rated 3
612
612 rated 4
682
682 rated 5
695
695 rated 6
632
632 rated 7
472
472 rated 8
279
279 rated 9
147
147 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
VZVERIZON COMMUNICATIONS9
TAT&T Inc9
CTLCENTURYLINK Inc8
EXCEXELON CORPORATION8
AAPLAPPLE Inc10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.