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The roller coaster metaphor we used
two weeks ago after the $90 flash crash
in the price of gold seems
appropriate this week as well. It must be tough out there for precious metals investors. Wednesday gold
futures tumbled again.
April-delivery gold fell
$51.30, or three per cent, to settle
at $1,642.90 an ounce,
the lowest gold settlement
price in more than eight weeks. The dollar strengthened and traders reacted
to the U.S. Federal Reserve’s
rate decision and policy statement in the previous
session, which buried any hopes for now of more monetary easing in the short term. Investors have been hoping that the Fed would take action again to spur the economy. The last
round of quantitative easing, known
as QE2, weakened the US dollar and sent gold prices sharply higher. After the market closed Tuesday, the Fed's upbeat comments about the US labor market dimmed hopes of further stimulus. Also Tuesday afternoon J.P. Morgan
announced it had passed the government’s stress testing
and was declaring a dividend as well as paying back a big chunk of government loans. Most of the largest U.S.
banks passed their annual stress test, underscoring the recovery of
the U.S. financial sector.
The U.S. dollar index traded higher
Wednesday, hitting a fresh seven-week high, also bearish for the precious metals markets. Year to date, gold is still up 5 percent.
Sunshine Profits subscribers should have a much less queasy stomach.
A day before the flash
crash we sent out a Market
Alert to stay out of the speculative long-term positions
saving them from the gut-wrenching drop.
And when we sent out another Market Alert with a buy signal on March 6th it was with a caveat
– to be prepared emotionally for the scenario in which
metals move temporarily lower for a few days and then form a bottom.
We believe the price action of the past few days could be
that the final bottom for
this decline has already been reached, or, is very, very
close to it.
Gold's sharp move lower will most
likely spark demand from emerging
markets such as India and China as buyers will come in lured by lower prices.
Interestingly, platinum out-performed gold and maintained a
premium over gold for the first time since September, reverting back to
the “norm” where
historically (for the past
20 years) platinum trades higher than gold. Happily, we had previously
suggested you to switch
part of your holdings from
gold to platinum.
To see if gold will be able to catch up, let’s
move to the technical part of today’s essay. We start with the USD
Index chart (charts courtesy by http://stockcharts.com.)
 
Our first chart this week is
the very long-term USD
Index chart. There have been some
slight changes this week as the index level has touched the horizontal red line
in our chart created by the early 2011 and
2012 highs. Prices then reversed and no breakout above this level was
seen.
Concerning the long-term declining resistance line, prices have moved just above it
but the breakout is not yet truly in. Prices would have to close the week and hold above this line for two more weeks for this breakout to be confirmed. Overall, the situation remains
mixed here.
In the short-term USD
Index chart, a correction is
seen to the highest Fibonacci retracement level of
the previous decline. It appears that a top is about to form. Prices could move a bit higher, though any significant increase seems unlikely, and the 2012 high will
probably not be reached. Perhaps some sideways trading and then some declines will precede the next cyclical turning point, which is about two weeks away.
The Correlation Matrix is a tool, which we have developed to analyze the impact
of the currency markets
and the general stock market
upon the precious metals sector. The correlation between the general stock market and precious metals now appears to be negative to neutral, and this is generally not the case, especially given the past three months.
The general stock market simply does not appear too important for gold, silver
and the gold and silver mining
stocks. However, it does seem to matter for platinum, which has performed relatively well compared to the other metals.
The strong negative correlations between the USD Index and the precious
metals continue. The implications appear bullish for the medium term and somewhat unclear for the short term.
The medium term
implications remain in line with
our overall view on the precious metals sector as expressed in our essay on a possible rally in
gold. We wrote then (March 14th, 2012):
(…) while it is not yet
certain that the final bottom
is in, it seems rather unimportant because gold’s price does not seem likely to decline much further and could actually move much higher very
soon. The risk of being out of the market outweighs the risk of being in.
This week we have also received an interesting question from
one of our Subscribers
and would like to comment
on it.
Q: Regardless of the self-similarity patterns [that we’re described in the previous essay] (which is not the most scientific tool out there), is there any
chance that we currently see the beginning of the situation similar
to what was seen in Sep-Dec 2011?
Additionally, what
about the price seasonality?
March-April is generally weak for the precious metals… Maybe the predicted rally will materialize so sooner than
in April-May – during metal’s
stronger months?
A: Naturally, self-similar patterns (just like any other
chart pattern) are not scientific
at all (but we are working on “making them scientific”, stay tuned) as they are not (as Karl Popper indicated)
falsifiable. They
are subjective and very much
analyst-dependent and detecting
these patterns is somewhere between art and
science. However, that’s
not the most important thing
here. The most important thing in our view is simply
that they work and are extremely useful as they provide both: price and time projections that
– if previous patterns are really aligned – play out very well.
Is there
any chance that gold will move even lower like in Dec 2011? Of course – there
are no sure bets. However,
at this time we view the chance of moving higher from here is
much bigger than the chance of a continuation of the decline.
Seasonality – a picture can tell a thousand words, so let’s take a look.
Please focus on the shape of the red line vs. dates
instead of the prices on
the vertical axis’ legend (technical glitch). While it is
true that March is generally a weak month for metals, please note that the weakness is concentrated in the first half of the month and this impacts the whole
March-April period. In fact,
April is moderately
favorable month.
The most
interesting part is that according to the True Seasonal (taking into account
options’ and futures’ expirations as well
as simple seasonalities) pattern, the bottom was likely
to be seen on March 14th…
Precisely when gold appears to have reached the bottom. Please note that the quality of projection measure on the chart is quite high for this date, meaning that the probability of bottom being in close to this date is high.
Summing up, the
situation in the USD Index is unclear
for the short term and bearish
for the medium term. This translates into a bullish environment for gold for the medium term
and the True Seasonal
patterns confirm that.
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Thank you for reading. Have a great and profitable week!
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