Gold and Silver Prices -
Before but This Time Is Different
By Dr. Jeffrey Lewis
metals have seen dramatic sell-offs before, although the primary difference
between previous precious metal declines and the recent drop is the current
shortage of physical metal.
It is also worth
considering how well the commercial bullion traders are positioned for a rally
after these past two days of sharply dropping prices, especially when the latest
price drop came on top of a physical market signaling tightness all along.
Physical Shortage and Goldmanís Selloff Signal
Major dealers in
North America and the EU seem to be out of physical precious metal stock almost
across the board. This physical shortage had been developing for some time, in
contrast to the 2008 drop.
In terms of the
supply fundamentals, the loss of Kennecottís Bingham Canyon mine last week, in
addition to further postponements for Barrick Goldís big Pascua Lama Project
were as bullish as can be.
Goldman was also
openly signaling the rest of the market by notably revising their gold price
forecast lower just ahead of the big down move, followed by more major banks
revising their price forecasts lower.
prices have now been falling overall or range bound for almost two years.
Contrast the current situation with the historical September 2010 to April 2011
period, when 30 percent down moves occurred after a short covering rally as a
speculative pile-on ensued.
physical demand had been surging just before paper price declines led by the
manipulated futures market. Also, hedge funds have also been piling in to short
the market to a historic degree based on the negative technical picture.
In contrast, J. P.
Morgan Chase et al have been slowly exiting or reducing their notable precious
metal short position over the last month without a drop in the marketís open
interest. Normally, heavy downside direction in price tends to be accompanied by
a reduction in open interest.
Frankly, the most
recent selloff seems like just an orchestrated opportunity for the big shorts to
Record highs in
equities have been seen recently, despite persistently soft economic data that
misses one week after another virtually across the board. Complacency and
universal bullishness seem to prevail, despite data indicating that little if
any real economic recovery is actually underway.
occurrence has been the persistent referencing of CPI and employment numbers by
authorities and the mainstream media, despite the obvious disconnect of this
data from the reality faced by most people.
The last straw was
the blatant early release of FOMC Meeting Minutes so that the markets could
react when precious metal sentiment was already horrible. According to the
latest FOMC Minutes, money creation via asset purchases by the Fed seems likely
to subside later this year. Furthermore, London seems to be anticipating that
Mark Carney's arrival at the Bank of England will see a more activist monetary
policy stance arise in the UK too.
world's stock of fiat money is not contracting ó quite the opposite, in fact.
Japan has just launched another round of monetary stimulus on steroids, which
will see the developed world's most indebted economy create a proposed $1.4
trillion in Yen in a bid to break the country free from depression and the
perceived threat of deflation.
and Key Retracement Levels
Once again, the
same price pattern seems to be emerging. A massive dump in early overnight
trading, followed by a margin increase pulls the rug out from under precious
metals support as the market approaches key technical levels.
The panic selling
feeds on itself as stops are triggered. The market moves much farther down than
statistical or historical norms would suggest seems probable. This latest sharp
decline, led by the Asian session, resulted in the biggest two day decline in
the price of gold seen over the past thirty years.
From a technical
perspective, the sharp move down seen a few days ago broke below the 38.2
percent retracement level of the big post-2008 gold rally from 681.40 to
1920.75, prompting traders to shoot for the 50 percent retracement level at
This 50 percent
Fibo level now seems to offer the market both a target and a rallying point to
buy gold ahead of. The substantial bounce already seen from the recent 1321.09
low just ahead of this objective indicates that the marketís desire to sell may
well already have been satisfied.
often seems to be the case that when market sentiment is apparently beyond
repair, the seeds for a new rally are quietly being sown.
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