Gold continued to sell off this week, and as the weak 'long' hands finally throw in the towel, gold sliced downwards through multiple support levels.
Where will it end?
More on this below.
The Feds own balance sheet has expanded drastically over the last 6 years even as quarterly GDP growth rates hover at just under 2%
Bernanke has suggested that the Fed would gradually reduce its bond -buying, and cease it altogether by mid 2014.
This has resulted in a sell off in the US bond market.
The US 10 Year Bond yield spiked upwards to just under 2.6% (from just under 1.6%)
Bernanke will have to keep an eye on the rising cost of borrowings, lest it derail the ongoing housing market recovery and destroy the ''wealth effect' he has tried so hard to create by boosting asset prices, i.e. US Equities and Housing.
With Federal Government debt at record highs, the last thing the FED needs is a rising cost of government borrowing.
The FED may have to keep its bond buying program going, just to keep the cost of borrowing low, and also to pacify the panicky bond market bulls who are currently weary that the long bull run in bonds is drawing to a close.
Coming to precious metals, The Bullish Bear continues to be a long term gold bull and views the current ''crash'' as a cyclical correction (albeit a severe one) in a secular gold bull run.
As Jim Sinclair once said " The price of gold is going much higher. The problems that give gold its reason to go higher are growing, not waning."
After a one way bull run over the last decade, this correction will really stress test the weak hands that bought into gold over the last two years at prices of $1300-$1700.
As the momentum has shifted to the downside, pinpointing a bottom at this stage is impossible.
However the drastic the sell off can result in a rebound from these oversold levels.
Gold and Gold stocks are deeply oversold at the moment.
The Commitments of Traders Report (CoT) provides an important insight:-
Source:
In Gold We Trust 2013; Long Term Gold Price Target $2,230 June 27th, 2013
(An extremely detailed and well written report)
The commitments of traders
report (CoT)1currently shows – from a contrarian perspective – a
clearly positive situation. It confirms that a great deal of speculation has
been wrung out of the sector in the first half of this year. Many trend-following speculators in COMEX gold futures
have apparently not only thrown in their bullish towels, but have embraced the
downward momentum for gold by selling futures short. On the other hand, large
commercial interests, the natural hedgers, considered by many as the “smart
money” in gold futures, have very strongly reduced their net short positions.
From
October of 2012 to June, 2013, the commercial hedgers reduced their net hedges
(net short futures positions) by 84%. They currently hold the smallest net
short position since February, 2005. This means that the largest, most
deep-pocketed and best informed traders have positioned themselves for higher
gold prices.
Compared to
October of last year, large and small speculators have decreased their net long
positions by 91% and 99% respectively.
For the same period the large
speculators have increased their gross short positions seven-fold to record
high bets the price of gold will fall further. Because they tend to trade
with the current trend and momentum, generally more short-term oriented
speculators reach their highest gross short positions at or near important
long-term low turning points for the price of gold. Conversely, the commercials
seek to hedge longer-term price risk. Commercial hedgers tend to reach their
least net short positions at or near important gold price lows.
The
commercial hedgers have not been net long gold since 2001 with gold then near
$270, but following the 30-plus percent correction for gold since September,
2011, the industry hedgers and bullion banks are now the closest to becoming
net long in 12 years. Indeed, on June 4, 2013 U.S. bullion-trading banks
reported a 29,622-contract net long position for the first time since July of
2008 during the financial crisis with gold then USD $939. In our opinion
this signals an attractive counter-cyclical entry point. The current
positioning data in the futures market are what we would only expect in a
mature downtrend and are a recipe for a pronounced rally.
For now, the Bullish Bear is cautiously monitoring the precious metals sell off.
Fresh buying can be avoided for now, until the dust settles.
Aggressive buyers could start accumulating on declines via staggered purchases. (start with allocating 5-10% of your total precious metals outlay on declines). While its too early to call a bottom, the substantial correction has provided a decent margin of safety.
I would recommend that investors 50-60% book profits on short positions in precious metals.
A near term low may be in, and a short covering pull back could occur.
Watch this space!
MORE LINKS:
Physical Gold Market In Disconnect
As Premiums Hit Record June 26, 2013
Citi:
Are Gold And Silver Finding A Bottom?
The Golden (Sentiment) Rule: If It Isn’t Off The Chart Now, It
Soon Will Be
Gold
and Gold Stocks –Signs of Life – Pater Tenebrarum June 28,2013
”””””””””””””””
So what can we
conclude? For one thing we can certainly conclude that there has already been
an 'overshoot' in the gold stocks. As we have pointed out with respect to
'long term oversold' signals, once gold stocks become as oversold as
they have recently been, the historical record suggests that a rally of between
55% to 550% can be expected to start from the eventual bottom.Moreover,
we know for a fact that gold stocks most of the time tend to lead gold. This is
very likely simply a result of the fact that the people who buy gold futures in
many cases are also trading gold stocks. It would make sense for them to load
up on gold stocks before they move into gold futures in size. Therefore, every
serious divergence that appears could be a sign of an impending trend change.
Whether this will be just a short term trend change, a medium term one or a
long term one remains to be seen. Certainly the technical damage to date
suggests that it will take some doing and a lot of back and forth before
the sector truly gets back on its feet.However,
what we cannot firmly conclude yet is that the
cyclical bear market is over. The evidence is just too flimsy to come to that
kind of conclusion at this point. There are many alternative possibilities
worth considering: the gold stocks may simply be subject to some short
covering. There may be some shenanigans going on related to end-of-quarter window
dressing. It may simply be a pause, relieving oversold conditions before the
long term downtrend resumes.It
is therefore simply not possible to sound the 'all clear'. However, as we have
emphasized previously, anyone buying at these levels with a very long term time
horizon probably won't make a mistake. The major fundamental trends that have
supported the gold bull market have not changed – although there have certainly
been a number of medium term gold-bearish fluctuations in the support previously
provided by negative real interest rates, credit spreads and forever rising US
budget deficits. However, these fluctuations have in our opinion not truly
altered the long term outlook. The painful measures that would be required for
long term solutions of the problems besetting the global economy have not been
taken and are unlikely to be taken in the foreseeable future. It seems far more
likely that what government will resort to will be measures that are inherently
gold-bullish.With
regard to the recent 'signs of life', let us watch and see what develops. It
certainly could be that we have just seen a major
trend change, even though we have to reserve judgment on that for the moment.
Nevertheless, the divergence we have just observed is no doubt quite noteworthy.
It is precisely the type of divergence we would expect to see once the medium
to long term trend does in fact change.””””””””
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