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.””””””””
.gif)
