Sometimes, the best trades are the ones you don’t do. I actually wrote up a Trade Alert to buy gold on Thursday, figuring that it would bounce the first time it hit my downside target of $1,500.
But then I scanned the entire hard asset landscape, and saw that everything was selling off huge; silver (SLV), platinum (PPLT), palladium (PALL), oil (USO), copper (CU), and iron ore. I took a long nap. When I woke up, I decided that there was something much bigger going on here, and the urge to buy the barbarous relic suddenly vaporized. I sent the Trade Alert to my recycle bin.
The selloff that ensued on Friday was of Biblical proportions, with the yellow metal taking an unbelievable $86, 5.5% swan dive. They say this is the commodity that takes the stairs up and the elevator down, and that was no more true than today.
I have been pounding the table trying to get readers out of gold since early December. It is clear what is going on here. The world is dumping hard assets of every description and pouring the money into paper ones. Commodities you can drop on your foot are getting dumped, and generous premiums are being paid for anything that can be created with a printing press. It’s as simple as that.
This is why you are having both bonds and stocks going up at the same time, a rare event in capital markets. In effect, everything is now a bond, both the wide array of fixed income securities that are getting chased, along with dividend yielding stocks. This is why a wide swath of technology stocks, like Apple (AAPL), are not participating in the game.
I called around to some of the leading technical analysts to see how much pain gold was in for. The tidings were grim. The 200-week moving average at $1,433 looks like a chip shot. If that doesn’t hold, then $1,300 is in the cards. My favorite target is the old October, 2009 breakout level where the Reserve Bank of India came in out of the blue and bought 200 tonnes of the sparkly stuff, punching it through to a new all time high. The previous resistance should now become support. This is the number my jeweler favors.
To make matters particularly fiendish for traders, we may see a breakdown well into the $1,400’s that sucks in tons of capitulation sellers, then a big bounce before a downtrend resumes. It is a scenario that will be enough to test even the most devoted of gold bugs.
At risk is nothing less than the end of a bull market that is entering its 12th year. The shares of gold miners suggest that the demise of gold is already a foregone conclusion. The index for this group (GDM) has breached major support once again and is looking for a new four year low. Since this index usually correlates very highly with the barbarous relic, the writing is on the wall.
There are a host of reasons why the yellow metal has suddenly become so unloved. The largest holder of the gold ETF (GLD), John Paulson, is getting big redemptions in his hedge fund, forcing him to sell. This is why the selling is so apparent in the paper gold markets, like the ETF’s, but not in the physical bars and coins.
India has suddenly seen its currency, the rupee, drop against the greenback. That reduces the buying power of the world’s largest gold importer. With years of pernicious deflation ahead of us, who needs a traditional inflation hedge like the yellow metal anyway?
The hyper quantitative easing announced by the BOJ last week has created an entire new class of gold liquidators. Gold has actually risen dramatically in yen (FXY) terms over the past five months, so retail jewelers across Japan have had to expand business hours to accommodate long lines of eager sellers. The overflow is hitting the international markets big time.
Here is the final nail in the coffin for gold. Gold has had a dozen reasons to rally over the past six months. Those include the European monetary crisis, the Italian elections, the Spanish elections, the Cyprus bank account seizures, sequestration, the fiscal cliff, Ben Bernanke’s QE3, the Japanese ultra QE, rising capital gains taxes, and even the reelection of president Obama. It has utterly failed to do so.
Any trader long in the tooth, such as myself, will tell you that if a market can’t rally on repeated fabulous news, then you sell the daylights out of it. That is what we got with gold, in spades, on Friday.