Sunday, April 14, 2013

Wrong on Gold / Silver Bottom - Bull Market Over?

In May 2012 I wrote that I thought a major bottom was in for Gold, one that would likely form the lowest point for the bull market going forward. After further consolidation (above that low) Gold and Silver did rally into the end of the year with a significant bounce, one that wasn't to last. In February this year as the price slid to $1600 I suggested there could be another $50 or so downside, but the indicators I watch suggested a bottom was in or close. I didn't expect a breach of the long term price support that we've seen for Gold & Silver at $1500 / $26 respectively. On Friday though we got just that:

Click Chart To Enlarge - Gold Breaks Below Support
Click Chart To Enlarge - Silver Breaks Below Support
So I was wrong with the bottom picking. Smelly fingers after all.

Evident by the strong volume a lot of stops were hit on the way down through $1523 and then $1500. There is a possibility the price reverses Monday back above support proving to be a false break, but I don't like the chances of such a quick recovery, ideally a false break would have reversed back above support on the same day. So that means likelihood of lower prices (in the short term at least).

The reason for the price slide appears to be the news that Cyprus could be selling their Gold reserves in order to pay back bailout loans (a rumour which was denied by the Central Bank of Cyprus):  
Cyprus must sell off the gold, amounting to three quarters of the country's reserves, to try to meet the soaring costs of its bail-out without any additional help from the European Union and IMF.

The extra financing burden, equivalent to a third of the island's annual GDP, is expected to push Cyprus into an economic meltdown and takes the cost of the Cypriot bail-out to over 135pc of the country's economic wealth.

Mario Draghi, the president of the ECB, has told Cypriot government that money from the gold sale cannot be used to reduce public debt but must be used to help pay back €9.1bn in emergency liquidity assistance (ELA) given to the central bank of Cyprus. Telegraph
It will be interesting to see whether this takes place, if so it has the potential to set a precedent and investors are likely fearful it sets off a chain reaction for other Eurozone countries in strife who have significant reserves (Italy & France both with roughly 2400 tonnes of Gold each, Portugal 382 tonnes & Spain 281 tonnes). We will have to wait and see how this develops, but given the number of back flips and changes we saw to the Cyprus "depositor haircut event" I wouldn't call it a given that they will be forced to sell their Gold. If they are forced, then why haven't the same conditions already been applied to other Eurozone countries who have received emergency/bailout loans? As opposed to selling it why not just use it as collateral for a loan (given the low rate they would pay for this)?

I have seen various price targets suggested for Gold (based on a break below support) ranging from $1100 to $1450. And then there is The Kouk who has been saying Gold is headed below $1000 for sometime now:
I am seeing quite a few calls for the end of the (secular) bull market, some of them apparently based on little more than the technical price breakdown (others with more substance), but as Chris Becker wrote in his latest trading week:
I study price, not because I believe that price is the be all and end all or like most economic theories that equate it a near-religious meaning. To me it’s just a temporary consensus of a limited number of participants and non-participants and it provides the trigger to my actions as a speculator.
Well put. Perhaps those commentators who think technical patterns are the only factor worth considering need a reminder that the 2008 correction broke through important support which also resulted in a few calling the end to the bull:

Click Chart To Enlarge -Gold Breaks Down in 2008
After the trend line break at $800 the price slid another 15% to mark an intra-day low around $680, before rallying 48% over the 4 months that followed to $1006.

Others point to the correction having reached 20% which is technically a bear market and suggesting it's all over, but the 2008 correction saw a larger correction (34%) as did the half way breather in the 1970s bull market during which we saw a multi-year decline and almost 50% wiped off the price before the final parabolic end which saw the price quintuple in the final 2 years. I recall buying Gold and Silver as they crashed into their late 2008 lows, the sentiment was awful, but it's always darkest before sunrise (this chart puts the 2008 correction into perspective, from The Short Side of Long):

Click Chart To Enlarge -2008 In Perspective
Gold and Silver will continue to ride the pendulum swinging from oversold to overbought as it navigates the tape until the conditions for the secular bull market cease to exist. Central Banks and Governments continue to act irresponsibly with policies of fiscal and monetary nature, there is no solution to the existing debt except huge inflation or collapse (both of which are positive for owning at least some Gold). The breakdown in price might be a good reason for the trader to step aside, but for the individual who thinks Gold and Silver are heading higher (over the long term, as financial turmoil continues) this sort of technical break will likely end up a good buying opportunity (as it was in 2008).

At the end of the day I can only give you my opinion, which remains firmly tht the bull market is not over and I expect higher prices for both Gold and Silver in the not too distant future. I will continue holding my positions firmly including the small position I took in SLV Call Options recently (which has dropped to roughly 1/3 purchase price). Granted it's probably easier to ride this correction out having had my money in the sector for longer than new entrants to the market (we'd have to see 20-30% further correction to take the price back to my average buy levels), but as some capitulate, there will always be smart buyers to pickup the pieces no matter how far it falls:
“I love the markets. I love the fact that gold is finally breaking down. That will offer an excellent buying opportunity. I would just like to make one comment. At the moment, a lot of people are knocking gold down. But if we look at the records, we are now down 21% from the September 2011 high. Apple is down 39% from last year’s high. At the same time, the S&P is at about not even up 1% from the peak in October 2007. Over the same period of time, even after today’s correction gold is up 100%. The S&P is up 2% over the March 2000 high. Gold is up 442%. So I am happy we have a sell-off that will lead to a major low. It could be at $1400, it could be today at $1300, but I think that the bull market in gold is not completed.” - Marc Faber

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  1. Fair and balanced, but I'm a bull.

    I've asked Jim Rickards to comment on whether Cyprus "gold sale" is likely and whether the template idea has legs. Pretty big moment if it does.

    1. Agree it would be a big deal if it happens. From ECB perspective it makes sense to target a smaller and more vulnerable country first...

  2. Thanks again for your views BB.

    Physical price of coins seems relatively high over current spot and availability seems low. Bars seem better value than normal.

    1. We are seeing huge numbers for American Silver Eagles, so we've seen the US Mint halt production earlier in the year and has resulted in some dealers advising of delays. There does seem to be some dealers who have increased their premiums, probably because they are not appropriately hedged to ride out large drops or volatility like this.

  3. I wanted to type more but iPhone posting and verifying is difficult on your blog.

    1. Sorry for this, I know the Blogger captcha is not easy to use, I did turn it off for awhile, but got inundated with spam comments everyday.