May 4, 2013 - 11:26pm
Even if one is not in the market trading, no one is ever prepared for a precipitous decline like the one we've experienced over the last few sessions.
But, in every calamity there is also opportunity. Witness the rise of what would become the Bank of America after the San Francisco earthquake of 1906. More on opportunity later.
There are a number of explanations for the sell-off. None is particularly satisfying.
Some are blaming the Cyprus comments by European Central Bank head, Mario Draghi. Others are talking about the unexpected, drastic slowdown in the Chinese economy. (As if it could have been any other way given that Europe is China's biggest customer and its economy is the pits right now.) The U.S. economy remains sluggish, at best, practically every day giving us conflicting signals.
Then there is the absurdist interpretation of recent Fed debate over when and how to end QE3 stimulus. In your own mind, make a guess as to when the United States will achieve a 6.5% unemployment rate. (That is a magical-thinking number, anyway. That level, while better than during the height of the recession, is nevertheless unacceptable.)
Some Fed members, ruing the entire stimulus concept, are merely falling back on economic ideology. Some borrowing is bad, the ideology says. Too much is awful. The only problem is that no one knows how much is "too much." So far, inflation has been a pussy cat, not a ravenous tiger. The economy is growing at less than 2% per year. So, the stimulus doves are simply making some sort of guess based on... nothing.
If one reads the last Federal Open Market Committee minutes (March's meeting), it is clear that stimulus hawks hold the majority. So, nothing will change soon.
On a brighter side, at 4:10 New York time today, HSBC said that gold had bottomed or was about to bottom and that there would be a long slow grind up again.
For gold (and silver) bulls, this presents an opportunity when the time is right based on technical signals as well as market conditions.
Major questions now arise. They are not easily answered. When will the equities market correct? Or, will they correct? Are the stock markets in the midst of a speculative bubble?
Many of the sellers of gold are big institutions - Goldman Sachs has been talking down gold for months now because of their short positions. And much of what big players are selling comes in the form of ETF's.
Small buyers - of physical gold - are slow to react to price changes. So, their reentry into the precious markets in significant numbers will take some time to have an effect.
Finally, there is the cost of gold production and refining. When all is said and done, it costs somewhere just south of $1200 an ounce to produce a bar of gold and bring it to market. It's easy enough, then, to calculate the difference between production gold price and speculative gold price. If speculative gold falls much lower, producers will slow, then stop, new production/delivery.
We are nearing that point.
HSBC said: "Hedge fund sales are fast and large. We believe that the robust gold bull rally of the past 12 years is probably over. It may take a long time for investor confidence to return. But we do believe gold is becoming oversold and that tighter supply/demand fundamentals and a still positive macroeconomic background will eventually lead to a steady grind higher."
So, it is time to look for entry points. Think of those who entered or re-entered the stock market after the debacle of 2008-09. Blood was running in the streets, as they say. But those with analytic skills and fortitude jumped back in and have made enormous amounts of money.
As always, wishing you good trading,
Gary S. Wagner
Executive Producer/The Gold Forecast
On Skype Gary.S. Wagner
Market Forecast: It is hard to envision a fundamental scenario strong enough, or severe enough to precipitate the type of meltdown we have witnessed in the precious metals markets over the last few days. Even on a technical basis it is hard to imagine a scenario in which we would see an utter collapse in global precious metals prices. Nonetheless this is exactly what we have witnessed over the last few trading sessions, and although we attempt to answer and shed insight into rationale reasons behind such a move as you can see from the letter above even in light of these events the moves we witnessed our disproportional to the events which have occurred. That being said what we have witnessed is an utter technically based selloff in which we have seen double-digit declines in gold and silver. Today’s video will attempt to shed insight into the question which looms on precious metals traders’ minds and that is where we will find support in this market.
See previous weeks in Historical Commitments of Traders Reports.
No current position in gold or silver