Without a doubt, this was a week of strong declines for the yellow metal. What could we read in newspapers and see on TV? The big banks were falling over each other in their scramble to get on the bear bandwagon. Here are some sample headlines:

Morgan Stanley to Goldman Cut Gold Forecasts on Fed Outlook

“‘Paradigm shift’ to send gold sliding to $1,200 an ounce: SocGen”

“Gold to Drop Even Further as Fed Increases Real Rates: Goldman Sachs”

“Deutsche Bank cuts gold, silver forecast for 2013”

“Credit Suisse cuts gold, silver, Brent forecasts”

Everybody is talking about the price of gold and wondering where the bottom is. Today in early Asian trade gold fell under $1,200 to its lowest level since 2010. This is down more than $200 an ounce since the beginning of last week and probably the yellow metal is on track to post its worst quarter since at least 1968. 

“It’s a long term bear market. If you bought into it today, don’t expect it’s going to do much. And if you own some and get a rally, get rid of it,” said Dennis Gartman, editor of The Gartman Letter, a daily commentary on financial markets. 

On the other hand we can read some more optimistic comments.

James Rickards, managing director at Tangent Capital expects China to start buying gold at these low levels, up to perhaps 4,000 tons. “People will say ‘Why is China buying gold if it’s so worthless?’ ” he said. 

Who is wrong? Who is right? Would it be the metal’s worst weekly performance since 1983? To see if this week holds any surprises for gold and the precious metals sector let’s begin this week’s technical part with the analysis of the US Dollar Index. We will start with the very long-term chart (charts courtesy by http://stockcharts.com.)

When we look at this chart, (recall that we have been expecting the index to move higher for some time now once the breakout was seen), we see that a rally finally materialized this week. This chart is still bullish at this time. There is a resistance level at 86.4, and also another one which corresponds to the previous high (seen this week) and that will be seen more clearly on the next chart.

Let’s take a look at the medium-term situation.

In this perspective we can see that the support line was reached and it held the decline, so the medium-term trend remains up. As mentioned above, there could be a pause around 84.5 or so, which is just one index point higher than the current level.

The situation remains bullish for the USD Index in the long and medium term, so let’s check to see if the short-time outlook is the same.

In this week’s USD Index short-term chart, we can see how the situation has evolved recently. A sharp rally was seen recently so a pause would not be surprising. As odd as it may sound given the previous sentence, a continuation of the rally is also a possibility. The upswing is pretty symmetrical with the preceding decline, and if this continues, we could see a move above 84 in the coming days. This would likely have severe bearish implications for gold and silver. Taking a closer look, it seems that higher USD values in the past few days drove gold and silver prices lower, so a move above 84 would surely be a big deal for the whole precious metals sector.

Now let’s move on to the analysis of the Euro Index.

In this week’s Euro Index chart, we see that the head-and-shoulders pattern remains in place. It has not yet completed (and it could still be invalidated) but it is still being formed. With the short-term trend down for the euro, this chart is bearish at this time for the medium term, so it confirms what we wrote about the USD Index, as the two indices move in the opposite directions as the EUR:USD currency exchange rate is the main part of the USD Index.

Our final chart looks at the price of the yellow metal from a non-USD perspective. We haven’t commented on gold from this perspective for some time, so at the beginning let’s remind what this rather unknown ratio actually is.

UDN is the symbol for the PowerShares DB US Dollar Index Bearish Fund, which moves in the exactly opposite direction to the USD Index. Since the USD Index is a weighted average of dollar’s currency exchange rates with world’s most important currencies, we may use the gold:UDN ratio to estimate the value of gold priced in “other currencies.” What we feature on the chart below is not the price of gold in one particular currency. It is a weighted average price of gold that we calculate based on the price of gold in a number of currencies other than the US dollar.

My first real bullish article in a long time. Ed Note: This is an extensive article

A “Pure Giveaway” At The Time According To Billionaire Entrepreneur.

As articulated here on Wednesday, gold is now approaching the 1976 bottom in terms of total percentage decline from its most recent top.

Following the FOMC-inspired decline of the last two days, we are now another 6% closer to that bottom:

The 1976 mid-cycle bear market in gold provides us with recent precedent of gold dropping by 48% in the middle of a bull market—only to rally by 900%+ once smart money fully re-positions itself.

It appears that re-positioning has been occurring all year long.

Self-made Canadian billionaire and head of Dundee Corporation, Ned Goodman, recently notedthat, “[Gold] is under siege today and maximum pessimism is being delivered in the midst of a very long term secular bull market…not unlike the early days of the 1970s when gold at $100 an ounce was a pure giveaway. Prices have been created by false and manufactured pessimism…[and] we can expect unbelievable opportunity for significant gains. The overall market for gold is still in a bull market but the current situation is acting like a bear market. As John Templeton said, ‘Buy at maximum pessimism’.”

Indeed we are at an important crossroads. Gold is either gearing up for a,“seismic move upwards,” as Goodman further commented, or the“grandiose monetary experiment…[which] is unprecedented in recorded financial history,” will have worked (ie. printing grow into infinity, absent of inflation).

Only time will tell.

……read Bull Market Thinking’s June 25th Market Analysis HERE

Gold continues to struggle and so do explorers.  I am seeing encouragement in the trading of some discovery stories but this is a very small subset of the junior sector.   

I think the precious metals markets are well set up for a rally but gold rallies don’t usually happen in the summer.   It’s still possible but I don’t think a rally strong enough to drag the juniors along for the ride can be assumed in the short term.

I will continue to focus on discovery and potential discovery stories. The lack of well-funded companies with targets I really like means I haven’t been adding new names to the list recently.   I don’t see that changing soon.   In a low liquidity bear market no one wants to get stuck with the wrong stock.  There are a handful of situations that look interesting but I’m waiting for the market to come to me. If that happens those of you on the SD list will hear about it first.

Most of the companies I have been concentrating on are either drilling or will be before the next issue is out.  That is where the rubber meets the road for this type of speculation.   We’ve had one work out and I’m hoping to see other successes before much longer.  The summer doldrums are almost upon us but companies that announce important discoveries will still get attention. 

Markets just keep getting stranger.   Traders are obsessed with guessing when the US Fed will start to taper their QE program. This has been generating a lot of counterintuitive trading.   

The US economy continues to post positive economic readings though it looks like things may be slowing a bit. 

It’s clear market participants don’t think the US economy is strong enough yet to advance without prodding by the Federal Reserve.  Every comment by a member of the Fed Open Market Committee (voting or not) sends markets stampeding one way or another.  Volatility levels are high.  A lot of retail money recently entered the markets for the first time in years.   It will be interesting to see if the wild swings during the last couple of weeks are too hard on their nerves. 

The overwhelming concerns about QE or no QE can be seen in the reaction to major economic readings through the last month.   In a “normal” market that has seen the sort of move the S&P 500 has the past few months any sort of negative or even contradictory economic reading would be a disaster.  That certainly hasn’t been the case lately. 

The US employment report for May is a perfect example.  The US economy produced 175k jobs in May, slightly higher than the consensus estimate of 165K jobs.  Revisions to March and April data basically accounted for the amount above consensus.   Normally this would have produced a flat or down session in the markets as traders who bet on a strong reading exited. (Ed Note:  Majority of U.S. Economic Data Beats Expectations this morning. Of the large number of economic releases that came out, 11 of the 12 beat estimates and some where well above expectations.)

Instead of that we got a huge rally in equities and a pummeling (again) for gold.  Most mainstream finance sites credited an employment report that “beat consensus” for the rally.  I think a widespread belief that the job gains would not be strong enough to convince the Fed to cut QE was the real reason stocks soared. 

(Ed Note: Charts updated since article written)

The charts above show recent action in the gold, $US and Yen markets.  Gold has continued to struggle, which is not comforting given the looks of the $USD chart.   

The Dollar Index has put in what looks like an important top, losing 4% and dropping below its 200 day moving average.  At least some of this is due to the bounce in the Yen.  Traders closing Yen short/Dollar long positions certainly accounts for some of the move.  It’s also part of the reason precious metals have reacted so weakly to the Dollar move.

Another trade that may be affecting the Dollar is a move out of US Treasuries. It’s hardly a stampede but yields on 10 and 30 year treasuries have increased by a third (from a record low base, admittedly) in the past month or so.   This too is a reflection of traders betting on how and when the Fed exits QE.

I can’t read Bernanke’s mind any better than Wall St traders can but I’m not convinced he’s as close to pulling the trigger as many assume.   Swings in the markets are making the decision that much harder.   The Fed Open Market Committee is well aware of the impact this move will have.   They want to time it to ensure the change in QE buying does not become a self-fulfilling prophesy that crashes bond markets and takes Wall St down with it.  

Based on comments by Bernanke he is looking for at least a 200k per month increase in employment for several months running.  We haven’t got that yet.  Job growth is still light and the jobs being created are mainly low quality ones.

Another important factor the Fed will consider is the lack of inflation.  The chart above shows the longer term trend in the Personal Consumption Index deflator, the Fed’s preferred inflation measure.  It’s at 1.1% (ex food and energy) and has been trending down since early 2011.  

I’m not bearish on the US economy and would be shocked if the PCE went negative.  That said, I don’t see Bernanke risking it.   Deflation is VERY hard to get rid of if it gets entrenched.  Japan is throwing everything and the kitchen sink at the problem.    Inflation is fairly easy to beat when you have a zero interest rates.  You just jack rates up if you think inflation is trending up.  Deflation is a low probability outcome but one Bernanke would be unwilling to risk.  

The Fed sets interest rates, but only some of them.  Treasury and LIBOR markets provide benchmarks for many loan types.  When QE ends the Fed will cease being a large buyer in the Treasury as well as some mortgage markets.  This could have a big impact, generating interest rate increases that will be damaging if they are timed wrong.  QE will end, but perhaps not as fast as some fear.

None of this will help the gold market unless the Fed announced firmly that QE will continue.  Gold has managed to hold its price range but hasn’t been able to rally convincingly.   Recent moves by the Indian government to make gold buying more expensive has put a dent in gold demand.  It’s too early to say if that drop is permanent but it’s not helping.  Given corruption and incompetence in the Indian financial sector it’s hardly surprising many Indians prefer to hold gold.   

I still think the gold market is set up for a rally but will continue to focus on discovery stories until that rally arrives.

About Eric Coffin

Eric Coffin, editor of HRA Advisories, recently sat down with President and CEO of Colorado Resources, Adam Travis, to discuss more about the company, its recent successes and why investors should stay tuned to this story. Click here to download Eric’s interview with Colorado Resources now! 

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