Just before New York’s opening bell last Monday somebody dumped 14,000 Gold contracts onto the market.That’s 1.4 million ounces (a contract is 100 ounces), or $1.8bn worth around a 65th of annual global production. And it followed a 6,000-contract dump earlier in the day as markets opened in Europe.
Is somebody trying to get the gold price down? Big sellers have been hitting the gold price.
Gold ended last week at $1,340 an ounce. Then, on Monday afternoon, it touched $1,302. That near-$40, 2.5% drop was its biggest daily plunge since December 2013 the nadir (so far at least) of gold’s bear market.
At first glance, it seems that those who sold had a pretty good day of it. But, closer inspection reveals that the gold price was already sliding in Asian trading (early in the day). By the time the massive European sell order came, gold had already slid below $1,330. And when the American order came, it was below $1,315.
Dumping all that gold in one go, particularly before the market open, does not seem to be about getting the most buck for each ounce of gold sold. Either a big position wanted out, or somebody wanted to spook the market.
Gold spiked last week over fears that the troubles surrounding Portugal’s Banco EspÃrito Santo would spark yet another crisis in the euro zone. By Monday morning, investors had realized that in fact the world was not about to end, fears were alleviated and this meant some rapid portfolio re-adjustment hence the gold dumping.
But selling often leads to more selling. On Tuesday morning, the gold ship seemed to have steadied, when another succession of sell orders came in again just before the New York opening bell. First, 4,000 contracts; then another 4,000; then 11,300 over 19,000 contracts (1.9 million ounces) in total.
I make that almost $2.5bn in the market hours. We don’t know if it was someone trying to spook the market or if it was simple re-positioning, as I have suggested. But there’s nothing we can do about it either way. As the simple sports psychology goes only worry about what you can affect.
The outlook for gold seems positive but don’t get over-excited we have seen decoy moves before. What’s more, the price action we are seeing fits in with the typical seasonal price patterns. A June low, followed by a rally into mid-July, then a sell-off is common and normal. There’s nothing to be too frightened of in that regard. What often follows is a nice rally between late July and October.
There is also a confluence of moving averages (the one-year, the 150 day, and the 50 day) all in the low $1,290s. So, again, a pullback to these levels is quite healthy. At present, my theory is that $1,180 (seen last July and then re-tested in December) is the low of gold’s bear market. What we have been seeing since is a basing process, before a gradual move into new bull market territory.
The action in the gold miners where the pullback has not been nearly so dramatic adds some meat to this theory. In recent gold sell-offs, they have fallen much more dramatically.
But, now the better companies are starting to move up again, mergers and acquisitions are happening, rumors are flying about and financing is not so dead in the water. Mining is not the dead ride it was a year ago. For a bull market in gold to happen, the miners need to be strong, ideally to lead and that is what we seem to be seeing.I don’t know why I am feeling so doubtful. This seems to just be ‘healthy’ corrective action. Perhaps it’s just seeing a seller with such deep pockets that has given me the creeps, who would it be ?
I can see another 10% or so downside in the miners; That might seem like a lot, but it’s not abnormal volatility for the sector. Should such a continued pullback occur, it would mean lower gold prices as well. These waterfall sell-offs tend to last more than just a few days…and usually imply price action due to dark pool players or the black box trading guys.
This is the gold price level to watch out for in dollar terms, for the Indian rupee price we need to see Rs.60/- per USD on the spot hold but that is not an ideal calculation given the possibility of dollar strength going forward is Janet Yellen starts to pivot and QE is cut faster ?? I also see the possibility of dollar strength going forward due to increasing geo-political instability.
For now, $1,275 is my ‘line in the sand’ price, though I’d rather see $1,290 hold. Above $1,275 and my ‘setting up for a new bull market’ theory is just about intact. Below and it starts to look dodgy. If you missed the June run and you want to take a position in gold or gold shares, the next couple of weeks may well be your opportunity. Some steady accumulation ready for an August to October rally might prove beneficial to your portfolio.
But you must manage your risk. If gold goes to $2,000 in the next three years, it will look extremely obvious after the event. But the same goes if it declines to $1,000 or $700 that will look obvious in hindsight too.
I know you want to hear a strong opinion, but I can only be honest and admit that I feel risks are paramount. Above $1,275 and this is just a so-called ‘healthy’ correction in a bottoming process, laying the foundations for a new bull market. But below it may be that the bear market is not over yet.