Metals: Gold & Silver

By Louise Yamada Technical Research Advisors, LLC ("LYA")

May 2 (King World News) - The technical observations suggesting risk for Gold spot price (GOLDS-1,462.09) over the past two months’ reports followed through with a severe decline in Gold through 1,539 support, achieving bear market proportions at 30% down thus far (bear market definition is 20% or more down from the high).  Interestingly, the decline was totally unrelated to any corresponding strength in the U.S. dollar.  Why?

Editorial Commentary

While we attempt to follow only the technical evidence, there has been a lot of chatter of the hand of manipulation in this Gold decline, raising even conspiratorial questions.  Firstly, major banks recently went out with Sell recommendations (and anecdotally set themselves up to benefit from short sales).

Secondly, that the U.S. and ECB, in continuous competitive currency devaluation, may not want the public to benefit from owning the safe haven protection of Gold against such devaluations, preferring to force money into equities.  Thirdly, the fear of confiscation, an event that took place recently with a European being relieved of $6M in gold at a border crossing leaving one to wonder whether even Gold will be safe.

The most plausible reason may relate to the above-mentioned sudden unwinding of structured products around Gold, resultant sales and margin calls.  Nevertheless, apparently, over months, the holdings of Gold held at Comex warehouses plunged by the largest ever since record keeping began in 2001; reasons unknown.

Additionally, the open question as to why it will take the U.S. seven years to fulfill the German request for the return of its 300 tonnes of Gold held by our Treasury for safe keeping, leads one to wonder whether it has been spent (as were our Social Security coffers).  Thus, do the central banks need Gold price to decline so they can buy it back more cheaply?

We simply are reporting the chatter, but governmental manipulation is an active agent in many areas, making the investment process more difficult for managers as well as for individuals.

Gold Structural Picture

Beginning with the monthly profile (see Figure 19) we have referenced the structural momentum Sell signal over the last year (see arrow) which continued in a sustained downward direction.

Notice too that Gold, from the 1999 low near 255 (at the middle of the saucer basing process, left), has risen about 644% to its 1,900 high in 2011.  The 2008 decline ran about 32%, similar to current bear market proportions, following an approximately 145% advance from 2005.  Given such generous gains, interim declines are to be expected.  To date, the pullback has carried toward the 38.2% Fibonacci retracement level of the 2005 to 2011 advance of 345%.

Our measured move (see March report) called for a potential decline toward 1,200, which coincidentally would carry the price of Gold to the 2005 uptrend.  The 10- and 20- month moving averages (MA) have now just crossed negatively in what is colloquially called a “Death Cross” (see just under the downtrend) signifying a structural bear market in progress.  We should mention that this signal did not occur in the 2008 decline as the repair began.  Gold now is in a defined downtrend off the 2011 high.

The current Gold pattern is badly damaged technically (the bigger the drop the longer the need for repair).  There is no guarantee the low has been seen, and we would advise against bottom fishing, which can be dangerous to one’s wealth.  Most likely there will be rallies, as have come into place, and retreats as the supply-demand factors battle it out.  A consolidation should lie ahead that either could begin a repair process, or a consolidation that could be followed by a new low (as those not having sold decide to do so on a bounce), or at best a test of the current low of 1,347.95.

Intermediate to Short-Term Picture

If we take a look at the intermediate-term profile for Gold (see Figure 20), the weekly momentum has also been on a Sell (see arrow) all year and declining, adding to the risk potential.  There is no alleviation of this decline yet and the current rally appears kickback in nature.  The weekly momentum should give early signals of stabilization, as can be seen in mid-2012, and a positive turn-up, as accompanied the brief 2012 rally toward resistance at 1,800.

The rally from the 2008 low to 1,900 carried 173%, due for a rest.  The price break of the two-year support at 1,539 (resulting in the defined downtrend off the 2011 peak), now becomes resistance for any rallies, assuming the rallies can even achieve that level in the near future.

Short-term rallies, such as that now in place, following such severe declines, are generally short-lived and followed by another decline to test the original low, sometimes exceed it.  One can then watch for any positive divergences or stabilization that might suggest the decline has run its course.  Given the degree of decline, such repair could take months if not years.

Notice that the 2008 decline continued until the momentum model was able to turn up.

The Outstanding Question

The outstanding question, of course, is whether or not the bull market for Gold has come to an end.  We have offered much higher conceptual potential for Gold, but those levels may not be forthcoming, at least not at the moment.  The answer lies in future price action.  Given the fact that the advance in the current Gold bull market is far short of that achieved in the 1971-1980 bull market, one might opine there could be further to go eventually.

But we have to remember there is “Concept vs Reality.”  We may have a Concept based on the charts, but if the price action eventually counters that concept, we have to respect the price action and go with Reality to preserve capital.

During the last bull market in Gold (see Figure 21, log scale), from August 1971 with Gold at 43, to December 1980 with Gold at 850, Gold was up 1,877%.  But from the low near 43 to February 1975 with Gold at 184, up 328%, the price dropped to 104 in August 1976, off 43% (see circle), putting the structural bull market for Gold into question.

It wasn’t until July of 1978 when the price of Gold exceeded 184 and broke out to 195 that the next leg up was defined.  The repair process took two years prior to the lift-off.  A similar period of repair may lie ahead once the ultimate low is in place.  It is possible that the decline may not yet be over (unless the suggested structured product decline was a one-time event).

The above information is just a small portion of her incredible 49 page report.  As Managing Director and Head of Technical Research for Smith Barney, Louise was a perennial leader in the Institutional Investor poll, and was the top-ranked market technician in 2001, 2002, 2003 and 2004, before going independent.  To subscribe to Louise Yamada Technical Research Advisors, LLC ("LYA") CLICK HERE.

© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

The audio interviews with Dr. Stephen Leeb, Bill Fleckenstein, Eric Sprott, Egon von Greyerz, Gerald Celente, Andrew Maguire, Nigel Farage, Dr. Paul Craig Roberts and Art Cashin are available now.  Also, be sure to hear the other recent KWN interviews which include John Mauldin, Marc Faber and Felix Zulauf by CLICKING HERE.

Eric King

To return to BLOG click here.

© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast,

rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

Subscribe to RSS
KWN Blog