Sell at highs and buy at lows: Revisiting the Nov 28 Gold crash

Last Updated : 02 January 2013 at 14:40 IST

Centuries after the French Revolution, Chinese comrade Mao Zedong said it was too early to pass a judgment on the same. However it is pretty much the time to judge the gold crash that occurred on November 28, 2012.

Total recall

On the said day February gold last traded down $26.00 at $1,718.80 an ounce even as spot gold was quoted down $25.20 at $1,717.25. Silver shed 1% and was seen at $33.725 an ounce. It recovered later on.

This was deemed pretty unusual as no news came in, that could become an explanation for the said price action.

I wrote on November 29:

I seriously doubt the issue has got something to do with fiscal cliff. The ones who carried out sell orders must have got some reliable information regarding US fiscal cliff talks...

The talks could have a positive outcome: this is no insider information, but any sensible market-watcher could reach this conclusion. No member of US Congress would let a recession creep in by making the fiscal cliff talks a complete failure. The disgruntled Americans would never forgive them for that.

However there is some stark contrast. There always exist a possible risk that things could go wrong, anywhere, anytime.

But risk could be insured against. How about uncertainty? One cannot insure against uncertainty, unless one gets concrete and reliable information that could demystify the ambience. My point is, somehow or other, some of those who placed sell orders in gold could probably had some positive information that the cliff issue will be addressed in a sound manner.

This in turn caused some selling which also triggered algorithmic stop loss attempts aggravating the bloodbath. Movement in one commodity can substantiate my point. Silver: the commodity gained after it dropped initially (following the trend in gold) making a comeback and closing with minimal losses.
And silver is an industrial metal. Industries use a major chunk of silver mined. If the fiscal cliff issue could be avoided, then that may prove to be beneficial for silver as a recession could be averted and as the recovery would continue; but the same could prove to be bad for gold, which some of those sellers averted by selling.

So much for the history.

Since November 28 gold started behaving like a commodity that was somehow or other got cursed.

The fact of the matter is that since then gold continued to plunge even as silver remained relatively steady. Gold started behaving like silver and silver like gold.

In no time gold came below $1700 and as fiscal cliff talks showed signs of fizzling out, gold prices came down yet again. Meanwhile, the selling continued and gold hit a bottom at $1636 on December 20. This January in 2013 may see gold going to as high as $1720, our analysts say.

Thus the picture becomes clear. It is a strategy as old as the commodity markets. Sell at highs and buy at lows.

But out there somebody sold so that he could take the prices down at the wee hours when the London markets would be closed and Asian markets would not be open; when volumes would be relatively thin creating maximum impact. And then buy back the same before the prices would begin to climb; which is happening now.

Worst over?

As many analysts say, the worst could be over for the markets.

Gold and silver would still be working out its magic, but may not be on the scale as one may think it would. A chunk of uncertainty is off the markets, but still a chunk remains. In fact,debt ceiling debate could turn out to be the new fiscal cliff...

And who knows, the history could still repeat. Now, who has that priceless info on debt-ceiling debate? 

As published here: http://www.commodityonline.com/news/sell-at-highs-and-buy-at-lows-revisiting-the-nov-28-gold-crash-52038-3-52039.html

Four factors that can support Gold long term

Last Updated : 07 December 2012 at 12:05 IST

Gold is plagued by a bear these days. Markets call the bear a mystery seller carrying out gold trade in twilight hours. But one thing is for sure: gold as a commodity is much much bigger than the mystery seller. It would continue to be a safe haven asset for one obvious reason: there is no substitute for gold. In fact gold has no other use. If there had been no investment, there would not have been gold. 

Aurum has an aura and that aura is the aura of investment. Until it gets stripped, gold would remain as a king of commodities and commodity of kings (and central bankers). Gold would always be thought of as a commodity that should be purchased in dips and often not sold in ups. That is gold and that is the kind of resilience and leverage it has.

So much for the eulogy!

Now, let us come to the four macro-economic factors that could support gold in the long term. Two of the four factors have a flip side which would also be put forth.

Eurozone crisis tops the list...

Euro area crisis

It need not be stated that Eurozone is in a mess.

“The Governing Council of ECB continues to see downside risks to the economic outlook for the euro area. These are mainly related to uncertainties about the resolution of sovereign debt and governance issues in the euro area, geopolitical issues and fiscal policy decisions in the United States...” the European Central Bank President Mario Draghi said in a statement yesterday.

“The economic weakness in the euro area is expected to extend into next year.” he added. “...annual real GDP growth (is expected) in a range between -0.6% and -0.4% for 2012, between -0.9% and 0.3% for 2013 and between 0.2% and 2.2% for 2014.”.

Now, that is a contraction of 0.4% in a minimum sense.

“Later in 2013 economic activity should gradually recover, as global demand strengthens and our accommodative monetary policy stance and significantly improved financial market confidence work their way through to the economy. In order to sustain confidence, it is essential for governments to reduce further both fiscal and structural imbalances and to proceed with financial sector restructuring.” Draghi stressed.

If the ECB President says that Eurozone is contracting, gold prices can remain well supported. In a contracting economy, there is no better way to preserve your wealth than investing in gold. This would keep gold prices supported over a long term.

Also, see that Mario Draghi has not left out US fiscal cliff issue in his speech. That makes our second candidate.

US Fiscal cliff issue

Fiscal cliff issue has flip side to it, which I would explain first: if US goes off the cliff then chances are more that the gold prices would skyrocket. But chances are less that US would go off the cliff: it would be the judgement day for Republicans if it happens to be so.

$600 billion in spending cuts and tax hikes that would kick-in in January, subject to failure of the current talks, is expected to take US back into recession. That can inflict panic in marketswhose consequnces could be so unceratain and complicated that gold would gravitate into new realms.

To understand fiscal cliff issue better, see this post 

China demand

China is not only the world's biggest producer of gold, it is also its top consumer.

China, the world's top gold producer is aiming to come out with 420-450 tons of gold in 2015 which is 25% higher than 2011, China's Ministry of Industry and Information Technology said recently. The country is expected to consume 1000 tons of gold in 2015.

The darling of copper is also the heart-throb of gold. And as long as China consider gold as a strategic asset, gold prices would just have to head northwards.

Meanwhile, India, the second biggest consumer of gold is worried that the nation has to import gold in so high quantities that it is hurting balance of payments according to Subir Gokarn, Deputy Governor of Reserve Bank of India, India's central bank.

According to Gokarn, “India imports about one-fourth of the total global supply of a little over 4,000 tonnes, and this excess gold demand is creating stress on the system, particularly on the balance of payments.”, the Hindu Business Line quoted him as saying.

QE4

There are rumours of a QE4 in market circles. But the QE4 too has a flip side. If the QE4 is of the same nature as that of QE3cited by Dennis Gartman, then chances are less that markets would respond with agility.

Still easing is easing and QE4 by the world's biggest economy will not go unnoticed. If QE4 is something to the tune of QE2—the latter saw at least $600 bn pumped into the economy in bond re-purchase-- then gold would hit the skies.

No wonder, all eyes are trained on the FOMC meet scheduled for December 11-12. 

Operation Twist is coming to an end and today's job market report would give us a better idea regarding the course of US Federal Reserve monetary policy. Afterall, Ben Bernanke has tethered easing to improvement in job markets. 

As published in: http://www.commodityonline.com/news/four-factors-that-can-support-gold-long-term-51710-3-51711.html

Gold crash: Three trader level reasons

Last Updated : 06 December 2012 at 11:40 IST

The current blood bath in gold can have many reasons. I would come up with three reasons, the not-so-common-ones, the reasons that may sometimes be obvious but get missed more often. I would rather focus on the micro aspects of the reasons than their macro. And these reasons bank on a trader's sense rather than long term investor's sense.

Reason 1: Subdued trend in crude oil prices

Crude oil has seen dwindling of its gains. Brent crude currently is ruling below the magical $111 barrel mark even as its trans-Atlantic counterpart is at $87 levels, way below its previous surge levels. It has to be noted that people do channel the money they book as profits in crude oil to gold.

When crude oil prices go up, there is a tendency for gold to come down. So, when it happens, traders generally sell crude oil and buy gold and vice-versa.

With crude prices ruling low, the scope is less for traders in crude oil to book profits and invest in gold contributing to bearish sentiments.

Reason 2: Uptrend in stock markets

Stock market uptrend in India has made a dent in gold prices here. As stock markets rule high, traders opt for an investment in stocks rather than in commodities. Since a major chunk of investors invest in metals-energy complex; when the stock markets rise, the said complex, including bullion, suffer the most on routing of money.

Reason 3: December effect

Seasoned observers of markets say that December is a weak month for commodities. It could be the year-end effect, a sort of psychological resignation taking over the markets only to make a comeback in January. 

As published in: http://www.commodityonline.com/news/gold-crash-three-trader-level-reasons-51681-3-51682.html 

Why Gold prices are crashing? Answer: QE3 !

Last Updated : 05 December 2012 at 11:35 IST

Gold prices may have recovered a bit aided by the uncertainty prevailing in Eurozone area; but investors seem to abandon the commodity in droves as US fiscal cliff issue continues to keep markets on tenterhooks.

While only a handful would predict that US would go off the click, the day-to-day developments in the US political arena is adding to the uncertainty in markets in a big way. When there is uncertainty in the markets, people hardly invest. They would simply sell and markets yesterday saw just that!

“Gold is being sold along with just about everything else in commodities with the worries on the fiscal cliff,” Bart Melek, the Toronto-based head of commodity strategy at TD Securities, said in a telephone interview to Bloomberg. The metal “is usually said to be a safe haven, but the threat to economies globally from the fiscal cliff is having knock-on effects.”

Now, one would be surprised if I say that QE 3 is having a role in this crash. The money supply did improve subsequent to $40 billion a month unlimited QE 3. But the Adjusted Monetary Base of the US Federal Reserve remained flat.

I can explain citing Dennis Gartman.

Many analysts are bullish on gold on wrong reasons, money supply (M1, M2) is expanding but a more crucial variable, the Adjusted Monetary Base of US Federal Reserve remains sideways, said Dennis Gartman Editor of Gartman Letter in November.

US Federal Reserve is buying $45 bn worth Morgan Securities regularly but they are all nearing maturity and hence Fed is not over expansive as many analysts explain, he had pointed out.

This means, what the Federal Reserve bought in effect was not sold!

Now, the latest data from Federal Reserve suggests that the case remains the same. Adjusted monetary base still remains flat.

So, where are the fundamentals supporting gold?

The Bernanke talk had enlightened many a gold bull Buddhas, only that the same was a passing phenomenon. All Buddhas collapsed and bears had the last laugh.

The great QE3 lie was not uttered by Ben Bernanke, but was heard by markets to be so.

As published in: http://www.commodityonline.com/news/why-gold-prices-are-crashing-answer-qe3!-51660-3-51661.html