Looking At Golds Current Downtrend

May 2, 2008 | By | 4 Replies More

With the metal markets having difficulty in breaking out from the current downtrend and suffering a few false starts during the last two weeks, now seems a good time to try to analyze recent price moves in the hope that some directional clues will emerge.

There is no doubt in our mind that the technical indications have been pointing to a gold pullback with a fall to around $750 an ounce being a favorite.

Our concern with this is that so many analysts have had the opportunity to air their bearish views that it has undermined the confidence of the investment community in the virtues of holding gold in the face of the developing economic crises in the US and many other western economies.

We have been told that there is a propaganda assault, by the “powers that be”, to undermine the gold price.

There seems to be some justification for this accusation when we read and hear some of the opinions going the rounds that fly in the face of the obvious, but then again should we blame governments and bankers for attempting to put a positive spin on such a grim economic outlook?

We have expressed the view previously, particularly in the case of gold, that technical issues are way down the pecking order in the current economic climate and that investors, both big and small, should be aware that it is news, positive or otherwise, that must drive the market in both the short and long term.

The problem is that so many fund managers, hedge or otherwise, and investors in general have become so brainwashed with the power of historical charts to foretell the future that many no longer have the confidence to put their money where their logic suggests.

It is this slavish following of technical indicators that, in our opinion, accounts for much of the contradictory moves in the gold price that we have experienced since $1000 high. That is not to say that we did not expect a correction for a period as profit taking is a reasonable reaction.

Thursdays trading was a case in point. Initially Wednesday’s .25% drop in interest rates prompted a $20 surge in gold, a sensible and logical reaction although much of the rise was previously factored in.

Then some dubiously encouraging news caused the dollar to strengthen against the Euro and Sterling, oil retreated and as a consequence gold fell to a four month low of $847 an ounce. This defies traditional thinking and we can only conclude that there was a serious unwinding of short positions in the dollar, oil and gold.

This seems at the moment of writing, to be backed up in European morning trading where gold has recovered to $852 an oz. having reached just short of $856.

Our problem is with the ebb and flow around the $850-900 an ounce price range as it seems to us that the publicists of gold’s doom and gloom theory are coming face to face with the rational thinking of the followers of fundamental facts and to date neither seem to have gained the upper hand.

Now and again there are signs that gold has disconnected from the oil price movement, an association we do not think is backed by sufficient logic, and in view of this latest price action we reluctantly come to the conclusion that it is looking a possibility that the propagandists and technicians will have their way, even if oil goes to $150 a barrel in the next few weeks.

Silver will follow the same trend as gold with the platinum group metals being much more sentiment driven. That is to say investors perception of demand from the BRIC nations in particular being maintained or falling in the face of a world wide lowering of economic and development activity.

We still maintain a long term bullish stance on gold and silver and expect common sense to prevail before long as western currencies in general continue to lose purchasing power and the US remains embroiled in war and political opportunism.

We are encouraged by the presence of underlying support for gold at the $850 level indicated by the price action of the last 36 hours and maybe we will see a rebound from here within the next 2-3 weeks.

Should the price of gold bottom out at around $750 an ounce within the next three months we will contain our shock/horror by diving into our rainy day fund to top up ready for bull run to get back on target.

Just maybe this will happen very soon after the Beijing Olympics are over. We only have a gut feeling that this will be a decisive time in world affairs but who knows? 


Precious Metal Investment.com 


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Comments (4)

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  1. Harry Grant says:

    My first post please forgive any cluelessness:

    I am glad its not just me shaking my head and flabbergasted by gold and silvers illogical price decline.

    Last time I checked something’s utility as in the US dollar’s value, it supposedly declines when more of it is made
    or in this case printed as in the expansion of the US money supply and lowering of the cost of bank borrowing.

    Bank prime rates?
    I haven’t seen banks passing on
    these benefits (no pun intended) to the average Joe have you?

    Will they lower them more? How low can they sink anyway?

    or rather how much more can they lower the rate without further humiliating ridicule?
    Bens not stopping because he thinks we are nearing the end of the crisis
    he’ stopping because he has nowhere else to go.

    Make it any lower and you agree the dollar is really that much more worthless don’t you?

    Aren’t there any usury laws anymore to regulate some of these exploding mortgages?
    Are bankers stupid or didn’t they see this coming?
    Of course they did and now they are going to own a lot of real estate.

    It occurs to me that there was already way too much money in circulation and that’s why the banks were going the sub-prime route in the first place?

    Making more of it only exacerbates the situation and then the fed and its cronies decide that they
    can change the rules in
    the middle of the game and affect the cost of precious metals.
    There ought to be a law against that kind of behavior and probably is.

    You have seen gold price go up, not down with each of the feds previous machinations (rate cuts) even if only briefly. But technically this time of year blah BS!BS!

    Is it really an adherence to technical analysis which as a science has yet to be proven as of overriding value or the fact that there is nothing better for these to brokers and so called experts try to convince the uneducated about? Common sense after all is free.

    Metals are somehow being kept artificially low anyone have a clue how its being done?
    I keep reading the world bank is going to sell its 400 tons of gold but they never do they?
    and what would they buy with it if they did with their dollar proceeds from the sale?
    And if they are selling that means someone is buying and that
    the price should go up.
    Is it just me?

  2. John Lloyd says:

    Hi Harry,

    I like the point you make concerning the vast amount of money in circulation being the reason that the banks bought into the sub prime market. It is understandable that the bright young things were running short of profitable ideas as their traditional markets were awash with money and came up with this scorcher to enhance their bonuses.

    Even the wise old heads at the top of the banking pile allowed their greed and short-term opportunism to override their years of fiscal conservatism.

    But then of course it does not take many years of multi million dollar annual bonuses to be sure of a financially secure future come what may!

    I suppose that bankers having learnt their lesson the hard way, it is only a natural human reaction to overdo the reluctance to lend and to impose restrictive criteria on potential borrowers, even in the interbank market.

    To be sure technical analysis is an important ingredient in market movements, the question is which comes first, the horse or the cart?

    Not only do we have fund managers of every hue relying on technical analysis but there are also tens of thousand of individual traders using their own interpretations of the runes to beat the market. There are even automated trading systems that are dependant upon the breach of a line on a chart to trigger an order. Remember “Black Monday!”

    I have heard of several theories to explain the reasons for the machinations of national banks, governments et al to keep the price of gold from overreaching. In the first place I am not privy to any insider knowledge so cannot possibly comment, and in the second I am not entirely convinced that if this concerted action does exist, that it is as harmful to the investor as it is made out to be. After all the gold price could become another enormous bubble that would cause tremendous global harm when it popped. At the end of the day let’s just sum it up by saying that I am a reluctant conspiracy theorist.

    Unlike the self styled ´prudent´ Gordon Brown, now the UKs disastrous Prime Minister who, when Chancellor of the Exchequer, announced to the world that he was selling off 400 tons of the UK´s gold reserves and actually advertised the timing and could not understand why the price dropped to rock bottom, the IMF know how to play the game. They will feed the market at un-announced times when they feel prices are favourable and they intend to use the proceeds to pay off the deficit incurred in aiding food shortages and famine sufferers worldwide and to resume a positive cash flow. All worthy objectives I think you will agree.

    Also it is worth bearing in mind that there has been much greater trading activity in the gold market in the last three or so years which means that the 400 tons coming onto the market and spread over a period is unlikely to have a significant impact unlike the almost dormant market conditions prevailing when the UK sold off ten years ago.

    The gold and precious metal markets are now truly global. It seems with every passing day confidence is being eroded in the greenback so it is hardly surprising that the OPEC and BRIC countries in particular are looking to hedge against the USD. Gold, together with the Euro and other currencies, are in favour and the Sovereign Wealth Funds are now in place and poised to pounce on key assets in the US.

    Fascinating times ahead.

    As a last thought it seems a reasonable bet that gold may have found strong support at the current $850-875 level and we think it a likelihood that the move up toward the $900 plus level will start within the next week to ten days as buyers regain confidence-but who knows?

    Thank you for your post and interesting comments. Please keep them coming.

  3. Lisa Reisman says:

    I’d be curious to get your take as to when supply and demand factors will have any bearing on the market. Personally, I think gold is in a downtrend as it appears that the Fed is going to stop lowering rates and the dollar appears poised to gain (albeit slight) against other currencies. But then again, gold seems to have a life of its own totally independent of market fundamentals…

  4. John Lloyd says:

    Hi Lisa,

    Our reply to your question has also given us the opportunity to make some observations and comments to incorporate into our weekly summary.

    We hope that you will not mind and please keep your comments coming.

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