Gold Fails To Advance – Find Out Why

March 20, 2010 | By | Reply More

Not for the first time have our expectations been dashed as gold and its sidekick, silver, failed to advance this week.

Mr. Market so often delights in proving much of our theorizing wrong, especially when we are bold enough to pass on our thoughts to our readers.

We were positive in our explanations in the ten days that have just passed for a probable break out to the upside this week for both metals, only to see gold close $20 down from Thursday’s close. It plummeted $22 in the space of a few minutes to $102.30 before recovering on Comex to end the week on $1107, a fall from an $1133 high earlier in the week.

Two factors conspired to have proved us wrong, at least on the surface. Both the strengthening of the dollar against the euro and GB pound as the dollar index improved and that an options expiry occurred on Friday.

The sharp impetus of the fall leads us to two conclusions.

  • It is possible that the urgency of the downturn was aided by a wave, or expected wave, of short selling and covering of options with dealers marking down in anticipation. This scenario provides an argument for the eventual $5 rise from the earlier bottom.
  • The second conclusion is that, if we are correct, then there is no long or even short-term justification for taking a bearish outlook on gold as all the fundamentals still remain in place and the leading technical indicators are not showing any serious breaches of support levels.

One further factor that is leaving us in limbo at present are indications that silver is no longer in step with gold. Nothing serious yet but sufficient to cause us some erosion of our bullish confidence in the metal over the next three months as we see a possibility that a drop to as low as $16.20 an ounce may be on the cards if the $17.00 support level breaks down, a situation that some technical indicators are showing.

Of course our nervousness may be due to the fact that we are heavily into the iShares ETF (SLV) July call options at $18, $19, and $20 strikes. Silver is a much smaller market than gold and its performance is also subject to its use as an important and widely industrial metal.

If this present economic scenario turns out to be the top before a double bottom occurs and China’s economic miracle goes the same way as the West’s bursting bubble then the performance of silver will be dependent upon its ability to stand alongside gold as a hedge against inflation and a store of value compared with the perception that it is likely to be a loser as industrial demand for the metal lessens.

The uncertainty surrounding the case for inflation/deflation has yet to be resolved and may also have had a bearing on the performance of gold and silver this week.

Inflation in China now seems well underway whereas in the developed countries the rate may be said to be slowing. This we take with a pinch of salt as there seems no western government is prepared to tell the truth and massaging the figures has become `de rigueur` come what may!

We seriously doubt that within the next 12-24 months there is any chance of holding in check the devaluation of the currencies of the developed countries in terms of purchasing the necessities of life.

Deflation may be managed for a period while our political masters have the opportunity to trumpet their success. In which case we can expect some sideways movement from gold before the realization that the whole pack of cards comes tumbling down and gold soars as being the only practical alternative to the discredited fiat currencies.

But then, as we have pointed out in our opening sentence, Mr. Market has a mind of his own, otherwise all of us market experts, analysts, tipsters, charlatans, call us what you will, would not be bothering to pass on our recommendations, thoughts and opinions as we would be spending our time wallowing in the wealth we have gleaned from the accuracy of our market forecasts.

So please do not do as we say or do, look at the facts and make your own mistakes!
We just hope that our ramblings will provide investors with food for thought, open up new avenues to explore or themes that they may have overlooked.
Be assured Mr. Market will have the last laugh.

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