Golds False Dawn : The Recovery Yet to Come

October 1, 2013 | By | Reply More

Lets make no bones about it, gold has been disappointing for us gold buffs for the last year. Yes, a retracement from 2012’s highs of $1800 an oz. was not unexpected as profit takers kicked in, but to fall steadily after that to its low of a fraction off $1200 an oz. was a lot to bear.

Since then we have had another false dawn when the price moved up from $1278 to peak at $1418 in just twenty days before reverting to support around $1300.

Gold’s Strong Fundamentals Were No Help

Aha ! We and many others thought, at last we are off to the races again. All those increasingly strong fundamentals that had and still do support the gold price since 2008 must be registering again with buyers of every hue.

At the same time we were being regaled by the media with tales of massive buying of physical gold by the ordinary citizens throughout Asia. Demand from central banks of the area plus other emerging nations with Russia in the lead was going from strength to strength. The result just another of gold’s false dawns.

Delivery Doubts Undermined The Gold Market

There was a downside however and that was the steady outflow of the yellow metal held by the worlds largest ETF backed by the physical metal, SPDR Gold Trust. At one time this ETF boasted the seventh largest holding of physical gold with only six countries ahead of it.

Whether the selling of its gold was due to its investors doubt as it does not actually hold the metal in its own secure vaults but only paper to show for its ownership (i.e. it could not actually be seen and physically accounted for as its sole property).

Then there were serious concerns that not enough gold was available to satisfy the futures market if many demanded delivery rather than trading. It could simply be that, with a little help from the US government in the form of QE, the illusion was given that the stock market could give quicker and better returns.

Government Turns the Screws on Joe Public

We call it an illusion because the prospect of massive inflation in the price of essentials is building behind the dam of lower consumer expectations, unemployment and excess government spending that takes more tax dollars from employers and employees alike and less flowing into the real economy.

Will the Dollar Be Worth the Paper it is Printed On

If and when QE is eventually tapered off and the politicians and the Fed face up to the reality of the situation they have created, there seems little alternative to the abandoning of the dollar as the worlds stand-by currency to be replaced with a unit of exchange that cannot be created from thin air with no strong asset to back it.

Gold The Front Runner

Lets face it, gold is the front runner in such a situation, no other alternative is as viable. Just watch inflation let rip as the dollar and other fiat currencies lose their buying power like those of the so called banana republics or even as bad as Germany after WW.

Big Sell Orders Keep the Gold Price Down

So now the price of gold seems to be teetering above a floor of $1300 an oz. Look at the charts, every time it makes a run at $1400 along comes a big seller and a sharp, if not precipitous fall, occurs. How overjoyed must Wall Street, the Fed and certain politicians feel as gold gets hit with yet another a nice big sell order to undermine any growing optimism amongst buyers.

Then, of course, there are the statements originating from Bernanke and others designed to misinform or mislead to dampen the fires of the gold bugs.

Short Term Trades to Ease the Pain of Waiting For Gold’s Big Move

All this only amounts to delaying tactics as the day of reckoning must come sooner or later. When it does those who have held their nerve and conserved their pot of physical gold, whether it be bars or coin, will find their faith justified. In the meantime the volatility shown by the physical metal is throwing up some excellent opportunities for short term trades. Of particular interest has been in the immediate aftermath of one of the frequent sharp sell offs.

The one hour and six hour carts are the ones we find the most useful. Using candlestick signals and watching for the trend to reverse with , most importantly realistic stops ( recently just below $1300) and moving the stop up in tune with the bounce back has worked well for me. It has been making some amends for my growing lack of patience waiting for gold’s next powerful surge back to previous highs.

N.B. As I write New York has opened with gold taking a fall from $1305 to $1290 in the first ten minutes leading to a slow recovery to $1295 so throwing up a short term trading opportunity that I did not take advantage of as my rule of thumb is never to trade within the first half hour of the open! It does seem to stayed a little flat by 12 minutes past three so I’m giving this a miss.

 

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