In The Lead – Chart Attack!

by Jon Nadler, Kitco Metals Inc. on December 29, 2011 · 0 comments

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Precious Metals CommentaryThe week that was supposed to be a calm and mostly boring one for gold and other precious metals players turned uglier by the minute as sellers demolished one support level after another and took no prisoners.

The bears who were supposed to be hibernating in some cozy cave for the winter attacked gold’s pivotal chart points with the ferocity of a great white this week. The yellow metal took out important supports at $1,550 and Wednesday’s staggering $36 loss was compounded this morning with an additional $33 worth of a free-fall.

Bullion spot bid prices thus touched the $1,521 level and brought into question the subject of whether or not the $1,500 pivot point might be able to hold up against the swollen tide of liquidations. Just weeks ago, some were willing to bet their life’s savings on the belief that gold would not reach such a number-certainly not before printing a $2K record into the logbooks. Today the precious metal came to within $22 of touching that "Unholy Grail." Oops. If and when $1,500 happens, we might suggest making a donation to charity, as a nice gesture of contrition.

The touching of six-month lows and the unraveling of the technical charts in gold has shrunk the year-on-year gain to but 8% as of this morning-a far cry from the near 30% gain being shown not too many moons ago on the Kitco 1-year change tickers. While gold’s recent BFF — the euro-has now fallen to an 11-month nadir this week, gold is on track to record its longest price cave-in since October of 2009.

The slide over the past six sessions has once again prompted a remark from economist Dennis Gartman.

He noted yesterday that "there is something very serious going on [in gold]" and that "the long-term chart of gold in US dollar terms…or in terms of almost any currency is in jeopardy of turning very ugly, very quickly."

That certain "something" could be the same thing that billionaire George Soros alluded to some two years ago (when no one was listening).

The only positive news item for gold this week was yet another feeble remark by one Chinese official that the country should consider adding more gold to its reserves. Such wishful thinking has been fueling the bulls since at least three years ago but it appears to continue to go unnoticed by the PBOC. We have previously explained the reasons why the Chinese central bank does not agree with such urgings on account of internal policies.

On the other hand, the mere indication that Indian gold imports might slump by 50% on the month and the news that Chinese authorities are shuttering a plethora of illegal gold trading (make that speculation) outlets around the country sent the bulls scurrying for cover that was frankly, not in sight to be had. Gold’s inability to react to Iranian saber-rattling and uncertainties surrounding a post Kim Jong-Il North Korea is especially worth noting over the past couple of sessions.

This morning’s price roundup showed gold trading under the $1,530 bid level (off some $28) and silver down 42 cents at $26.73 (this, after having basically fulfilled our earlier call for the $26 initial downside target by having approached it to within a dime). Platinum dropped another $23 to reach $1,362 per ounce amid year-end selling by Japanese sources who are jumping ahead of new taxation laws to be imposed on bullion retailers there. Dealers will have to report all physical gold and platinum transactions larger than 2 million yen to the country’s tax authorities. It is as yet unclear if palladium might benefit from this edict. In any case, palladium also fell this morning, but it only lost $7 to ease to the $632 bid level per ounce.

Gold prices have fallen under the 200-day moving average and then some. They have also begun to alter the curvature of the 50-day moving average into a southerly direction. The weekly charts show the gold ETF (GLD) closing under its own 50-week moving average for at least three trading sessions now. Silver is in a similar but more pronounced pickle; its 50-DMA crossed under the 200-DMA back in late October. Yet, many have refused to acknowledge the very existence and advent of a bear market in the white metal. Readers are still being bombarded with either [perennially rescheduled] promises of $80 silver or with fantasy stories of manipulation and/or severe shortages in the physical metal.

Well, the US Mint has now managed to put a serious damper on such allegations with yesterday’s announcement that it has enough gold and silver Eagle coins on hand to meet (fading) demand and that it does not anticipate having to allocate the products next year. This month’s silver Eagle coin sales came it at one-third of the level (2 million units) they achieved back in January. We had already noted in an earlier article that the Mint’s gold coin sales had experienced a 20% year-on-year contraction in 2012.

The Treasury Department’s US Mint moved 1.22 million ounces of gold Eagle coins off the shelves in 2010. This year’s tally comes in at precisely the 1 million mark. Do the math. Still, writing about putatively empty coin shops remained the favorite pastime of newsletter vendors and talking about investors standing in line to acquire Eagles remained the favorite scary line among telemarketers.

Apparently, investors are caught up in an exodus from formerly profitable niches such as gold and health care; to name but a few assets. The money being pulled off the table is going into bond funds and (gasp!) savings accounts. The latter instrument has seen the inflow of some $50 billion over the past month and the trend flies squarely in the face of US dollar doomsayers and their prognostications for a dead-and-gone greenback. Moreover, January — a month in which inflows into equity mutual funds are normally one of the largest — has not even rolled around just yet.

And, much as we’d like to agree with the rationale that claims that gold is currently suffering from year-end liquidations, cannot do so more than partially. One year ago in December gold remained strongly attached to the $1,390 level for most of the month and it managed an upbeat close above $1405 in the last trading day of the year. Remember, 2010 started off at the $1,121 mark, so if profit-taking was to manifest itself then where were the throngs of players willing to cash in on a 25% gain? They were likely holding out for higher values (which they certainly got in 2011), unlike some of them are now doing.

Speaking of the coming year (the one of The Dragon, to boot!) don’t look now, but there is at least one school of market thought that is willing to label it "The Year of the Dollar." Yes, yes, that’s a bad word in some circles. The debt-ridden, manipulated, worthless greenback that is supposed to evaporate into thin air and take your life savings right down the drain along with it, is poised to possibly have a good year indeed. How can this be? Read on:

Marketwatch’s David Callaway reminds us that "if the crises of the past several months have taught us anything, it’s that despite the allure of a new Asian currency champion, despite the potential for the European project to be saved, despite the weakness of the dollar and the gains in gold over the last decade, when large institutional investors truly get scared, they buy U.S. dollars."

While acknowledging the fact that very often the largest market moves are quite frequently slow-in-the-making ones (such as gold’s quadrupling over the past decade), Mr. Callaway also notes that it is the very deliberate fashion in which such battleship turns occur that catches the pundits off-guard and on the wrong side of the market’s "tracks."

As things stand right not, opines Mr. Callaway, "A trend shift in the dollar is long overdue, and when it happens it will happen despite which cast of characters is presiding in Washington or whether it’s an election year or not. Our politicians simply react to global asset migrations. They don’t manage them."

That trend shift may well already be underway. Are you prepared?

"The era of financial engineering and the global investment banker was poor for the dollar because there were so many sexier things to buy. Now that, one by one, those have all blown apart or had their underlying fragility exposed, investors are returning to the comfort zone of the greenback" concludes Mr. Callaway.

This might be so, despite what noted economist Nouriel Roubini recently said about the greenback — and that it is that:

"People may complain as far as they want about the U.S. dollar, but the reality is that actually when there is risk aversion, when there is tail risk, when we have trouble like today, people dump the euro, people dump emerging markets and go to the safety of the U.S. dollar and U.S. Treasuries because it’s the tallest small midget in the room."

Here is looking up at you, green-faced George. Flawed as you might be.

Until tomorrow,

Jon Nadler
Senior Metals Analyst — Kitco Metals

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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