As the following chart shows, the gold price has undergone a waterfall decline in the past two trading days. With a drop in the gold price of 7.7% (a figure slightly different than the one on the chart which shows only the COMEX trading session) following Friday’s decline of 5.5%, it makes up for the sharpest drop since the start of the current bull market in the metals in 2001.
We had published the following table also in our Friday commentary to show the ferocity of the price decline not knowing we would beat all records one trading day later.
Just to show how extreme this situation is, we show in the next chart the sentiment BEFORE the historic gold price drop of the last two days. Undoubtedly, the recent decline has caused the sentiment to deteriorate even more.
The gold prices and the charts show gold in terms of US dollars. We should note that the historic declines were similar in all currencies. That’s noteworthy as it happended for instance in the midst of a significant devaluation of the Japanese Yen (higher Yen gold would be very reasonable).
In line with the above, Gold’s short-term volatility index has spiked to 18 month highs above 29%.
The key question is what the aggressive price decline has triggered but, more importantly, what it is signaling. In terms of reasonable triggers, we can be very short by saying that several reasons have been brought forward, but the most obvious one seems the aggressive technical selling initiated in the futures market. Zerohedge wrote that “a futures sell order worth $6 billion, equal to 4 million ounces or 124.4 tonnes of gold, by a large investment bank sent prices plummeting and spooked the markets contributing to the decline. The order was believed to have been placed through Merrill Lynch’s brokerage team. Gold futures with a value of over 400 tonnes were sold in hours and this is equal to 15% of annual gold mine production.”
A much more important question is what to make out of this. The point is that nobody knows for sure. No matter if one reads all articles that were published today and over the weekend, listens to all online radio and youtube interviews, looks at all charts … one will only hear a lot of opinions. Simply nobody has the answer right now.
An warning signal comes from Zerohedge. In comparing this historic price decline with the previous one in 2008, Zerohedge writes that “it appears that gold volatility is signalling counterparty risk concerns once again. Gold’s short-term VIX is its highest relative to medium-term VIX since Lehman as protection is bid and it seems the last two times that gold protection was in such big demand relative to stocks was when counterparty risk was rising once again.”
Something is brewing below the surface. Time will tell what exactly it is. Economic indicators appear to be worse than expected all over the world (unemployment figures, consumer confidence, record high foodstamps in the US, etc). The monetary base in the US and Japan in particular is reaching record highs (see latest US monetary base). Interest rates remain near zero. Debt levels are unsustainable and keep on increasing (not stabilizing or decreasing). Only the stock markets appear to be in positive territory for the time being. With commodity prices in a slump in the recent weeks, it is likely that a new period of deflation has arrived. Time will tell if this is correct.
Investors (not traders) that are involved in precious metals should refrain from panic selling. Investors have chosen for precious metals for the safe haven characteristics, being the absence of counterparty risk and currency depreciation. While it is true that a lower gold price seems to be far away from those characteristics, the big picture is still what counts for those investors (not traders).