Gold, Silver And Miners Trending Lower Today

Submitted by Dan Norcini.

This past weekend’s election in Ukraine has come and gone and the long awaited outcome has sent gold bulls packing. Russia seems to be taking more of a conciliatory tone for now. 

Combine that with a stronger Durable Goods number,  and a jump in the Consumer Confidence reading, and you could hear the umpire calling, “Strike 2”. When news about decreasing Chinese gold demand reached the ears and eyes of market players, that was all she wrote for the yellow metal. Bulls jumped ship, bears got aggressive and the downside stops were reached. Once $1275 was breached, those stops were activated and the snowball began its downhill roll. 

Throw in an option expiration day and the selling was fairly intense.

I mentioned in my Friday comments that the still fairly sizeable grouping of speculators on the net long side of the gold market had me concerned. With falling GLD reported holdings, a sinking HUI and GDXJ, and a Fed talking quite a bit about their concern for the lack of inflation, it is rather remarkable that many specs were still bullish towards gold. As long as the technical charts held up, they were hanging in there over at the Comex, but today’s breach of that key technical downside level near $1280, has now become a market factor insofar as it flips the gold market out of the recent range trade and shifts it more towards the POTENTIAL for a fresh trending move lower. Those speculative long positions are now deeply underwater ( especially those who foolishly chased the price higher fearing global war from the Ukraine crisis) and they are exiting as new shorts also move in. Losing bulls should be very thankful for those recently lowered margin requirements for gold as it might give them a wee bit more ability to hold onto losing positions should they so desire. 

The saving grace for gold is that it happens to be near the cost of production for some mining outfits and that might serve to slow the downside momentum somewhat.

I can see the metal in a grinding move lower rather than a sharp fall as it slowly bleeds out speculative interest off the long side while meeting some increased physical buying from India and perhaps China. But as far as Western-oriented investment demand goes, that is not going to be there until investors believe that the bull market in equities is over or some fresh geopolitical event arises. As far as the majority of investors are concerned, the lack of inflation in a low interest rate environment with improving economic data is the perfect recipe for continued money flows into that asset class ( stocks ). Money managers are going to put money to work where it can produce returns – it is really that simple. 

I would like to make one more point in this regard – again and again we get the chorus from the gold perma bulls that gold sentiment is lousy and that is a great reason to expect a bottom. The problem with this goofy theory is that the Comex positioning indicates the opposite – as I mentioned last Friday, every major group of speculators, whether it be the large hedge funds, the other large reportables or the small traders ( general public ) are NET LONG gold. How in the world can someone say with a straight face that gold sentiment is horrible and that is a reason to buy? It would be better to say that bullish sentiment towards gold is falling but remains positive. That would be more accurate. This is why that talk of a “capitulation bottom” is premature. That is the last hook that gold  perma bulls are now trying to hang their hats onto after their wrong-headed theories on negative GOFO rates and backwardation have collapsed. 

My own view on this is that it would be much better for gold if the speculative category of traders actually moved to the NET SHORT Side of the market on the Comex. Then we might start having an intelligent discussion about “capitulation”. Anything prior to that is just wishful thinking dressing itself up as market analysis. 

Looking at the gold chart ( daily) you can see the loss of initial support near the $1280 level. That was followed by an additional breach of the next downside support level that came in near $1266 or so. The next level extends from $1260 – $1250. 

gold_price_chart_27_May_2014

Gold price chart

The ADX is just beginning to rise indicating that the market has not yet entered a trending move lower but the potential does exist for such a thing. I am of the view, at the moment, the more likely outcome for gold is a steady grinding move lower, rather than a sharp leg lower. We’ll have to see. A breakout of a trading range market, especially the longer the duration of the previous range trade, tends to bring about some big moves. The issue here is the level at which gold is already trading. As mentioned above, it is down near the cost of production of some miners. The problem is that the speculative forces are still trapped on the net long side of this market; the wrong side I might add. They are going to be exiting barring some unexpected geopolitical event but as price descends from the current level, it should attract some decent physical demand from the East. I guess the question is are these speculators on the long side going to only grudgingly throw in the towel and gradually get out or are they going to say, ” I am done with this crap” and abandon the metal rapidly. I am leaning towards the former view at this point but as always, will respect the price action. If it is the former, the market will grind lower; If it is the latter, the market will drop very sharply.

In the meantime, let’s just watch the price charts and let that guide us. I am especially interested in seeing what now becomes of the HUI and the GDXJ. The shares led the metal lower and should lead it higher when the time comes for a true bottom in the metal. The GDXJ is down over 5% as I type these comments while the HUI is not faring much better, losing over 4% right now. 

Here is a chart of the GDXJ:

GDXJ_price_chart_27_May_2014

GDXJ price chart

Note that the market GAPPED DOWN below a key support level that has been in place since April 22 of this year and has extended losses to the point that it is now trading at its worst level since early January. In other words, it is at an over 4 month low. 

Forebodingly, the ADX is now beginning to rise indicating that the potential for trending move exists. That trend is however down. Bears are firmly in control with the -DMI registering the highest reading in nearly two months.

The HUI has lost chart support at the bottom of its range as well. It reached a low today right on top of a support level that runs back to December of last year. If that does not hold it, it is probably going to drop below 200. That would essentially wipe out any gains in the index for the entire year.

HUI_price_chart_27_May_2014

HUI price chart

Silver had best thank copper today that the red metal is bucking the trend towards lower prices. Silver remains caught between following copper and following gold. It is hanging around that $19 level which is becoming more and more technically significant. It is a lot like the $1280 level in gold. The more the price held near that level but failed to extend higher, the greater the damage inflicted if/when that support level fails. Until silver can scale the $20 barrier and REMAIN FIRMLY above that level, it is vulnerable. 

Interest rates remain subdued as bonds actually ticked up some despite the new all time high in the equity markets and the improving economic data. What seems to be at work in the US Treasury market is that traders are becoming more and more convinced that some sort of monetary easing is going to be coming the way of the Eurozone with lower rates resulting over that way. This is causing those who want to own bonds to increase ownership of US Treasuries due to the higher yields in what they consider to be a tame inflationary environment. In other words, money is flowing to where it can capture the best yields and with many thinking that the US economy is improving at a better pace than the Eurozone, money is flowing to the US. 

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