Gold Market Update - Monday, March 2

Gold suffered an extraordinarily brutal smackdown on Friday afternoon, which had been presaged by a similarly violent drop in Precious Metals shares on Thursday. Right up until this development gold had been doing well and looking like it was functioning as a safe haven, in marked contrast to what happened in 2008. However, as we will see, notwithstanding this violent reversal doubtless being the product of chicanery on the paper market, it does not bode well and is a sign that as the nascent major bear market in world stock markets unfolds, investors will be running the same old script and faced by liquidity problems and margin calls, will “throw out the baby with the bathwater”, dumping everything over the side again as in past crises, and we have already seen evidence of this last week with their mindless flight into intrinsically worthless Treasuries.

Was the last update wrong? – yes, it was. Could we have seen this smackdown coming? – yes, we could – the keys to it were in the COTs, as we will shortly see. Then why didn’t we? Part of the reason was that with QE already running full bore and set to intensify, inflationary pressures are mounting that ought to make gold the “go-to” safe haven, but in a full-blown panic scenario such as we have seen over the past week, these considerations are ploughed under by indiscriminate mass liquidation by investors, and with respect to the COTs, readings had been running at a very high level for a long time, and that didn’t stop gold until last week. But in fairness to myself, I did see the crash coming and we made an absolute fortune out of Tech sector Puts, but mistakenly thought that gold and silver would weather it.

We’ll now review this major development on the charts in an effort to determine what it portends.

On the 6-month chart for gold, we can see that it looked fine until as recently as yesterday morning, and then all of a sudden it cratered, dropping a massive $75.80. Prior to this sudden plunge it was overbought and had looked like it would consolidate to unwind this condition, but eventually, the acute pain being felt elsewhere translated into an avalanche of selling that caused it to tank, and there was some indication of trouble brewing in the volume pattern, as the plunge was preceded by several days of heavy downside volume. The plunge yesterday broke it below both its 34 and 50-day exponential moving averages, mentioned as important in a generally bullish article by Bob Hoye in a February 24th update entitled Gold – A Review of Fibonacci Targets. This kind of massive smackdown, which took the gold price straight down to its rising 50-day moving average, is viewed as a clear “shot across the bows” and is interpreted as meaning Big Trouble. It is believed to be a sign that gold’s nascent bull market is aborting. Probably, without the coronavirus, it wouldn’t be, at least not till later, but we have to live with what we are dealt. So it is regarded as a sign that, at least during the earlier panic phase of the general bear market, gold and the PM sector generally are going to be dragged down too. Note, however, that with a reversal candle appearing on broad stock market charts on Friday, and gold arriving at its rising 50-day moving average in a short-term oversold state, it is likely to make some sort of limited recovery rally, before it turns and drops anew, as shown on the chart, which is a scenario that is considered fairly likely.

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