Huge Volume & Tiny Volume – Meaningful Paradox For Gold Investors

Sometimes the clues one needs to make a very important decision are hidden and not visible at the first sight. Sometimes, they are right in front of one’s eyes. Interestingly, at times it’s more difficult to notice the obvious ones than the hidden ones, as one views them as something so obvious that it’s not worth paying attention to. Today, on the precious metals market, we have both. There is one word that connects them: volume. The devil, however, is in the details.

The volume was tiny. And huge. Your Editor’s eyesight could have been better, but it’s not the reason behind this paradox. The reason is change in perspectives and parts of the precious metals market. The weekly and daily volume in gold was small, but it was very significant in case of palladium, and both can tell us something about gold’s next move.

Let’s start today’s discussion with the flag metal of the sector – gold.

Gold’s Weak Volume

Gold - Continuous Contract

 

Last week’s decline was tiny, but the more shocking fact was the volume that accompanied it. We saw something similar shortly after the previous two major tops, so it seems to be quite normal at the current stage of the gold market. That’s simply how gold tends to perform shortly after the top.

Some may say that gold’s decline on low volume is a factor that shows that gold doesn’t want to move lower. This claim would not be correct because of at least two reasons. One is that the price-volume mechanism is not symmetrical.If there were no buyers and no sellers, the price would decline, not stay at the same level. The implications of low volume are really different for the upswings and for the declines. That’s why upswings on low volume are bearish and declines on low volume are rather neutral.

The second reason is that gold didn’t decline for the entire previous week – it moved a bit higher on Friday.

Gold - Continuous Contract

 

Obviously, the Friday’s move higher – on its own – does not prove or indicate anything. The daily volume, on which it moved higher, however, does.

Last week’s decline took place on low volume, so many traders viewed it as a counter-trend pullback. However, if that was really the case, then gold should have rallied on Friday on strong volume. The volume was neither strong, nor average. It was weak. This suggests that the decline that we saw earlier last week was not just a pause in buyers’ activity. Taken together – both: declines and Friday’s rally – show that the buying power has most likely dried up. Everyone (or almost everyone), who was considering purchasing gold around current levels (before seeing an additional downswing) has already entered the market. And the price needs fresh buying power to keep rallying.

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