Gold drops in price by $100 per ounce on Friday!
The big move down in Gold has caused quite a bit of concern on Wall Street. As you can see from the enclosed chart, Gold has the potential to go to the $1,440 per ounce level. If it can drop $100 in one day, it could certainly make another $40 without any trouble. Silver has also broken badly and is breaking out bottoms that have held for two years. This has long-term bearish implications on both of these metals. The fact that Gold and Silver could not rally during the Cyprus problem was the first indication that something was wrong. But it goes a lot deeper than that, as all commodities have been hit hard; including copper, platinum, palladium, and the grain markets. Falling commodity prices are deflationary, and the one thing the Federal Reserve cannot fathom.
1 – Nothing new has happened to the stock indices even though they made new highs once again this past week, but only marginally.
2 – The Dow Jones Transportation’s continued to weaken and was unable to make a new high.
3 – The Dow Jones Utility Index was able to make a 1.27 expansion.
4 – The Volatility Index (VIX) was able to hold the lows, giving some indication that there might be some fear beginning to come into the market.
5 – The Treasury Bonds were also rallying this week, which was quite unusual as they usually only rally when there is a flight to quality. We still believe that there is a possibility the Treasury Bonds can make the 150 level, where they could be a good selling opportunity.
6 – The Euro versus the US Dollar has reached a 382 retracement of the last high. This is the same pattern that occurred in Gold several weeks ago at the $1,625 per ounce level. The Euro needs to close above the 133 level in order to have any possibility of rallying further. This is a very bearish chart on a long-term basis with price objectives near 100. Remember, the Euro did once trade at 85 to the Dollar, so this is not out of the possibility.
7 – Notice the correlation of the chart on the cash S&P Index versus the Commodity Index. This convergence is very troublesome. Corporations buy products to convert into other products using commodities. How can commodities be dropping when corporations are supposedly making a lot of money selling these products? Something is not right somewhere. The charts are telling us the demand is not nearly as strong as our corporate executives would like us to believe.
8 – There is a wide divergence between the cash S&P and the yield on 30 year Treasury Bonds. This spread is at historical levels and is due to come closer to a normal relationship (i.e. lower stocks, higher interest rates).
9 – Crude oil has broken support at the 91 level, giving the next price objective in the mid-80s. This is in context to the other commodities also following to the downside.
Someone asked me where would I would investment at the present time and I can honestly say that I really think that the best thing to do, for a conservative investor, is to do nothing until the dust clears on the commodity markets. If these markets continue following to the downside, it is going to mean that deflation is going to come into play and something very ominous will happen to the bond market at that time. All of the central banks are doing the same thing. They are issuing more credit via their purchase of bonds in order to stimulate the economy à la the US Federal Reserve. This is an experimental project that no one knows the outcome. They are trying to pay off their credit card debt with more credit cards. That doesn’t work for us and probably won’t work for the government.
One thing is perfectly clear at this particular junction and that is that we are going to see some really wild volatility in all of the markets. The reasoning behind this is that unknown consequences of what the future can bring causes money to move rapidly to find a safe haven, whatever that safe haven may be. I’m sure those who purchase gold at $1,700 per ounce were thinking it was a safe investment and now under $1,500 per ounce they are probably reassessing their position.
Gold drops in price is part of an article by Larry Pesavento . He started trading commodities in the 1960s as a private trader, whilst working in the pharmaceutical industry. By the 1980s he was trading full-time from the floor of the Chicago Mercantile Exchange, focusing on the SP500 futures. In total Larry has been devoted to the financial markets for more than 46 years. He has written a wealth of articles as well as 11 books on technical trading. A chance encounter as a broker with another legendary trader, Ruth Miller, saw him turn his attention to an area known as astrological forecasting. During the 1980s Larry ran a hugely successful financial newsletter providing timing signals using astrological confluences. When he is not trading, Larry spends time with his wife and children/grandchildren. Larry resides in Tucson, Arizona.
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