Gold’s Latest Stumble Puts It on the Edge

Not that gold has done exceedingly well at any point since mid-2011, but one could always take solace that it would at least hold its ground while waiting for the next batch of buyers to muster. After Monday, though, it may finally be time to open the discussion that the gold rush is over — and that this commodity is no longer the no-brainer, easy-money trade it was between 2009 and 2012.

That’s not to say Monday’s dip was catastrophic. It was only about a 1.2% decline in gold prices. In the shadow of no net movement from gold all year long, however, following a 7.3% pullback from last September’s peak, that seemingly minor sell-off may be the subtle beginning of what could become an avalanche.

Charts Don’t Lie

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This chart better explains why Monday’s small problem may not be as small as first figured. A key support line (red, dashed) that extends all the way back to early 2009 — when the mega-rally began — has been breached.

That merits repeating, perhaps in a different manner: The last line of defense the bulls had working for them for the better part of four years has just failed. If this isn’t a red flag, then nothing is.

Gold futures didn’t just tumble under a critical support line. Gold was already beneath its 200-day moving average line (green) and with yesterday’s pullback put some more distance between it and that critical long-term indicator.

But Why?

Some of the media and gold’s perma-bulls were quick to point out that many Asian markets are closed to celebrate their New Year, while some European traders may have been taking a break on Monday for Carnival. But it’s a bit of a stretch to say that’s the reason gold was struggling.

More realistically, gold was pushed lower for the more palpable reason that G7 countries (U.S., U.K., France, Germany, Italy, Canada and Japan) are hinting that they’re considering letting the market fully determine their respective currency’s exchange rate rather than each of those governments establishing it. The stated goal is to steer clear of a currency war, but the likely effect is a strengthening U.S. dollar.

That’s bad for gold.

Of course, it’s all rhetoric we’ve heard before. While those past instances of currency “management” have pushed gold higher or lower for a few days, when it’s all said and done, the market’s memory of those threats and promises is short-term. Sooner than later, gold gets back on the course it was going to take anyway, which is still ultimately a function of supply and demand, which is still reflected in the chart. So…

Zooming In

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While gold’s technical breakdown on the bigger-picture weekly chart is clear, the up-close daily chart provides some needed detail of how this is all shaping up, and what’s apt to happen next.

Truth be told, one bastion of hope is still left — the support at $1,637, which prompted the rebound in mid-December and then again in early January (it also used to be a ceiling, back in July of last year). That’s a long shot support/rebound area, though, and it’s unlikely to hold the line with as much bearish pressure as the 50-day moving average line is applying to gold futures right now.

Not sure what it all means? In layman’s terms, the chart says there’s some structure and organization to the way the sellers are letting go of gold now and that organized and calculated selling effort is the last thing the bulls want to see. If, or when, $1,637 snaps, it’s game over, and not in a small way.

What We Don’t Know (Yet)

While the chart’s shape suggests that real demand for gold is deteriorating, one more piece of the puzzle hasn’t been laid yet: the World Gold Council’s fourth-quarter report on actual consumption of gold, categorized by uses like investment, jewelry and electronics. In the third quarter of 2012, demand fell by 11%, a dip that was relatively well reflected in gold’s chart in the latter part of that quarter and through fourth quarter.

Gold hasn’t perked up a bit since then, so it wouldn’t be off-base to expect the WGC to report another period of weak consumption.

Yes, it’s nothing but a number, and considering it’s not published until a month-and-a half after the end of the quarter it covers, why give it any credence? Yet, traders look to these quarterly reports for clues of any trends. If the council says demand fell again last quarter, that may well be enough to stave off any new buying as well as shake current gold owners out of their positions.

And, if that’s how things pan out, then this small trend will indeed become very big, real fast.

That report will be published sometime in the middle of February, perhaps even this week. In the meantime, gold’s chart is precariously hanging by a thread.

As of this writing, James Brumley had no position in gold, gold futures or gold-related securities.

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