Time to dump gold?

POSTED ON October 31, 2014 BY CEO Technician
CATEGORY Gold,

After yesterday's ugly session it was pretty much a foregone conclusion that gold would knife through the $1180 level, an area of support which it has tested on 3 different occasions since June 2013.

As is often the case the breakdown took place in the early morning hours New York time:

Gold is currently fumbling around in the $1160s and the technical damage incurred over the past 24 hours has been extensive. Technicians will be quick to tell you that you 'can't buy the gold chart' after this recent breach of support near $1180. However, should an investor exit his gold position after today's technical damage? The answer to this question is a bit more nuanced.

There is a high probability that precious metals prices will fall to lower levels over the coming days & weeks. However, the problem with selling now in the hopes of buying lower at a later date is one of timing. Bottoms aren't telegraphed well in advance and buyers aren't given a great deal of time to pick up assets at bargain basement prices. In fact, true bottoms are violent and ferocious - the situation will look desperate and then an unforeseen catalyst will come about and prices will rally 10% or more in a matter of hours. Suddenly those who sold out in hopes of getting a better price or simply because they couldn't stand the pain anymore end up buying back at higher prices just to get back in.

The fact is that the gold price has now fallen to levels which make many of the higher cost mines out there uneconomic. Moreover, any new projects that are borderline in terms of their NPV (net present value) are likely to be put on care & maintenance until prices recover back above $1250. Analysts will be spending much of their weekend reconfiguring profitability models for companies and resources, estimates will be drastically lowered and new mine supply (6-12 months out) will be much lower than previously forecast. While all of this is supportive of the gold price down the road, panic investor liquidation can continue to pressure prices over the short term.

The breakaway gaps in the gold miners over the past couple of days are also indicative of panic selling and capitulation:

This morning's 'halloween surprise' was quite a scare for owners of gold mining stocks. The GDX did something it has never done before; it gapped below the 3-standard deviation lower Bollinger Band on the daily time frame. If there was ever a sign of capitulation that might be it.

Simply stated, now is not the time for investors to panic and sell gold. However, it's probably not the time to buy either. The market needs time to heal and a V-bottom, at least from current levels, appears to be exceedingly unlikely.

CEO Technician

10 year veteran trader & portfolio manager focused on US/Canadian equities, precious metals futures, US Treasury bond futures, and foreign currency utilizing a technical approach with a deep macro-market understanding. More →

ceotech@ceo.ca

CEO Technician

ceotech@ceo.ca

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