Monday, September 14, 2009

Signals Gold May Be Headed for a Short-Term Downside Break

Note: I hestiate writing this post because of those of you who have gold coins tucked away. This should NOT be taken as an advisory to sell those coins. Long-term there is likely to be huge inflation in the United States. Keep in mind that is why you bought those coins. It is too dangerous to liquidate them to trade against short-term gold market moves.

However, for those of you that are short-term futures traders, the likelihood of a pull back is real for a variety of reasons:

1. The money supply in the U.S. has not grown since February. Thus, there is no new money available to buy gold.

2. Gold has had a tremendous run. Thus, a lot of latecomers are jumping on board, including the behemoth Barrick Gold.

3. John Reade, an analyst at UBS, has pointed out that the number of "net long" positions held by speculators reached 29.02m an ounce last week, a record high.

On the opposite side of this equation, we have the fact that the September/October period is usually bullish for gold.

And the big factor. China, could go either way.

China is clearly accumulating gold and reducing their dollar reserves. However, they are savvy traders and are unlikely to chase the metal. If they see a pullback coming, they are likely to step out of the way.

Thus, traders should sell-short gold rallies.


  1. Everyone and their Aunt Millie, including most of the well known goldbug writers, are anticipating a breakdown due to the COT. To be sure, the COT looks very bearish.

    But wouldn't it be just like Gold to take off like a scalded dog with so many expecting the opposite?

  2. Your reasoning for a downside break is false. (Mind you, prices for gold and silver can come down but not for the reasons you outlined.)

    You claim that the money supply, or printing as I like to call it, has "not grown". I beg to differ the fed has become more surreptitious in it's money printing ways. Case in point the "Caribbean Banks" are now the 3rd largest buyers of debt. Also, the printing of money is not the only source of fuel for a pm price increase. Central banks around the world are looking to use their worthless fiat money to buy gold as a hedge. Thus, stagnant money sitting in accounts are being used to buy gold, increasing the velocity of money.

    China and Russia are leading the charge into gold and the Chinese have come out and admitted they they are always on the look out to buy on dips. Thus rendering your claim "they will step out of the way" moot.

    "Gold has had a tremendous run" is false on many regards. The money supple around the world has exploded exponentially while the prices of pm have been capped for obvious reasons.

    You say that the net long position is at a record high without looking at the net short position. A very narrow and biased view. This is the latest from Mr Steer [The Bullion Banks Are Now Net Short 31 Million Ounces of Gold]

    The signals you outlined for a "downside break" are very narrow and shallow. I visit you blog daily for insight but it's been seriously lacking with each post.

    Good day.