The precious metals continue to trade not so precious.
Gold broke its 200-day moving average today. The yellow metal seems to be suffering the same fate as Apple going into year-end. Some investors are too long and the perception of fundamentals and thus the premise of holding gold is in question.
Gold is not behaving the way it should. That is, rising as central banks expand, or threaten to expand, their balance sheets. We’ve lost a lot of money this year trying that trade.
Despite all the talk about safe haven status in recent years, PMs have had a strong positive correlation with stocks and risky assets more generally. Their correlation with the dollar, of course, has been strongly negative. Less intuitively, the impulse correlation of PMs to treasury yields has been positive, even though low levels of yield (more precisely, real rates) is an important driver of higher PM prices.
These correlations have flipped in the last few days in a way that is apparent to everyone. The decline in gold and silver in the face of a strong bid to risky assets will now likely force people to reconsider their investment hypothesis for holding them. Big events and correlations that change signs often do. Specifically, a lot of big macro tourists hold large PM positions, and what I believe we are seeing is some of them starting to hit the bid. It is also possible that some of them are also facing redemptions, since those clinging hardest to their PM positions are also those most likely to have been working under the wrong economic assumptions and underperforming all year. So, the year-end dynamic may be exacerbating the pressure we are currently seeing
On the technical side, though I am not, ahem, a master technician, it is apparent that gold and silver yesterday broke medium-term trend lines. But I actually don’t think that is unusually significant. As I said before, PMs are notoriously tricky to trade on a short-term basis. I’m sure even the best technicians have great war stories about being fooled by gold and silver. What I think is hugely significant is the 1600 level on gold (Feb 2013 contract). If it breaks below that level I think the warning flare goes up for everyone to see. Gold has rebounded from strong corrections before and may well rebound from this one. But I have a strong sense that if we get below 1600, it will matter in a way it hasn’t in many years, and all (gold) bets will be (taken) off.
Gold looks broken here and needs a big flush, our opinion. The May low of $1527.5o looms as must hold support.
(click to enlarge)
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