In early Asian trade yesterday, gold was smashed by a wave of short selling. Going ‘short’ means you’re betting on a price fall. To bet ‘long’ means you expect prices to rise. From the UK Telegraph:
‘Powerful speculators have launched an unprecedented attack on the world gold market, driving prices to a five-year low as commodities wilt and the US Federal Reserve prepares to tighten monetary policy.
‘Spot prices slumped by more than 4pc to $1,086 an ounce in overnight trading after anonymous funds sold 57 tonnes of gold in Shanghai and New York, choosing the moment of minimum market liquidity in what appears to have been a synchronized strike intended to smash confidence.’
Bear raids have been around as long as markets have. This is not a conspiracy, it’s just how markets work. As I wrote yesterday, speculators (mostly hedge funds) hold record short positions in the gold market.
But that record figure was from the end of trading on 14 July. It would now be even more extreme. Moreover, hedge funds are now likely ‘net short’ the gold market. This means on balance, more traders are short gold than long.
Please correct me if I’m wrong, but I don’t think that has happened since futures reporting started. We’re talking extremely lop-sided positioning here.
The short sellers will no doubt try to push gold down further and this will bring in even more momentum traders. As the longs (bulls) sell and the shorts (bears) build their position, the market will get so out of whack that you’ll see a massive short covering rally. Whether it happens tomorrow or in a few weeks from a much lower level though is anyone’s guess.
What is clear to me though is that this is a capitulation point for gold. Gold stocks were absolutely smashed in the US overnight. It’s panic stations. The media is awash with negative gold stories. This is all fuel for the fire of emotional selling.
For Aussie bullion investors it’s important to get some perspective. Your holdings are Aussie dollar denominated. Looking at US dollar gold isn’t much use to you.
Here’s the Aussie dollar gold chart (see below). Yesterday’s bashing stands out clearly. The upward momentum that was building has completely disappeared. But the price is still holding above the lows of March and May. So it’s hardly a disaster.
Looking forward, keep an eye on support between $1,450 and $1,425. If this gives way, there is a good chance we’ll retest the lows of November 2014.
What you do about it all depends on your reason for buying in the first place.
If you’re a trader, you’ll probably want to get out and see where this correction takes you. If you’re holding for financial insurance purposes you won’t want to sell at all. And if you’re holding for portfolio diversification reasons and hope to make some money out of the investment you’ll want to see that support region hold.
If, on the other hand you own gold stocks, your best bet is to stick with your stop loss levels (you’ve got an exit plan, right?) and then stand aside if you get taken out. Don’t be a hero and try to pick the bottom of this correction.
I believe this is the final washout in a gold bear market that has already seen plenty of washouts. You want to try and be in the best possible emotional state to get back on the bull when he starts his charge.
For The Daily Reckoning, Australia