The bear came before the bull
Welcome back from your Easter break.
To kick off the short trading week, I thought we’d take a look at what’s happening with gold.
Just before the Easter break, the precious metal dropped US$10 per month into the US$1,270s.
It turns out the fall caught most analysts off guard, myself included.
And what’s ahead for the gold price?
Get ready, gold bulls. We have a bumpy couple of weeks ahead…
11,000 reasons gold dived
When I woke up to news of the falls, a glance at the chart confirmed what I was already thinking: There are bigger falls to come.
You see, gold hovering between US$1,280-90 isn’t such a big deal. The last few months of trading have made this a key area of technical support for the metal.
But tumbling below that, well into the US$1,270s on Wednesday last week, is an ominous sign…at least from a technical trading point of view.
Markets-focused blog Zero Hedge and cryptocurrency website BlockPublisher point the finger at the gold futures market, saying that 11,000 gold futures contracts were dumped in the early hours of US trading.
The 11,000 gold futures contracts sold equates to about US$1.5 billion in value.
No wonder the gold price tanked…
But the guessing game behind the gold falls doesn’t end there.
In spite of the US sanctions in place, Bloomberg reports that Venezuela sold off almost nine tonnes of gold. This US$400 million sale — reportedly to the United Arab Emirates in exchange for euros — is supposedly adding to the bearish sentiment around gold.
The sale may have wrapped up last week, but Venezuelan President Nicolas Maduro has been planning to sell gold to the UAE since February.
That makes me think this news would have already been factored into the gold price.
Then there’s the usual headline noise that distorts the picture.
The US dollar is slightly stronger and the US market rallied as gold fell.
Plus, there is gross domestic product (GDP) data coming out of China, suggesting that perhaps the government stimulus is preventing a big drop-off in GDP.
All unravelling last week…
…all adding white noise to the gold price falls.
What’s really going on?
Well, I’ll be honest. They are all factors contributing to the fall in the gold price.
However, the massive gold futures dump caused the most drastic price action for the yellow metal.
For two reasons.
Firstly, US$1.5 billion (approximately) is an awfully large gold position to move in one go. And that massive position is then compounded by the four-day trading week.
In the lead-up to the Easter weekend, few traders are willing to put on big positions.
Mostly because they know that the volume tends to drop at this time of year. So there’s not as many investors and traders around to absorb large trades.
Whoever dumped the futures trade would know this too, I might add.
The ordinary investor doesn’t have access to a position of that size. Meaning it was either a panic sell, or a well-timed dump to drive the gold price down…
And this sort of trade dump changed the technical setup for gold.
Rather than bob along between US$1,280-90, it pushed the gold price deep into the US$1,270s.
So from a technical trading point of view, many people will get quite bearish on the yellow metal.
And that brings me to the charts…
How low can it go?
The problem with Tuesday’s trading session is that it drove the gold price to a place where it doesn’t have much technical support.
Once price action moves to unfamiliar territory, you need to increase the use of other forms of technical analysis to predict what might happen from here.
And — take it from this gold bug — we may have to grit our teeth for the next couple of weeks.
Well, let’s start with the support lines…
Gold price in US dollars – daily chart
Technical analysis: Simple moving average (SMA)
This chart has three simple moving averages (SMAs) overlayed on it: The 50-day SMA (purple line), 100-day SMA (blue line) and 200-day SMA (black line).
SMAs are useful for confirming the overall trend of a stock or asset. Furthermore, the different timeframes show us the short-, medium- and long-term trends.
We can see that the 50-day SMA — the short-term trend — has begun to turn downwards. So over the next couple of weeks, the gold price is likely to dive further.
What is critical to note here is that on Tuesday, the gold price fell through the 100-day SMA — the medium-term trend. In short, this confirms that perhaps the falls are going to be bigger than first thought.
To add to this overall bearish picture is the bright, horizontal green line.
I didn’t add this; it’s the dynamic data line that shows you where the gold price is. However, I left it on the chart because of what it shows you.
And you can see that where it cuts through, there’s no ‘clustering’ of price action around the green line.
In other words, there is no support for the gold price.
So it’s going to get much lower than the current US$1,270s range.
But just how much lower is it going to sink?
Well, let’s check out what the Fibonacci charts tell us…
Gold price in US dollars – daily chart
Technical analysis: Fibonacci retracement
Have you heard of Fibonacci?
Technical traders often use the Fibonacci retracement to predict future trading movements by taking two extreme points as reference.
The theory is that asset price movements will always fall to the key Fibonacci numbers, identified by Leonardo Fibonacci, of 23.6%, 38.2%, 50%, 61.8% and 100%.
You may know that 50% is not a Fibonacci number. However, traders have developed the method over the years to include the 50% retracement as part of the analysis.
Now, let’s crack this chart.
What we can see is that the current price of US$1,275 is very close to the 38.2% retracement (shown as 0.382 on the chart). And in all honesty, it may be on the verge of breaking through it.
However, the next two retracements show us what’s to come.
The 50% line is around US$1,257, which is something most gold bugs will have a giggle at. The US$1,250 price mark has been a crucial level of support for the gold price for the past few years.
But…there is a worst-case scenario I want you to be aware of.
If the yellow metal tumbles even further to a 61.8% ratio…that would see the gold price tumble all the way down to US$1,238.
We’ve got to be a little bit bearish as the long-term bull market charges ahead.