Gold and Silver Prices - Been Here Before but This Time Is Different

gold and silver prices

The precious metals have seen dramatic sell-offs before, although the primary difference between previous precious metal declines and the recent drop is the current shortage of physical metal. 

It is also worth considering how well the commercial bullion traders are positioned for a rally after these past two days of sharply dropping prices, especially when the latest price drop came on top of a physical market signaling tightness all along.

The Developing Physical Shortage and Goldman’s Selloff Signal

Major dealers in North America and the EUseem to be out of physical precious metal stock almost across the board. This physical shortage had been developing for some time, in contrast to the 2008 drop.

In terms of the supply fundamentals, the loss of Kennecott’s Bingham Canyon mine last week, in addition to further postponements for Barrick Gold’s big Pascua Lama Project were as bullish as can be.

Goldman was also openly signaling the rest of the market by notably revising their gold price forecast lower just ahead of the big down move, followed by more major banks revising their price forecasts lower.

Price and Positions

Precious metal prices have now been falling overall or range bound for almost two years. Contrast the current situation with the historical September 2010 to April 2011 period, when 30 percent down movesoccurred after a short covering rally as a speculative pile-on ensued. 

This time,physical demand had been surging just before paper price declines led by the manipulated futures market. Also, hedge funds have also been piling in to short the market to a historic degree based on the negative technical picture.

In contrast, J. P. Morgan Chase et al have been slowly exiting or reducing their notable precious metal short position over the last month without a drop in the market’s open interest. Normally, heavy downside direction in price tends to be accompanied by a reduction in open interest. 

Frankly, the most recent selloff seems like just an orchestrated opportunity for the big shorts to cover.

The Economic Backdrop

Record highs in equities have been seen recently, despite persistently soft economic data that misses one week after another virtually across the board. Complacency and universal bullishness seem to prevail, despite data indicating that little if any real economic recovery is actually underway.

Another notable occurrence has been the persistent referencing of CPI and employment numbersby authorities and the mainstream media,despite theobvious disconnect of this data from the reality faced by most people.

The last straw was the blatant early release of FOMC Meeting Minutes so that the markets could react when precious metal sentiment was already horrible.  According to the latest FOMC Minutes, money creation via asset purchases by the Fed seems likely to subside later this year. Furthermore, London seems to be anticipating that Mark Carney's arrival at the Bank of England will see a more activist monetary policy stance arise in the UK too.

Nevertheless, the world's stock of fiat money is not contracting —quite the opposite, in fact. Japan has just launched another round of monetary stimulus on steroids, which will see the developed world's most indebted economy create a proposed $1.4 trillion in Yen in a bid to break the country free from depression and the perceived threat of deflation. 

Price Patterns and Key Retracement Levels

Once again, the same price pattern seems to be emerging. A massive dump in early overnight trading, followed by a margin increase pulls the rug out from under precious metals support as the market approaches key technical levels.

The panic selling feeds on itself as stops are triggered. The market moves much farther down than statistical or historical norms would suggest seems probable.This latest sharp decline, led by the Asian session, resulted in the biggest two day decline in the price of gold seen over the past thirty years. 

From a technical perspective, the sharp move down seen a few days ago broke below the 38.2 percent retracement levelof the big post-2008 gold rally from 681.40 to 1920.75, prompting traders to shoot for the 50 percent retracement level at 1301.07.

This 50 percent Fibo level now seems to offer the market both a target and a rallying point to buy gold ahead of. The substantial bounce already seen from the recent 1321.09 low just ahead of this objective indicates that the market’s desire to sell may well already have been satisfied.

Interestingly, it often seems to be the case that when market sentiment is apparently beyond repair, the seeds for a new rally are quietly being sown.

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