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In our most recent report on gold we recommended accumulating some of the larger gold miners (Newcrest Mining (NCMGY.PK), LGL Group, Newmont Mining (NEM)). Big gold producers are incredibly cheap and given the weakness in the Aussie dollar (and rising Aussie dollar gold price) and pullback in energy prices, profitability should begin improving while most other companies’ margins will come under pressure.
However, recent developments in the gold market point to the potential for near term volatility that Members should be aware of.
The short term outlook for gold appeared positive while the yellow metal was trading above US$820 an ounce. However, in New York trading on Thursday, gold was hit with a wave of short term selling.
The green line in the chart below shows that gold plummeted just after the New York trading session began, falling nearly US$40 in a very short space of time. More selling pressure emerged soon after but in early Asian trade Friday, gold has recovered some of its gains.
From a purely technical perspective, the break below US$820 indicates the likelihood of near term weakness. It shifts the focus back to the US$735/US$734 support region and away from the potential for a push above $931.84.
The $820 to $860 region now becomes resistance. While prices remain below this region, the risk is that prices will break below $734 and retreat toward the $650/$640 region. This marks the 50% retracement of the entire 1999-2008 advance, plus the next major price support/congestion region on the charts, shown below.
However, such a move is only a possibility, and should prices once again move into the US$820/US$860 region, the near term outlook would improve again.
We remain committed long term bulls on gold. The stimulus being thrown at the global economy is unprecedented and has not yet even begun to work its way through the financial system. The Fed’s program to purchase commercial paper does not get underway until 27 October. The transmission of this money through the system will take some time.
The Fed’s balance sheet expanded another $245 billion last week to $1.7 trillion. Its important to note that the Fed has not sterilised any of the cash injections it has made in the last month or so. Credit had jumped from $880 billion to $1.7 trillion and none of the Fed’s holdings of Treasury securities have been sold to offset the cash injection. Instead, poor quality assets have been added to the balance sheet.
But in the short term gold can do anything, as we witnessed recently when the yellow metal plummeted below US$750, only to reverse that move a few weeks later with an $80 single surge to the upside.
So Members riding the bull should prepare for more short term volatility. Any cowboy will tell you that riding the bull for the full 8 seconds is a very difficult task. This bull market will be no different, but if we’re prepared, we can tighten our grip.
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