Gold did not trade higher yesterday despite the US Government getting one step closer towards a debt default. Instead, prices sank greatly, falling from a high of 1,337.5 to a low of 1,278 – almost $60 an ounce in less than 12 hours. The catalyst for the fall wasn’t really due to fundamentals, but was spurred by a singular huge sell order on Gold Futures, pushing Gold related assets including Spot Gold lower as well. This sudden selling triggered numerous stops along the way, resulting in a snowballing effect where the huge numbers of stops added even more sell orders into the system, pushing price further lower and triggering even more stops. All in all, a billion dollar worth of Futures were traded in a 10 minutes window, almost close to a full day volume.
Prices finally found some support around 1,285, but prices continue to look depressed with no significant pullback since the great fall. Furthermore, even though no names have been thrown around, the singular sell order would no doubt be from a reputable large institution. Whether this institution was clearing its long positions, or perhaps even building up short positions is not important, as either way means that this Friday’s COT Net Long number would almost certainly be lower. And as discussed previously, a strong bearish signal that could potentially bring us all the way to 1,200 or even lower will be formed if we see both price trading below 1,300 by Tuesday and COT numbers falling. Why we had to wait for the COT numbers previously is because we need to verify that the dip below 1,300 is driven by institutions selling and not low volume volatility. This is important as the rally from 1,200 back in July was solely due to speculative behaviors of these institutions. Hence, remove the institutions flow, we will be back at 1,200 where we started and potentially even lower as we’ll draw out even more speculative bears this time round. As we can make an intelligible guess about who yesterday’s seller was (assuming that it wasn’t a mistake), it is reasonable to think that other institutions will/or has followed suit, giving us the bearish signal instead of waiting until end of Friday.
From a technical perspective, we’re currently within a bullish corrective/pullback phase which is natural considering the strong sell-off that we’ve seen yesterday. This is echoed by Stochastic readings which is giving us a bullish cycle signal right now. However, the magnitude of the pullback is up in the air and certainly not guaranteed. The recovery could potentially falter at 1,295 resistance, or perhaps around 1,305 which is the swing low back on 24th September.
Long term direction is definitely down with price indicating that the bearish continuation of August’s Channel Bottom bearish rejection is ongoing. Stochastic readings pushing below the “support” level of 60.0 lends further conviction that a move lower towards 1,200/Channel Top is possible. However, price should ideally trade below the low wick of the Doji candle 2 weeks ago (which symbolize uncertainty) before next round of strong bearish momentum can take root.
Fundamentally, the only upside risk moving forward is the fact that US may still pull the unthinkable and default on its sovereign loans. In such a scenario, USD will depreciate and Treasuries holders will likely clear their supposedly 100% safe securities and convert them into Gold which is internationally recognized (maybe physical gold even). This is made worse by the fact that market has basically ignored this risk, with Pimco’s Bill Gross saying that the odds are “a million to one”. Hence, it is rather unlikely but do not be fooled thinking that price will never rally back up again. The market tends to bite worst when everybody is sleeping.