The markets' sentiment regarding gold (NYSEARCA:GLD) and silver (NYSEARCA:SLV) changed in the last two weeks or so with particularly strong selling today, leading to the metals just being crushed. In fact, gold dipped under $1,600 for the first time since the summer. The miners, which I am bullish on for the long-term, have been obliterated. There could be more downside ahead, but for the long-term investor I view this dip as an opportunity to add to physical and stock holdings as prices decline. Investors could look to bullion, the GLD or SLV (or one of the alternative ETFs I outline here) as well as the gold miners index (NYSEARCA:GDX) or the junior gold miners index (NYSEARCA:GDXJ). Finally, bargain hunters could look to individual stocks. I personally doubled my position in the best of breed gold miner, Yamana gold (NYSE:AUY). The purpose of this article is to explain some of the major drivers behind the selloff and to look at some near term catalysts for movement in the precious metals coming up in the next few weeks.
Watching macro events now is particularly important as gold and to some degree silver took out important technical chart levels (namely $1610 and $29.90). Gold for April on the Comex settled at $1,609.50, down 3.5% for the week. Silver settled at $29.86, down 5.0% for the week. The drop in gold prices under $1,628 means that gold has shifted into a loss for the year and once this level was broken, stop-loss sell orders likely were triggered which deepened the decline. Another bearish sign near term was an increase in open interest in Comex futures. Recall that the open interest is simply a tally of the number of outstanding positions at the end of a trading session, and in general when the count rises when prices decline, it suggests new bearish positions were initiated.
Other investors may have been spooked by news that major investors such as George Soros and Pimco sold some of their gold exchange-traded fund holdings, as listed in U.S. Securities and Exchange Commission filings. This news, which reports on activity from Q4 2012 may have led to some of the early selling, but is also a key driver of the decline in prices in November and December.
We could see more technical selling ahead, but whether the metals extend its losses or reverse course could depend on what buyers in Asia do over the next few weeks. Many who follow the precious metal markets, including myself, think that the short-term direction in gold and silver for the next two weeks will be guided by what Asian traders do once they return from their Lunar New Year holiday (we are in the year of the snake, for reference). The question is, at these levels will traders dive right in and do some buying on bargain hunting? This would of course bring some much need demand in and elevate gold and silver prices. Or will these traders come in, hate what they have seen and sit on their hands because of the negative sentiment and not put any money to work? If they stay on the sidelines, technical selling pressure could hurt prices further.
The metal's price declines could bring in some retail investors who are also thirsty for a bargain in the space. I see this as a possibility for the miners as well. While likely not enough to reverse the action entirely, long-term investors would be getting fantastic entry points and could slow the descent of the physical metals and/or miners. Psychologically, seeing gold under $1630, but particularly silver under $30, has enticed a lot of buyers that I speak to make purchases in the last 6 months.
Ahead to next week, we must watch closely how traders react to the comments from G-20 meeting, which officially will be released tomorrow (2/16). As we know, there has been a race to the bottom to devalue currencies and most market participants will look for comments that provide any clues to how the international community is really handling this. So far, the market really hasn't been baking in the reality of the race to the bottom on currencies. The likely reality is we will see most comments focus on foreign exchange rates. In particular, there has been a lot of attention given to Japan who has serially debased the yen which has fallen like a rock as Japan continues to put forth stimulus programs in an attempt to prop up its long stagnant economy.
Two pieces of news out of the United States could also impact gold prices next week. First, there will be the release of the Federal Reserve's meeting minutes on Wednesday, which if there is talk of continuing QE given the terrible Q4 GDP report, could provide a boost to gold and silver prices movements. Further, right around the corner on March 1st the United States sequester of spending takes effect. This is the remnants of the old fiscal cliff deal and debt ceiling resolution. Any news on this front could move the needle for the metals.
Overall, the long-term investor is getting some excellent buying opportunities as prices of gold, silver and the companies that produce them drop. The short term action has been driven primarily by old news from major hedge funds and then some technical selling. This selling could continue on the technical side, but could be reversed depending on what Asian traders do this week, the comments out of the G-20 meeting, the information in the Federal Reserve minutes and any news on the automatic spending cuts in the United States that take effect March 1st.
Disclosure: I am long AUY, PSLV, GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I own physical gold and silver bullion. My GLD holdings are options based.