Gold was slammed on Friday (4/12/13). So was silver. The SPDR Gold Trust (GLD) bled 4.70% to close at $143.95 and the iShares Silver Trust (SLV) lost 5.32% to close at $25.28, both making brand new lows. The most frequently traded gold futures, the June 2013 gold contracts, fell below $1,500 an ounce for the first time in almost two whole years. This move appears to be largely technical in nature but has also been motivated by some important fundamentals.
On Friday, there was no real economic news at all that should have resulted in such a volatile move, but there were some economic trends and pieces of news that fundamentalists took note of that likely started the selling. First, the U.S. dollar has continued to strengthen in 2013, which is usually always bad for gold and has pressured the metals all year. There has also been a wave of price target downgrades by major firms, including Goldman Sachs, UBS and Societe Generale among others. These downgrades all pushed gold lower in the last few weeks. Further, this past week Goldman outright called for a short of gold, which impacted the metals further. With the action on Friday in the metals, their call was well timed to say the least. But, the fundamental "icing on the cake" to spark selling Friday was a report that Cyprus might sell over 10 tons of gold to help its deficit issues. This certainly caused some overnight selling Thursday into Friday and continued throughout the morning. Once the selling pushed gold below $1550, it most likely triggered massive sell stops to initiate. As the market slipped first through last week's lows selling intensified and then further picked up steam once gold penetrated the $1525 and $1510 levels. Interestingly, the broader equities markets were under some pressure Friday and in recent similar sessions gold has performed well. But today was a complete liquidation sale.
The move in gold really caught my eye around 11:30 am on Friday when I saw that gold dropped under the $1500 mark and was down $70.00 at $1,495 an ounce. Although it tried to muster a small comeback above $1500, gold went on throughout the day under high volume selling pressure to close at a new low of $1476. This is the lowest gold has traded since April 2011. Silver, following gold's move down, also made new lows. The May 2013 silver contract printed a 25 handle for the first time in years as silver took a beating to close at $25.76. As it stands now, the charts and the technicals are currently in control of the action, at least in the short-term. They are driving the price of gold and silver lower and have some support fundamentally to move lower in the way of a perceived stronger U.S. economy and the belief that the Federal Reserve may slow or end its quantitative easing this year. Further pressuring gold has been the fact that the GLD is seeing record outflows, resulting in the fund selling physical holdings. On the bullish side for gold, U.S. economic conditions are still overall weak but there have been some negative reports lately, such as the last jobs number. Further, the US debt situation hasn't gone anywhere, and with all of the money printing that the Federal Reserve and central banks globally have done, inflation will eventually return.
It is a difficult time to be in there buying. However, the key technical support level to watch is $1470. A break below this could send gold down to $1340, at least. I see this as unlikely. Buyers with risk tolerance could initiate a position but be prepared to take a loss if the $1470 level breaks down. At this time, with such a large move down, there could be some buyers seeking opportunity this week which could give a small lift to prices. Silver seems to be the safer metal at this time, as there is still record buying of the metal. Further, unlike gold it has industrial demand, which will support prices. Silver is not just a precious metal, but also is one of the most conductive metals out there. It is thus utilized in photography, electronic devices, optics, medical devices, nanotechnology and cellular/smart phones. This use in electronics is a new phenomenon of just the last 30 years. With the growth of cell phone use, there has been record industrial demand. In fact, about 20 cents of silver is utilized in every new device. Thus, there will always be demand for silver, not just as a safe haven (like gold), but also in the event of a strong economic recovery. I recommend buying physical assets in this space or one of the ETFs.
Finally, a high beta way to play could be to buy some of the mining equities, even though there is "blood in the streets right now." Some of the highest returns can be had when you buy when everyone is selling. However, the charts are against this trade in the short term. Despite this, if gold can hold and rebound up to the $1550 level or $1600 level, or silver to the $28-$30 level three highly profitable trades could be buying shares of (or call options in) the Gold Miners Index (GDX), the Junior Gold Miners Index (GDXJ) or the Silver Miners Index (SIL). They are risky given the recent price action, but the long-term fundamentals are intact. If one does not wish to risk capital on the miners then one can stick with the more conservative approach of adding to physical silver and gold holdings as the price drops, due to the long-term tailwinds in place from central bank action and worldwide debt.