Amidst Physical Shortages, Gold Is Technically Neutral

Includes: GLD, IAU, PHYS, SLV
by: Tom Luongo

The stories of dealers and warehouses being out of physical gold (NYSEARCA:GLD) are now too numerous to ignore. Reports of huge buying in India and China are commonplace. The physical off take from the Shanghai exchange so far this year exceeds global production estimates to this point in 2013. And that is just one market. We know also that JPMorgan's (NYSE:JPM) bullion vault supporting the COMEX gold futures contract looks like it was robbed last week with more than 65% of its inventory removed in one day, leaving it with an historic low of just 141,585.5 ounces.

Short-term sentiment seems to have turned a bit as well. Bloomberg reports that in their survey of analysts, just more than half expect to see strength this week. I'm loathe to take anyone's advice at this point, but it's worth at least noting that not just the so-called gold bugs are still bullish after the ridiculous crash the gold market saw.

I think it is worth noting, by the way, that when it comes to gold, it is more than okay for the market to crash 15% in an hour or two. If a third of that move were to occur in the equity or bond markets, trading would be halted, conferences held and soothing, calming words would emanate from CNBC to assure everyone that everything was under control.

Steve Liesman will have to work overtime.

But in gold, not only is the price allowed to fall freely but the buyers on the physical side are locked out of the system, thus ensuring that the price falls further faster and even more people are margined out of their positions. Be the cause of said failure sinister or incompetent, the net result was the same.

We live in an age where the U.S. Attorney General openly admits that certain banks are too important to prosecute for breaking the law and we're supposed to believe that everything that happens in the most important market in the world with respect to the health and well-being of the financial system is on the up and up? Moreover, that admission seriously undermines the credibility of the results of any CFTC investigation, should one occur.

This brings us to where we are now. For those that want to protect the purchasing power of their savings in the long run, gold is on sale and that is the sentiment that is driving worldwide buying right now. Dan Norcini has a great rundown on the current structure of the COT report in gold and silver (NYSEARCA:SLV) over at King World News wherein he is sanguine about the near-term prospect of the price moving through $1500 in the near term. Bull or bear, Dan's comments are always worth listening to and considering.

Fundamentally, gold is a screaming buy at these levels and lower if the prices emerge. Adding U.S. and Japanese demand for physical metal to the Chinese and Indian demand, which is up at least 20% year over year, puts a pretty strong floor under the price regardless of what happens in the futures market.

The price ran up to fill the gap on the GLD weekly chart to the penny ($143.43, see table below) and then sold off after the London market closed, which guaranteed that no more physical settlement could happen in London before the weekend. Simply put, in my opinion, the drop on Friday was a classic case of tape painting and nothing more.

Week Beginning

























That said, the technical picture is neutral for this upcoming week. I subscribe to a purely quantitative approach to looking at the charts at this point, and for this week all I want to know is what the probabilities are that GLD will break this past week's high of $143.43 or the low of $135.85.

With a flat open on a given $0.50 move in either direction, there is a 41.4% chance of breaking $143.43 to the upside and a 20.8% chance of breaking $135.85 to the downside. Given numbers like that, there is actually a good chance of neither the high nor the low being broken. This happens once out of every 7 weeks in GLD. Moreover, the average difference in closing price week to week is $2.54 which is just barely larger than the difference between last week's high ($143.43) and the close ($140.90). The numbers I'm quoting come straight from the price action of GLD over the past 252 weeks.

GLD Weekly Statistics n=252

Mean Statistics

% Probability

# of Points

Diff. Between Closes


Pts. Above Open


Pts. Below Open


Break Prev. High


Break Prev. Low


Inside Week


Engulfing Week


These statistics support a range trade here in gold for the rest of the week, but since we are in a very volatile period, all of these data should be salted to taste. Obviously, an open that is significantly higher or lower than $140.90 will change these odds as well.

GLD has not violated an important weekly high price all year with selling always coming in to keep bullish momentum out of the gold market. What we should be looking for now, technically, is for one of these weekly highs to be violated which would be a preliminary signal of sentiment changing.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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, silver, a few dairy goats and a couple of big white dogs to guard them.