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Summary

  • Can gold "fundamentally" drop below $1000?
  • Various sentiment gauges.
  • Upcoming week's expectations.

All I have been hearing of late is how gold will never see lower than the 2013 lows. People say it is simply not possible since it would be lower than its production cost. And, my answer to them is "so what?" Yes . . . so what? Are you going to tell me that producers will not stop mining gold? And, again, if so, so what? Won't that then make gold more scarce since less of it will be available, as mining will significantly slow, and then maybe we see a long term bottom?

But, people have it in their mind that the metals simply can't go below a certain price and they think I am simply crazy for thinking that they can. Well, I was called crazy when I called for a top in gold in the $1,915 region back in 2011 when everyone was so sure it was going over $2000; I was called crazy when I said silver was going to "crash" from the $45 region and target the $26 region; and I was called crazy for thinking that silver can drop to $22, or lower. So, I am used to being called crazy by now. And, maybe you may consider me crazy for thinking that it is possible to see gold below $1,000, but I am telling you that it is clearly within the realm of probability.

Yet, when people look at the recent Commitment of Traders reports, they see evidence that the commercial traders have covered their shorts, so everyone who reads these reports is very bullish once again. But, may I remind you that these reports are very delayed, and even though they may have covered their shorts a week ago (when we were expecting a rally), they may well have re-positioned on the short side once again by Friday afternoon. Yet, we will not know if this is what occurred until the middle of next week, at which time the next decline phase may have begun. My suspicion is that the commercial traders did indeed add to their short positions as of Friday.

And, as I peruse all the Seeking Alpha articles on metals, it seems almost everyone is bullish again. In fact, one article even notes that price targets on gold miners are being raised by most analysts, despite the current price drop. Very few even believe that there is a bearish scenario to consider. Most everyone seems to be only looking up.

Personally, I am always looking at where and how I can be wrong in my expectations. In fact, I will even note specific levels that, if the market should move through, would have me consider that I am wrong in my primary expectations. Yet, most do not provide such objective perspectives in the metals, and will simply maintain a position, no matter how wrong it turns out to be. In fact, many people have been holding silver after a 60% decline, still claiming that they are right for doing so. That is not an objective perspective upon which any of you should rely.

One of my members at Elliottwavetrader.net also sent me a note that when we were at the highs in GLD the other week, the options group on CNBC were suggesting long trades in GLD. It seems that they potentially fueled the bullish fires right at the highs, and added to the extreme bullish sentiment. And, when we were selling our longs and shorting GLD, it seems we were selling to them, as they became quite bullish at those highs.

Another popular perspective that has most likely been revisited, and will likely be addressed in upcoming articles on the internet is the "safe haven" perspective of gold. And, with the rise this week as the equity markets went down, I am sure more will be blindly jumping on this bandwagon. But, as I have addressed in many articles in the past, there is no historical evidence for gold being a safe haven against equity market declines. There have been times it has gone up and there have been times it has gone down during equity market declines. So, please make sure you actually know the history of gold's movement vis-à-vis equity market declines before you accept this perspective as gospel.

Furthermore, did we not expect a rally in the metals whether or not the equity markets declined? And, are we not expecting a strong move down in the metals (as long as GLD remains below 131.50), whether or not the equity markets go up or down? So, as I have cautioned all traders whom I teach, please make sure you are focused upon the chart in front of you, as that is the only one that really matters when you are putting your money to work regarding that particular investment or trade. Remember, supposed "correlations" disappear just as quickly as they appear, which ultimately means that a correlation really never existed in the first place. As an example of how one can be hurt in relying upon widely accepted "correlations," take note of how the dollar and gold rallied this past week in tandem, yet, is not gold supposed to drop on the dollars' rally?

So, while it seems that there is appropriate bullish sentiment in the metals marketplace, I am still not yet convinced it is quite bullish enough. I still think there is still a little more upside to be seen in the metals early this coming week before the metals can begin their larger degree downside drop. But, that upside room may be quite limited.

Last week, I noted that as long as we hold the 123 region in GLD, we should expect a rally. The low for GLD this past week was 123.10 before GLD began the rally we saw towards the end of the week. However, the rally has been quite weak. Initially I had expected we would be able to move up towards the 129 region on this corrective rally. Yet, the market does not seem strong enough right now to move quite that high. And, as my technical indicators have turned up enough to support a strong decline, I have now become very cautious about the long side in the metals.

In the upcoming week, I think we will likely be developing a topping pattern of some sort. If it is the conclusion of this corrective rally, or just the first leg of 2 movements up in this corrective rally is yet to be determined. But, as long as 131.50 is maintained as resistance in the GLD, I am focusing on an impending large downside move. The support level to watch is 123-123.60 region. A break down below that region, which is seen on very high and strong selling volume means we have begun the bigger decline, with the next target being the 2013 lows, on our way to lower lows in the metals arena.

Disclosure: I am long SLV. 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 intermediate term puts on SLV and GLD, with some remaining short term calls on SLV which will likely be sold Monday or Tuesday.

Source: Can Gold Drop Below $1000?