I was expecting a relatively quiet morning.
I was wrong.
As I was compiling my notes earlier today, gold futures started to tumble. They had been slowly drifting lower overnight, giving back about $10 by 5 a.m. But it was the action at $1,450 that bothered me. After it crossed below this level, the floodgates opened—sending gold futures sharply lower. By 7:30 a.m., gold had coughed up $40, hitting a low of $1,427.
I know it might not feel like much—especially with the April crash still fresh in your mind. But this move lower puts gold below critical short-term support.Since mid-week, price has fallen from the high $1470s to the $1,420s. These are levels we haven’t seen since April 25.That’s when gold began trading in a nice, orderly horizontal channel.
Just a couple of hours ago, it broke through its price floor on strong volume. Not a good sign if you’re a gold bull…
Here are two important takeaways from all of this:
First, it’s important to note that the consensus opinion amongst the chart watchers has been that gold would probably have a fairly mundane summer. I’ve generally agreed with this position. Aside from a little volatility here and there, I was expecting gold to wander sideways for some time after its massive drop. Clearly, it has other plans. You have to adjust your thinking here and prepare for the possibility of another leg lower.
Next, the recent action in gold is a great lesson on dip buying—or buying any asset just after it takes a nasty fall. “Buy when there’s blood in the streets” is one of the most misunderstood investment axioms ever. Every asset needs time to recover after a crash. I’m talking about a significant amount of time—not just a few days or weeks.
At this point, too many investors are convinced gold can move higher from here. You’ll want to buy when everyone agrees that gold is cooked. To paraphrase the great technician Walter Deemer:
When it’s time to buy, you won’t want to…
It was a challenging first half of the year for most commodities, with only two resources we track on our Periodic Table of Commodities Returns rising in value.
Greg Guenthner, CMT, is the managing editor of The Rude Awakening. Greg is a member of the Market Technicians Association and holds the Chartered Market Technician designation.
Not only am I familiar with gold bear markets that can, and sometimes in the past have dragged-on for years and fooled everyone with bear market rally traps, but I am concerned for how steep and how far these counter-trend bear markets can drag-out.
Let’s go over some bloody history:
Gold comes alive out of nothing and from out of no-where with quite a story to tell about just how awful things were getting with government mis-management in America and in fact, throughout the Western World.
From out of no-where on the time axis, gold moved in 1971 up the scale on the of cash settlements at banks from $35/oz. to an arrival in 1980 for at least one or two days at the $ 860/oz peak.
The bear market in gold began with a quick drop in gold to under $500/oz within days, and then the first bear market rally trap took gold back to its first bear market shelf at a trading range $600/oz to $ 700/oz. Losing punch by 1982, this market started testing its lower end around $500/oz. As the 1980s continued, things started to look steadily more bearish with gold and silver and with everything else. Questions started to be raised about just how far these markets would drift lower?
It wasn’t until 1994 that it became apparent that a possible bottom in these markets had even been reached, and with gold down below $300/oz.
Question: What is the final lesson to be learned from the gold chart, or is that final lesson still being taught to us now?
Just observing the world as I observe the gold market, I notice a bit of deflation, perhaps a strange zero interest rate Bernanke deflation; and who knows for sure? But gold seems to be testing a floor, more and more, of its bottom of $1400. That floor could give-way to a new floor of $1300 and a begging of $1200. That would ask for $1000 ahead because the rise came so fast in gold. And from the round number of $1000, we go back just over the top of the old trading range of $800 beneath as the floor.
In the used home market in California, some interesting things are also starting to develop. Prices are $350,000 for bunglows of about 1400 sq. ft. in pretty much any of the choice cities in central California in pretty much any of the choice neighbourhoods on pretty much any of the choice streets. One kicker: the bungalows are rather old, and they are the quality of the kind of those that you would get with people who can not make payments. So you had better figure some big money in expenses to bring these puppies up to being nice homes….. But, I am giving the story to you correctly.
One of the negative things is that the demand now is for town-houses, not for bungalows. The post WWII baby-boom generation is exiting bungalows now fast, so the demand for these is negative.
Other things working in your favour if you want to buy into the de-flating bunglow market: you won’t have much bidding competition. Those days are over. You dictate the terms with cash, even at 0%, and maybe even more so.
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