How Germans And Italians May Have Killed The Gold Rally And Technical Gold Traders Lost
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
After a brief retracement, gold was in a strong rally mode. Gold gurus were issuing buy signals based on technical analysis and their followers were buying in full force. Seeing the momentum to the upside, the momo crowd was aggressively jumping into gold. All of a sudden, gold fell $20. Initially the gurus were at a loss as to what happened. Even a major news wire that a lot of media depends on wrote that they did not have a clue what happened.
As the time passed, media and gurus are embracing a theory that the reason for the fall may have been a fast finger mistake. In my view, it is likely that it was not a mistake but a decision based on fundamental news.
Early on I informed subscribers to The Arora Report as to what really happened in the Morning Capsule that is delivered every trading morning and extensively covers gold, often providing original insights. Now I am sharing with you a likely reason for the trigger. This trigger came after $19 billion bank bailout by the Italian government. Italy has large gold reserves. How will Italy finance the bailout? It is not likely but Italy selling gold cannot be ruled out. Let us start with a chart.
The Annotated Chart
The annotated chart shows that the real reason was Germans becoming a little too jubilant. Gold just does not like jubilation. It appears someone had a finger on the trigger waiting for the news of German business confidence after the Italian bank bailout.
The chart is of gold futures (GC_F). The chart shows that after the $20 fall, there was a reflex rally but the rally failed as shown on the chart.
You can easily see that, at least in this instance, all technical indicators failed. Gold fell rapidly on a fundamental development. To understand the fundamental development, here are the excerpts from the Morning Capsule.
Based on a survey from Munich based Ifo, German confidence hit the highest levels since 1991. The consensus was for the index to fall 114.4 from prior reading of 114.6. The index came at 115.1. The higher the number, the higher the business confidence.
Gold And Silver Swept Down
Gold and silver were aggressively swept down on German business confidence.
In a down sweep, an aggressive seller puts in an order to take out all resting buy orders way below the market. In the case of gold, the seller swept all the way down to about $1236 starting from about $1256.
18,500 gold contracts were swept down on CME. CME is the primary exchange where gold futures are traded in the United States.
Silver Not Spared
Silver was not spared. 5,500 silver contracts were also swept down.
At The Arora Report, to take advantage of the situation, there is a position in inverse gold miner Direxion Daily Gold Miners Bear 3X ETF (DUST). This is only a short-term trade and not an investment. For those interested in investments for longer time frames, please see the gold ratings below.
Stops Should Typically Be The Third Line Of Defense
The rapid plunge shown on the chart illustrates two points.
Gold And Silver Ratings
The Arora Report precious metal ratings are widely used by bullion dealers, jewelers and investors across the globe.
The first cut of ratings on gold and silver at The Arora Report is generated by complex algorithms that automatically change with market conditions. Then human judgement is added before publication. Inputs to our algorithms include relationship between currencies, interest rates, sentiment, money supply, global geopolitical picture, global GDP growth, inflation in key countries, leading indicators of inflation, risk appetite, mine production and jeweler demand, smart money actions, speculator actions, and our proprietary technical indicators.
Here are our current ratings that take into account not only the rewards but also the risks. The goal of every investor ought to be to generate high risk adjusted returns, i.e., returns in excess of those commensurate with the risk taken. These ratings are designed to produce higher risk adjusted returns. In our over 30 years in the markets, one of the biggest and most common mistakes we have seen investors make is to ignore risk.
Allocation To Precious Metals
From 2007 to 2011, Arora allocation to precious metals was 20% of the portfolio. For those who are inclined to always have gold in their portfolio, a long allocation of 2 - 4% to precious metals from a very long-term perspective at this time is appropriate.
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