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How Germans And Italians May Have Killed The Gold Rally And Technical Gold Traders Lost

Commentaries & Views

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. 

Please click here to see the annotated chart

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.

German Confidence

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.

The Trade

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.

  • Investors should consider using stop limit orders. In this case when gold bounced, an investor putting in a stop limit order would have received a reasonably good fill.  To the contrary an investor using a regular stop order would have received a very bad fill.  A regular stop order becomes a market order after the stop point is hit.  Stop limit orders have the disadvantage in that sometimes they do not fill.
  • Stop orders do not always protect investors the way newbies think.  This is why The Arora Report advocates that stop orders should be the third line of defense. 

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.

  • Neutral in the very, very short-term.
  • Neutral in the very short-term.              
  • Mild Negative in the short-term.
  • Mild Positive in the medium-term.
  • Mild Negative in the long-term.
  • Positive in the very long-term.

These ratings are reviewed daily and changed frequently to help both long-term investors and short-term traders.  For definitions of time frames, please click here.

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. 

Full Disclosure: Subscribers to The Arora Report are provided precise buy zones and sell zones as appropriate.  Further, subscribers to The Arora Report may undertake short-term trading positions in addition to the very long-term generational opportunities.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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