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The Real Reasons Gold Had The Biggest Surge In Over A Year That Every Serious Investor Must Understand

Yesterday gold swung from a low of $1141.70 to a high of $1221,  a 6.9% intraday move. This was the biggest one-day move in gold since April 15, 2013.

Silver had an even bigger move than gold.  Silver swung from a low of $14.15 to a high of $16.81,   an 18.7% move.  This was the biggest intraday move since May 8, 2012.

The prior big moves occurred on fundamental developments and in line with fundamental developments.

This time, it was very different.  The fundamental development that I will explain later in this article was very negative but the moves in both gold and silver were to the upside.   To the uninitiated, it may seem perverse that gold and silver rocketed to the upside on a major negative fundamental development, however this is quiet common as you will understand by the time you have absorbed this article.

These days it is popular to trade gold and silver using ETFs such as ETF (GLD) for gold and ETF (SLV) for silver, however, these ETFs do not trade overnight and thus mask the true moves in gold and silver. For this reason to understand short-term moves, it is best to look at the nearest month futures contract that is most active.  At this time, the contract to consider is February 2015 that trades under the symbol GCG5 at the CME Group.

Let us start by looking at a 15 minute annotated chart of this gold futures contract.

Please click here for a larger image.

As shown on the chart, Sunday night gold fell to a low of $1141 on the news that Swiss voters had overwhelmingly rejected “Save our Swiss gold proposal.”  The proposal would have required the Swiss National Bank to hold 20% of its balance sheet in gold and never sell any of the gold.  Going into Sunday, the expectation was that at least 38% of the voters will vote for the proposal.  It turned out that only 23% of the voters voted for the proposal.   Even in a country like Switzerland, where traditionally gold is believed to be the best store of value and the country is struggling to manage its fiat currency against assaults by the euro, only 23% of the voters supported keeping only a small part of reserves in gold. This is very bad news because this dashes all hopes of gold becoming a major factor in policies of central banks across the world.  Central banks have been considered as potential big buyers of gold.

On the news, gold could have easily cascaded down towards $1000 but fortuitously came the news that Moody’s had downgraded Japan.  In recent years, many investors have used Japanese bonds as a safe haven.  It was natural for safety buyers who were seeking shelter in Japan to start buying gold.  As shown on the chart, this lifted gold about $15 which was very reasonable. 

After the rise, based on the news of Japanese downgrade, gold market mechanics kicked in.  It started with a garden variety short squeeze.  After this short squeeze ran its course, gold pulled back.  As shown on the chart, the support held on the pullback leading to technical buying.  Because of technical buying when gold broke through the first resistance, it led to two successive legs of massive short squeezes shown on the chart.  Finally, at $1220 smart money stepped in with light selling, this contained the rise and gold started pulling back.

Short Squeezes Are Temporary

The most important point about short squeezes is that in the absence of positive fundamental developments, they are temporary. Here is the important question, “Has the short squeeze run its course?”  The weakest hands have been squeezed and can no longer add fuel to the upward move. However if there is the slightest bit of fundamental good news for gold or technical buying takes hold, even strong hands who have short positions will feel the pain and start covering leading to a further temporary rise.

What To Do Now?

For day traders, short squeezes are like Christmas.  However, investors may want to consider strength in gold and silver as opportunities to lighten up their positions.

Current Ratings On Gold And Silver

The background colors on the chart are automatically generated by a combination of some of our algorithms; green is bullish, maroon is bearish, and blue is neutral. Signals are automatically generated on yearly, quarterly, monthly, weekly, hourly, and 15 minute charts.  Combination of these signals is then input into another algorithms that has many additional inputs such as relationship between currencies, interest rates, sentiment, money supply, global geopolitical picture, global GDP growth, inflation in key countries, leading indicators of inflation, risk appetite, etc. 

Some of the inputs are adaptive, i.e., their weight changes based on conditions and co-relations. The adaptive nature of the algorithm has been the most important reason behind consistently accurate calls on gold and silver by The Arora Report over the years.  Experience has shown that algorithms that are static stop working after a while because market conditions change.   For this reason, investors and traders should avoid algorithms that are fixed.

Of course, our timing models on gold and silver are much more sophisticated and take into account many more factors.  Here are our current ratings.

  • Neutral in the very, very short-term.
  • Mild Negative in the very short-term.
  • Negative in the short-term.
  • Negative in the medium-term.
  • 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.  These ratings are used by bullion dealers, jewelers and investors across the globe.  For definition of time frames, please click here.

Full Disclosure: As appropriate, 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.

By Nigam Arora
Chief Investment Officer
Courtesy of www.TheAroraReport.com

 

 

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 precious metal products, 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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