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10/18/13

A week ago (aka “Argentina About To Default! We Recommend You Buy The Argentine Peso Immediately!”)

One week ago, early last Friday morning, we saw a very strange move in the gold market, one so odd that even your non-goldbug non-goldmarket-caring humble scribe decided it needed comment in The IKN Weekly last weekend. Here's how that editiion kicked off (just two words redacted).




Still Bullish
Here follows the disjointed rant of the week. The most interesting price move of the week, as far as I’m concerned at least, came  early on Friday morning when somebody pushed some button somewhere and dumped 2m oz of gold (well, not literally, it was an electronic trade) onto the market and this 5min chart (right) shows what that did to the price of the metal. The move got the goldbug faithful spitting their usual bunch of feathers and looking around for somebody to blame, for anybody to blame, which is par for the course but it got me thinking in slightly different terms to the fist-shakers.
Firstly yes it was a big trade for the size of the market in question (let’s round it to U$2.5Bn in the space of a minute or so) but despite its relative market glamour and headline-making appeal, the gold desk isn’t that big compared to the REALLY big markets, such as US bonds or EUR/USD forex. It’s all comparative of course, because the money that runs through gold dwarfs the market which this publication dabbles in, that of junior mining companies, but if we’re considering gold as a monetary asset or currency and dollar trades through the metal as a type of forex pair, it doesn’t really belong in the bigger leagues.
Secondly, the look of that chart isn’t that bad, post-dumpage at least. Gold sold off at the open but it kept its shape the rest of the day and even made ground back while those around it faded and wilted (I know that because I have the stocks to prove it). It’s the moves of a metal that isn’t expecting another big dump to happen in the days to come, it’s the moves of an issue that has its buyers ready to step up and buy.
Later came a third thought on reading of the technical damage on gold reported by chartists. I’ve read from several sources in the last three days that the current price level is critical and if it doesn’t hold, we’re going to new lows for the year. Well, isn’t that just what we’re required to worry about right now? And while on the subject by way of a slight aside, let’s also note that if gold recovers from its current “critical level” price, the TA enthusiasts will tell us that they were right about calling the current price as key, whereas if gold sinks further they’ll tell us they were...errr...right about...errrr...calling the current price as...errrrrr...key. Class that under “nice work if you can get it”.
OK, enough flippancy, let’s get to the point. Last week I said that I saw October and November as bullish for gold, set myself a reasonably reachable price target for the period and announced adjustments to the Stocks to Follow portfolio that would move it net longer. Last week started ok but faded badly and the result of seeing gold under $1,300/oz this weekend does not jive with my call at all, but that doesn’t mean I’m changing a thing just a week later. Mine is still a near-term call and it’s still about being reasonably optimistic in the weeks to come, faced with a strange backdrop of political and economic happenings (the US political scene first in line there). Gold is just as smart a thing to hold as it was last week and if the fear trade begins to take off, as I believe it will still (no matter if the US lawmakers conveniently find a solution just before a week’s break from duties shows up on the calendar or not), it’s going to take a lot more than a single 2m oz sell order to keep gold from moving up.
It is indeed a strange market atmosphere for gold out there at the moment, one where Alice’s Through The Looking Glass (and therefore Biiwii) come to mind. Market influences are reversed, fear causes gold to be sold, dollar weakness gets no upside reaction from the metal, what’s normally good for bullion’s day-to-day market price is bad. My best guess is that normal logic has been suspended due to sentiment drivers trumping the normal rules, which suggests traders pushing buttons on GLD have the whip hand compared to those who are buying, shipping and holding bullion. Meanwhile, we see people who are scared of a US default buying the dollar as safe haven and driving down prices of other issues (gold included) as a counterparty result. It’s the concept of ever decreasing circles writ large and I can only imagine the reaction if a big bank in Argentina issued an alert along the lines of “Argentina About To Default! We Recommend You Buy The Argentine Peso Immediately!” and how long the author of such an analysis would be able to keep their job, or keep out of a mental health ward.
So yes, there is a great deal of difference between near-term sentiment drivers and longer term value drivers and although I’m no conspiracy theory spouting goldbug, there comes a point when the stupid has to be called out. Last week was weird and I think it was full of signals that are getting far more attention than they deserve. Therefore I’ll stick to the plan of looking for higher gold prices and a trading set-up that reflects that call.