The growing risk of a snapback rally by the dollar, highlighted as a danger in the big article on the site at the weekend and in the last Gold Market update, became reality today, precipitating a bloodbath in gold and silver and Precious Metals stocks. As pointed out to me by fundamental analyst Claude in California this development was rendered virtually inevitable by the accelerating rise in long-term interest rates. The action in the dollar today is not regarded as a "one-day wonder" but rather is believed to signal an intermediate trend reversal.
Many of you will have read in various articles on the internet in recent months about how gold has become "decoupled from the dollar". For sure, gold can outperform on occasion to the extent that it actually rises when the dollar rises, but how can it become decoupled from the dollar when it is priced in this currency? - the notion is ludicrous, and those who fell for this absurd argument will have found out the hard way today that it is nonsense.
So, if the dollar is now reversing to commence an intermediate uptrend from its current deeply oversold position, what does it mean for the Precious Metals? It means an intermediate reaction, of course, from their current overbought position. The market started to appreciate this reality today and the exits were jammed by frightened speculators running for cover.
Let's now examine the action on this cuspal day on the charts, which require little commentary, as the action is self-explanatory.
The dollar chart shows the strong rebound today from a deeply oversold condition, made dramatically obvious by the RSI and MACD indicators at the top and bottom of the chart.
After a long, steep, orderly uptrend, resulting in an extremely overbought condition, the ground opened up beneath gold today, assisting those who had lost touch with reality to reacquiant themselves with it. The answer to the question as to whether this drop is a "one-day wonder" is a corollary of the answer to the same question for the rise in the dollar - no, it is believed to signal an intermediate reaction.
The prospect of a lengthy reaction by gold is given added weight by the look of many gold stock charts. An extreme example is provided by Goldcorp, where traders didn't just jam the exits, but were climbing over each over in their haste to get out. The rot had set in on Friday, and volume swelled to a massive 16 million shares today as it plunged 9.7%. Others large golds fell on heavy turnover.
Our Newmont put options recommended at the weekend rose by about 70% today as Newmont crashed support at the $55 level. This sort of action in the large golds is bearish over an intermediate timeframe, and possibly longer depending on subsequent developments. However, a very important point to keep in mind is that gold mining stocks had presaged a breakdown in the metals for some weeks, by seriously underperforming them, a point made by the following chart which was posted on the site at the weekend. The implication of this is that mining stocks will probably hit bottom some time before the metals do.
After today's dramatic plunge, a partial recovery is considered likely that should last at least a day and possibly several days. Such a rally should be used by traders to lighten positions and/or load up with put options in weaker large golds such as Newmont, to either take advantage of further retreat, or to insulate existing long positions in the sector from major losses. We will be highlighting the most effective put options in large golds on the site in coming days.
