The Panic in Needle Park

Gold traded at a month-and-a-half low on Tuesday and its 50-, 100-, and 200-day moving averages were all either touched and/or demolished amid a fresh bout of heavy selling by speculators of the institutional ilk. More on that phenomenon, later. After touching a low near $1,662 the yellow metal closed in New York at the $1,674 spot bid level, down about $32 per ounce. In news from the world of gold fundamentals (still largely ignored), we reported the other day that Aussie output was flat year-on-year. Overnight, we learned from the USGS that US gold production rose by 4% in 2011 and that it climbed by 10% in the final month of the year.

Standard Bank analysts did note a bit of physical demand in the wake of the rout but they still believe that the $1,650 support area remain in the cards as a possible test for gold before this is over. This morning’s opening bids showed a small recovery trying to get underway but gold only added $3.40 to start off the day at $1,678 while silver once again briefly turned negative and fell to $32.92 the ounce. Platinum rose by $10 and palladium gained $7. The early quotes were $1,621 and $672 respectively.

Recent analyses allude to a possible complete label change from “bull” to “bear” for the market in the event the $1,550 support level falls. The other end of the price spectrum – the one where bullishness might once again be justifiable is at the $1,800 mark and it would have to be taken out with conviction if the sentiment is to undergo such a shift. Of course, when and at what price one perceives value is a subjective matter.

Some retail gold investors do not pull the “purchase trigger” until the markets confirm that the "train" has left the station. What could be better than going with a proven “winner?” Others are inclined to buy, and do so heavily, only when desperation and/or capitulation are on display. In any case the recent debacles in the actual business of buying/selling physical precious metals have prompted Uncle Sam (as in: the US Federal Trade Commission) to issue new consumer guidelines on how (and how not) to buy gold (this short primer is a read well-worth your time in the event certain prices become too tempting to resist).

Speaking of when people buy or sell, and who they might actually be, we have come across some fascinating precious metals trade statistics courtesy of frequent Forbes contributor Nigam Arora. Being a nuclear physicist (among other things), it is little wonder that Mr. Arora takes an interest in numbers. In his latest Arora Report, he relays that, as we have pointed out here numerous times, the sky has a tendency to…remain in place in lieu of crashing down upon us and suddenly enriching us by virtue of what such an event is thought (hoped?) to do to gold prices.

More interestingly, Mr. Arora’s algorithms show that humans will be…humans (some forums call them “sheeple”) and that trend-chasing and mis-timing are not only as alive and well as they were back in 1980, but that they do harm to small retail investors whilst enriching the savvy, professional ones. To wit: “in gold’s run from $1,450 to $1,910, [last September] 70% of the buying was by retail investors. Only 7% of the buying was from institutions. In the subsequent run from $1,600 to $1,760, 85% of the buying was by momentum chasing retail investors, but the 'smart money' was a net seller. In the latest run up, 92% of the buying between $1,500 and $1,790 is from mom and pop. Institutions are again net sellers.” Are you starting to see a pattern here?

For example, yesterday, gold took out last week’s low of $1,688 with relative ease and apparently ignored the ominous words of one Mr. Netanyahu (who warned that Israel must be the “master of its fate”) once the institutional selling of gold on the floor intensified (on the back of lackluster growth or worse in the global economy). Meanwhile, practically at the same time, Dr. “Doom” Faber was urging his faithful followers to buy gold (and stocks too!) precisely because of the issues in the Middle East over Iran. It is a sure bet that small retail investors took those words seriously and loaded up on metals just as trading desks began being flooded with sell orders from hedge funds and such.

The Doctor of Doom, for one, envisions the region “up in flames” sometime soon. Precisely how such an event would send precious metals into “orbit” (for more than a few hours, if at all) remains unclear, but the good Doctor figures that a conflagration in the Middle East would automatically prompt Mr. Bernanke (himself!) to turn up the RPMs on American printing presses and thereby deal the buck a fatal blow. That, by a long-shot, remains a prognostication firmly entrenched in the realm of…theory. Hedge funds do not act based on theory. When their sophisticated computer programs flash “sell” it does not much matter who is about to blow someone up or where; it is time to bail. Period.

At any rate, last night, one market strategist was quoted as saying that “We’ve done a lot of chart damage these last two days, especially today. Yesterday and in prior sessions, we were bouncing off of the 100-day moving average, which is in the $1,700 area. Today, we plowed through the 100-day, 50-day and 200-day [moving averages].” Silver fell out of bed once again and lost more than $1 on the session, to settle at $32.95 the ounce on the bid-side after having touched lows under the $32.50 level.

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