Gold price breakout & breakdown

It seems that collective memory is becoming shorter and shorter. We just celebrated two important holidays in the Judeo-Christian traditions that commemorate events that took place thousands of years ago. Yet, now, in the age of Internet, people seem to forget major events after weeks, or even days. Given this weeks’ performance in the precious metals, people have forgotten that only two weeks ago Cyprus was on the brink of unraveling not only the European union, but the sacrosanct foundations of fractional banking, with the crisis highlighting the fundamental fault lines of both.

On Wednesday silver for immediate delivery slid as much as 1.3% to $26.9175 an ounce, the lowest since July 25. Gold is now trading below the pre-Cyprus crisis level and is challenging the two-month low.

There is a difference between a bear market and a correction, which is a short-term trend with a shelf life of less than two months. In a bear market, widespread pessimism becomes self-sustaining. Many consider a downturn of 20% or more over at least a two-month period to be an entry into a bear territory. We disagree with this definition in case of precious metals. The secular bull market remains in place as long as fundamentals remain in place – and that is clearly the case with silver.

According a Credit Suisse Group AG report Wednesday, global government stimulus has cut the likelihood of further banking and liquidity crises and reduced the need for a protection of wealth. The bank cut its 2013 gold forecast by 9.2% to $1,580 and lowered its silver estimate by 11% to $28.50.

We can only guess that the folks at Credit Suisse have forgotten as well. It was only last Thursday that Cyprus cautiously opened the doors of its banks but tightly rationed withdrawals. People could only withdraw 300 euros of their own money, couldn’t freely cash checks or use their bank to pay suppliers who use other banks. In a few short weeks Cyprus lost its status as an offshore banking center with a banking sector 7 times larger than the annual GDP.

The restrictions are meant to keep Cypriots from emptying their accounts in the wake of the bailout deal announced last Monday that would drastically prune Cyprus’s oversized banking sector, bloated by deposits from Russia and other former Soviet Union countries. Although the deal scrapped the highly controversial idea of a tax on bank deposits, it would still require forced losses for depositors and bondholders, with the amount to be yet determined. The ink has not even dried on the Cyprus story. We have gotten the message loud and clear that gold and silver are the ultimate monetary assets. Now we need to wait for everyone else to get it without losing our shirts in the process.

We have gotten the message loud and clear so let’s have a look at the yellow metal’s technical picture – we’ll start with its the very long-term chart (charts courtesy by http://stockcharts.com.)

Click to enlarge.

We saw a significant price decline this week.

Even though the situation is still bullish, as gold is above its long-term support lines, it seems that it could be the case that the next long-term turning point in gold may be a major bottom as opposed to a top.

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