Gold topped on Sept 6 2011. This was after the US credit downgrade, after Bernanke failed to telegraph QE3 at Jackson Hole. Gold finally topped on the day the Swiss Natl Bank intervened in the Swiss Franc.
But consider the over-arching dynamic or theme here since the Sept 6 high. The EU’s financial crisis has escalated. Banks no longer trust lending to each other. Sovereign credit spreads in the EU have exploded to the upside as risk of sovereign defaults and EU contagion rise. EU banks are no longer interested in funding emerging markets. In this economic environment driving the EU into a deep recession and peripherals into a Depression, they are more interested in deleveraging their risk assets, including gold.
Gold acts as a wonderful store of value in either a deflationary or inflationary environment. But when troubled banks and sovereigns are deleveraging and unwinding positions, gold becomes vulnerable to a great unwind as occurred in March to Oct 2008 when Bear Stearns, Fannie, Freddie, Lehman, and AIG all went 6′ under. The EU Summits, the G20 meetings, and even the Nov 30 “coordinated” central bank support to provide unlimited liquidity to financial markets has not been able to support gold prices. The reason is simple, there are flaws in all those schemes. Moreover, gold participants recognize this is not a liquidity crisis, but a solvency crisis. Hence gold investors and traders are loathe to be aggressive buyers in front of a looming solvency crisis.
Which brings me round to the Nov 30 “coordinated” central bank support to provide unlimited liquidity. The low in gold that day was 1700. If this is just a liquidity crisis, the coordinated central bank efforts should have been a boon to gold prices as that liquidity should have to find a home as investors either chase yield or speculate with that new source of liquidity. But thus far none of that promised liquidity has been allocated to gold. Gold investors are rather smart this way, and thus the gold market can be a leading indicator of the larger risks looming to investors in other asset classes such as equities.
So, today, the ECB President Mario Draghi tells investors that the ECB will not be lending money to the IMF to by Euro “Stability” Bonds. If the ECB isn’t lending money to the IMF to buy stability bonds because of treaty constraints, who is or who will be? It is not a huge leap to recognize that if the ECB and the IMF are constrained from purchasing “stability” for the EU region, the net result is likely to bring instability to the region. Gold posted an outside down day, a bearish signal. This bearish signal occurred after it failed to breach the December high set on the friendly Dec 2 NFP report. The high set on the Dec 2 NFP failed to breach the bear resistance line drawn off the Nov 8 and Sept 6 highs (all showing some correlation to US NFP dates give or take a day or two).
The low in Gold today is 1711, and the low in December is 1703, and the Nov 30 low is 1700. Tomorrow’s EU Summit will bring promises of “ironclad fiscal rules with intervention rights” to the EU region. But how will those rules and rights be applied? Will the implementation of the program be feasible, and if it is feasible, will it not cause some social and political instability along with a deep recession in the EU region? Today’s high at 1752 is just $2 below the Oct 28 EU Summit high at 1754. It is also just below the Sept 23 high set at $1755, Sept 23 was the beginning of a strong Unwind in Gold. Today’s high suggests the Oct 27-28 Summit high is an indication that the EU summits are not credible solutions to the crises rocking the EU markets. Gold is aggressively bearish short term with all trade below $1752-1754, and a failure of the Nov 30-Dec 2 $1700-$1703 supports and the Sept support line could result in another unwind similar to the unwind in the last month of Q3, precisely three months later.
It is even possible to imagine, using a measured objective model, gold could end the year unchanged in price from last yr’s close of 1421. The measured move objective would target $1363 by January. Not saying that is going to happen, just that if an unwind were to occur like that which occurred in Sept, that such an outcome would be plausible. Silver can be said to be leading gold prices towards unchanged on the year. At 31.58, Silver is up just 2% on the year, and is poised to end the year upside down, in spite of such a price spike in 1H 2011
For more from John Bougearel, visit Structural Loginc.