Gold Mean Reverts to Average Price Since the Daily Low Close of Year: Downside Risks Likely to Persist

Gold experienced a high frequency attack at 2:54 am ET that drove the price of gold down $11 from $1355 to $1344 in less than a minute. It was said to be the result of a block order to sell 2000 gold futures on Comex. The 2000 block order halted trading for 20 seconds.

The level at which the block order to sell 2000 Gold futures was just below the support from Wednesday’s (yd) lows at $1356. Gold prices will remain aggressively bearish with all trading below 1) the bearishly sloped 5 day average (now at today’s high of $1366 & 2) the May 22 FOMC Minutes low at $1353 & 3) the August 22 Syrian Low at $1354.

Because there are no downside limits on gold future prices and gold prices are prone to high frequency attacks, quantifying the downside risks can be nearly impossible when almost anything is possible over the near term. The best we can do over the near term is make some key observations going into next Wednesday’s Sept 18 FOMC meeting – when the Fed is expected to taper asset purchases of US Treasuries by $10b a month. Then a cycle low should be in place concurrent with the first taper.

Subsequent tapers may set other cycle lows until the Fed has fully removed all asset purchases by end of June 2014 – if they stick to their playbook and don’t move the goalposts.

Key Observations

  1. Gold prices declined -10% in 16 trading sessions from April 26 to May 20. A 10% decline over 16 days from the August 28 targets $1290 by Thursday Sept 19, one day after the FOMC taper. The average price of gold in July is $1286.
  2. The July 31 FOMC low is $1305. The 2011 year low is $1309.
  3. The 50% retrace to the year low is $1300.
  4. The Wed August 7 low is $1271.
  5. The Wed July 17 low is $1269.
  6. The Wed July 10 FOMC Minute high is $1266.
  7. The high of July 2 is $1267.
  8. The high of June 2010 is $1266.
  9. The July 11 Bull Gap Low is $1261(Set by Bernanke’s highly accommodating remarks on the afternoon of July 10).

Summary
There are a cluster of intermediate term supports in the $1300-$1309 and $1266-$1272 zones.

Chart

For more from John Bougearel, visit Commodity Trading Advisor.