Have Gold and Silver Capitulated?Apr 16, 2013
Chad Karnes, CMT
On 4/12 gold fell over 4% on its way to its final support level. And on 4/15 that support failed massively as the both gold and silver continue to trend lower.
On Thursday, April 11, 2013 the New York Times ran a story on gold titled, “A Sure Bet Loses Its Luster." The article focused on gold’s decline the last two years, just before the bottom dropped out of the precious metals.
Anyone that follows the markets knows that gold has lost its luster since its 2011 price peak, falling from a high price over $1900 to below $1400. But the recent selloff shouldn’t come as a big surprise for those who knew what to be watching.
A Sentiment Flip Flop
With the latest bearish headline confirming the overall negative sentiment, we find it interesting that this sentiment is exactly opposite the bullish euphoria that accompanied gold in 2011 near its price peak.
The above headline itself shows that gold was considered a “sure bet” in 2011, and we of course know that there is indeed no such thing as a sure bet.
A summer 2011 simple Internet search reveals that most investors did indeed consider gold (NYSEARCA:GLD) a sure bet. As it was making new all time highs, literally everyone in the world was jumping on board the bullish bandwagon. 2011 indeed was a time that everyone wanted to own gold.
“34% of Americans Think Gold is the Best Long Term Investment: More than any Other Asset Including Mutual Funds” – April 2011, Gallup Poll
“First Purchase of Gold for Korean Central Bank in 10 years” – August 2011
“Emerging World Buys $10B in Gold as West Wobbles” – August 2011
Popular gold focused
television shows were created in 2011 and as we pointed out recently in
the ETF Profit Strategy Newsletter published 3/22. “We don’t see it as a coincidence that Pawn
Stars was the second highest rated television show in 2011 along with another gold focused television show, "Gold Rush."
(Check out our latest VIDEO: Is Apple's Fall a Warning for the Rest of the Stock Market?)
Even mainstream television was all in on gold (NYSEARCA:GDX) euphoria helping mark its top in 2011.
Also noteworthy is that these “smart money” central banks from the above headlines were buying gold when its price was above $1700 - a far cry from where it is now (read: the paper losses are adding up).
Contrast the enthusiasm behind the gold market's 2011 peak with today’s extremely negative view of gold.
Here are just a few of the quotes that capture today’s mood, taken from the previous mentioned NY Times article:
“The End of the Gold Era: Price Target $1375” – Societe Generale
“GoldLine drastically cuts back advertising on television to $3.7MM from $17.8MM in 2010”
“Gold to Decline Further: Price target now $1390” – Goldman Sachs
You get the point.
Gold (NYSEARCA:IAU) sentiment is now completely opposite what it was at its price peak in 2011. However, sentiment alone was not enough to keep gold above its important long term price support.
So what caused the precious metals to fall the most since 1983?
The Technical Battle Lost
In the 4/3 ETF Technical Forecast published twice a week, we took note of the important technical levels that gold needed to hold when it was trading at $1554 and Silver at $27. We accompanied that analysis with the following chart by saying:
“Gold’s 50% Fibonacci retracement level as well as previous support that has held every pullback since 2011 is around 1530. The 1530 support shelf has been highlighted all over the media and is a very well known support level. This means there are likely a plethora of stops and shorts located just below 1530. If price falls below 1530 and there is no snap back rally, it likely means the selloff will continue down to the final 1470 support shelf (in green) as sellers win the battle.”
On 4/10 we followed this up with the following chart and commentary of SLV when it was trading at $26.68 after a short term bounce from its similarly important $26 support level, “anymore deterioration in price and the expectation would be for another test of the long term support level ($26 on SLV). Until proven otherwise the short and medium term trends in Silver (NYSEARCA:SLV) still remain bearish as the red downtrend channel in the chart below acted as resistance, stopping the precious metals rally. A break of $26 on SLV (shown on the chart in green) is a warning sign that the support shelf on spot Silver ($26.15) may not hold this time.”
The technical lines in the sand were drawn.
Gold bulls needed to hold 1530. Silver bulls needed to hold $26.15 ($26 on SLV). And in both cases they didn’t.
On 4/12 price indeed fell below 1530 taking out the stops on its way to 1470.
These prices were so important we actually have been harping about them since last summer when on 7/11/12. We warned: “If $25.50 on SLV fails as support, look out below as there is very little support south of $25.50. If/when that occurs, a great short opportunity will likely be upon us.”
The Gold Bull Officially Over?
On 4/15 precious metals bulls didn't put up much of a fight at the final support of 1470 as selling pressure intensified.
The breakdown of the important 1530 level on gold and $25.50 on SLV level we have been watching since last summer was a big warning that the downtrends were accelerating. Not only were gold ETF traders who took our advice able to avoid a 10%+ decline in metals, but opposite performing ETFs like the UltraShort Gold ETF (NYSEARCA:GLL) have jumped 47% over the past three months. Our best gold trade of the year is up +450% and is still an open position.
For now, the previously mentioned levels should act as
resistance on any short term bounces in gold and silver as sellers
hold their newly established battle lines (1470-1530 on gold and $26 on silver).
What will be the next catalyst for gold's next big move? And what's the best way to capitalize?
The ETF Profit Strategy Newsletter outlines critical support and resistance levels
that have the power to shape the market’s direction and warn of important trend
changes. Although the metals downtrend continues, prices don't fall in straight lines. With sentiment so bearish, there likely will be relief rallies offering precious metals longs a chance to unload positions. Updates are
provided every Sunday and Wednesday night.
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