Gold Follows Bitcoin Into the Abyss

Earlier today we joked that it looked like Cyprus was selling its Bitcoin reserves rather than its gold reserves. This goes to show that it is sometimes better not to say anything, because the markets can make one look like a fool in very short order. Gold had a bleak Wednesday this week, but it has an even bleaker Friday. There was no discernible trigger for the selling (in fact, what economic data releases there were should normally have been regarded as slightly bullish, as they indicate that economic weakness is spreading to the US).

So our best guess at this point is that the selling is largely 'technical' – weakness begetting more weakness, as support levels give way. Incidentally, the crash in Bitcoin has continued as well, although the only thing gold and Bitcoin have in common is that they are both non-state alternative currencies.

It seems more likely to us that some of the selling was initially at least triggered by squirrely algo trading, perhaps egged on by the increasing volatility in the Japanese bond market as Zerohedge suggests, or simply as a belated reaction to the ongoing weakness in the commodity complex more generally. It should be noted here that often the fundamental reason for a market move only becomes evident in hindsight, and often enough no such reason emerges at all (in which case the market concerned reverses just as mysteriously and quickly as it broke down).

 

The Technical Situation

One thing that has no doubt accelerated the selling was the fact that gold has now finally broken below the lateral support level defined by the triangle that has formed since the 2011 high. The lesson here is that this should probably have been expected on account of the fact that the gold stocks have broken through their equivalent support levels a long time ago.

Here is an intraday chart that shows the support level concerned as well as a minor support level from a mid 2011 interim low:

 

 

 

 

 


 

gold intraday,trendlines

Gold intraday, with the major lateral support of the triangle in red and a minor support level from 2011 in blue. It is certainly interesting that the market always displays an 'elephant memory' when it comes to such support/resistance levels. Note that the decline has been attended by very high trading volume – click chart for better resolution.

 


 

Here is a daily chart of the continuous front month futures contract that makes clear how these support levels were determined and shows a few more lateral support lines:

 


 

Gold, continuous,trendlines

Continuous front month gold futures, daily chart. The uppermost lateral support level from the triangle has been broken. The next one below it stems from an interim low made in mid 2011 and has so far held. Two more lateral supports are drawn in below those. Also, the broken trend-line shows that it was 'back-kissed' in the late 2012 rally just before the most recent wave down. The blue lines show the previous symmetrical triangle the support level of which has been violated in 2013 – click chart for better resolution.

 


 

To be sure, none of this looks particularly encouraging. However, we know that gold-related sentiment data have been at rare extremes for many weeks, so perhaps a case can still be made that additional downside potential will be smaller than this technical breakdown would suggest. Sometimes a major support break is what is required for a wash-out, but one cannot be certain of that – it would only be a valid consideration if the broken support level is very quickly regained.

So has this happened before in gold? It actually has, namely in 1973 and 1972, although the time frame was more compressed in both cases. Below are the charts illustrating these events.

 


 

Gold, 72-75annot

Gold, 1971 to 1975. In 1973 a large triangle formed and initially gold broke below the major lateral support level defined by the descending triangle. However, a minor support created many months earlier actually held and prices reversed from there – click chart for better resolution.

 


 

Here is a close-up of the 1973 triangle:

 


 

gold-1973close-up

Close-up of the 1973 triangle – click chart for better resolution.

 


 

A similar slight break of triangle support had already happened in 1972 as well and was also reversed in very short order:

 


 

Gold-1972-ann

Break of support in the 1972 triangle, followed by a quick reversal – click chart for better resolution.

 


 

Of course we simply cannot know if things will play out in a similar manner this time. It is just as likely, if not more likely, that gold is now suffering a larger degree mid cycle correction akin to the one that happened in 1975-1976. This correction also began with a triangle (the green ellipses show triangles that resolved bearishly, the red ones the triangles that resolved bullishly):

 


 

Gold, 1968 to 1981,triangles

Gold – triangles between 1968 and 1981. Shortly before the 1975-1976 mid-cycle correction, a triangle resolved in bearish fashion. The same happened again in 1980, at the end of the bull market – click chart for better resolution.

 


 

Conclusion:

We wanted to show these past occurrences of triangle breaking down to provide some perspective to today's technical breakdown in gold. None of this has any predictive value in the sense that one could firmly argue for one or the other outcome (i.e., whether a quick reversal or a continued breakdown will now be in store). Rather, the value of knowing about these past occurrences is that it prepares us with regard to how to correctly interpret what happens now in the very short term. If gold can regain its broken support very quickly, then it will count as one of the 'false breaks' similar to those in 1972 and 1973. However, a further decline to even lower levels would clearly warn us that a major mid cycle correction is now underway.

Lastly, one should probably watch the gold stocks closely, as it is to be expected that they will likely signal a potential reversal in advance. If they do not signal one, it will be all the more likely that a mid cycle correction of very large (i.e., primary) degree is underway. Conversely, a reversal of the gold stocks or a show of relative strength would probably indicate that the break is indeed a false one.

 

Addendum: Bitcoin

Here is a chart showing the continued crash in Bitcoin – the digital currency has now lost $180 from its recent intraday peak within three trading days. Trading volume has soared to a new record high in the process:

 


 

bitcoin-update

Bitcoin continues to crash and trading volume soars.

 


 

 

Charts by: BigCharts, BarCharts, Bitcoincharts, St. Louis Federal Reserve Research


 

 

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17 Responses to “Gold Breaks Support – What Now?”

  • Monty Capuletti:

    my 2 cents- Easy to ascribe causation ex-post facto but Real interest rates troughed in 3Q’11, just as gold hit it’s peak. The DXY hit its multi-year low then as well. Incremental QE stopped boosting CRB/Commodities like previous iterations despite ECB, BOE, BOJ actions as mkts perceive these moves as dollar +, so gold take the punishment. So far in 2013, Global growth expectations have dropped dramatically and inflationary impulses have been overwhelmed by rising dis-inflationary fears. I don’t see de-flation fears yet present in mkts as credit spreads remain tight and multiple expansion offsets the (as of now) mild earnings downgrades occurring.

    Inflation expectations are dropping globally but remain above levels signaling deflation, or where prior deflationary sovereign and banking fears have flared so I would think gold will likely go lower over near-term despite the incredible sentiment extremes. Gold and USD move + together only when systemic failures (either Euro or US Fncl system) flare and while I see much higher near-term risk for US recession than most, systemic risks in US seem a bit further off into future. US sequestration (ie- deficit reduction) is real (see the large but shrinking US deficit last 6 months) as higher taxes, lower deficit, improving housing market are all gold negative.

    QE seems to have been a bit of a red herring in terms of predicting near-term gold performance as Central bank action offsets tightening fiscal policy which seems to indicate that fiscal policy may win out as the dominant factor to watch for when the true de/in flationary impulse arrives..

    • jimmyjames:

      AJ…

      Not sure i follow your logic–house prices have never seemed to have an adverse effect on gold- in either direction to my knowledge-

      http://www.calculatedriskblog.com/2012/04/real-house-prices-and-price-to-rent.html

      I don’t believe the majority of real-estate buyers are in – or have been in the gold market-they weren’t buying gold- they were buying houses on credit and living fat off the ATM features-
      From the chart (CR) the price ramp started in 2000- peaked in 05 and crashed until recently-while gold powered up through most of it-

      As far as QE ending-I’m not sure that is gold adverse either-as mentioned above..possibly a short term reaction- but the gold price was rising long before QE made its debut-

      As this site has explained- bull markets don’t end without a blow off- we have had no such froth in this one-

      http://tinyurl.com/cq69xdd

      I still believe it is the eventual adverse effects of unpayable debt/default- that has been powering gold- where will the money to pay it off come from?

      http://research.stlouisfed.org/fred2/series/TCMDO

      As far as a recovery goes- that is debatable-the whole planet is slowing down- flash PMI’s have been crashing in some very important countries-Japan is in a trade deficit now-
      Europe is fading fast-France is cooked along with the PIIGS-
      All this after throwing trillions at anything that moves lower-

      I’m not a big fan of GDP or CPI data-but it’s all we have and it looks to me like there is no real recovery and might instead be turning lower again–

      http://tinyurl.com/c6prxub

      I think we could see a lot more credit/debt deflation enter the picture if this continues and money (gold) should benefit-

      • Andrew Judd:

        JJ, I mentioned the US housing recovery as it is one sign that the US economy is not finished yet and I think that Gold has priced in some kind of hyperinflationary event related to the US economy being unable to recover without an attempt at increasingly worsening deficits.

        I think Gold was rising before QE began because Gold buyers were assuming that there would be widespread monetization of debt and there would be high inflation. Inflation is i think quite high but we do not seem to be anywhere near the kinds of higher inflation that so many gold buyers have expected. So now that QE could be ended/wound down and US deficits could become manageable it seems to me to be a significant game changer.

        • jimmyjames:

          AJ…

          I get what you mean about house prices stabilizing here but they are still holding a big shadow inventory off the market and there’s people that have been living rent/payment free in foreclosed homes for several years now–so I’m kinda reluctant to call a bottom here-
          As far as gold ever being priced for hyper-inflation-i think we’re a long way off the mark for that-although i do agree that a lot bought with that expectation and maybe the talk of ending QE has spooked them…
          I still think the reason for low yields on the long bonds is from pricing in deflation and i also think if there is further credit/debt deflation- it will be positive for gold-i guess we’ll have to see what rates do-if they do stop QE-
          If they spike we can probably kiss the housing recovery goodby maybe gold too-gold being taken out to the woodshed again tonight- oil and base metals as well-
          China missed all expectations tonight and all Asia is red-
          Who knows–

          • Andrew Judd:

            JJ, it is interesting you are Gold bug like on house prices – you might still be denial about what is going on? People might be living rent free in houses that are not foreclosed, but multi unit rental property has been doing very well in construction and in rents for several years, and multiple bids are coming back to some of the areas that were so depressed. Even the Inland empire has come back – although they did finally manage to build road and rail links to it. California is returning to fiscal sustainability. Tax receipts are rising.

            On the other hand 90% of new housing finance is provided by the US government which is an astonishing amount, but balancing that fannie and freddie are doing well and are in run down mode. And most interesting is the unusual fixed rate mortgage finance the US traditionally has. 30 year fixes continue to hover at historically very low rates offering anybody willing to take the plunge a great opportunity while house prices are so very low and most people are in fact working.

  • jimmyjames:

    AJ…..I pretty much have to agree about the printing/QE and gold relationship (at least so far)
    Before the first QE in 08 and before the ramp up in BASE and Fed balance sheet .. gold was doing just fine-
    I’m sure that this all has at least a knee jerk effect on gold-but the last QE didn’t seem very effective as to boosting the price of gold-
    I don’t know what reason it was that gold got whacked-but i doubt it was because of some new found faith being born in paper currencies-
    IMO..gold is looking at the same thing the bond market has been looking at since 01..that being default risk-

    btw…. nice rant monty – their explanation of “dark forces” don’t cut it-

    • jimmyjames:

      Off topic-

      I still can’t log in with IE-

      Authentication required!

      This server could not verify that you are authorized to access the URL “/blog/wp-login.php”. You either supplied the wrong credentials (e.g., bad password), or your browser doesn’t understand how to supply the credentials required.

      In case you are allowed to request the document, please check your user-id and password and try again.

      Error 401

      *************
      Firefox works fine-

      I know i’m not making a mistake on my log in–so it likely has to do with this-

      ***************

      Thousands of WordPress and Joomla sites are currently under attack by a large botnet brute-forcing passwords. Administrators need to make sure they have strong passwords and unique usernames for their WordPress and Joomla installations.

      Over the past few days, perpetrators have significantly stepped up on brute-force, dictionary-based login attempts against WordPress blogs and Joomla sites, according to reports from CloudFlare

      http://securitywatch.pcmag.com/none/310350-wordpress-joomla-sites-under-brute-force-password-attack

    • Andrew Judd:

      Jimmy James, The US housing recovery and probability of QE ending in 2014 is very Gold unfriendly, particularly when priced into Gold is the collapse of the monetary system and more or less WW3. Those things will still happen but they seem much further away than they were previously – even the US deficit is showing signs that it could become manageable.

  • Monty Capuletti:

    Thanks RedQueen,

    I’m sick and tired of the gold bugs blindly ignoring what has been an epic bear market in gold stocks (now moving to gold) by waving empty accusations and conspiracy theories at the “banksters” or whomever else they believe to be holding down prices, without ANY more sophisticated analysis, thought or humility about what has gone wrong w/ their investment thesis. THAT is why I come to Pater’s blog- and why I look for any areas where I am wrong (and clearly I have been as despite claiming on this blog almost a year and a half ago I was “done” with gold stocks”, I never sold them and that decision has indeed left some scars) and where any serious investor or serious person would and should question themselves, I find that gold “bugs” broadly, at the most widely read and more thoughtful sites on the web, have FAILED massively.

    Forget Kingworld or many other jokester gold apologist sites. Where is the mea culpa (not for the cheerleading- I’m a big boy and make my own decisions and hold myself accountable), or the apologies for not just the false certainty and bombast, but for genuinely saying “I don’t understand what’s moving this market” because, clearly, the whole blogosphere has missed this, and outside of Pater’s blog, with charts and DATA, I find NOONE seeking anything beyond Jim Sinclair’s assanine assertions of “smack downs” (like it’s WWE) for the reasons why gold could go from $250 to $1,900, when apparently the banksters weren’t looking, and back down to $1,500, when apparently they had enough.

    Where’s the work? The analysis? The questioning of the thesis? What rules/world do these people live under where they can so consistently (for 2 years now) be wrong and yet never acknowledge it, or question themselves? Where is that ok in the rest of their lives? Disgraceful.

    I have held over 20% of my net worth in gold since gold was $1,200 (bought my first at $550) for the simple reason that I could never understand how so clearly imperfect people like Bernanke, Trichet, Kuroda & Co
    could equalize in 1 computer stroke the collective real wealth of society with another electronic zero yet I have struggled to find any forum that has truly sought to understand where it is that we can all be WRONG about gold, or any that have approached this now 21% decline in gold and 50% crash in stocks with any kind of grown-up analysis. Take some damn responsibility as I do- and at least question that MAYBE there’s something going on other than whatever some a#@hole “London Trader” suggests…

    • georgew:

      I have a hard time understanding this Monty’s comment, or Red Queen’s comment with respect to anything actionable.
      If you are a speculator, then you must read the winds of all directions for signs of market movement and are inevitably going to make errors sometimes, as will everyone else, acting to some degree rationally and some degree emotionally. The rest is details.
      If you understand the fundamental economic backdrop, then you diversify your wealth away from where Govt malfeasance can easily destroy it and Govt tyranny can easily confiscate it. The rest is just details.

      • RedQueenRace:

        “If you are a speculator, then you must read the winds of all directions for signs of market movement and are inevitably going to make errors sometimes…”

        I could flip coins and get decent results as long as I

        1) trade with the trend

        2) use stops and not take open-ended losses (especially while trying to average down/up).

        For a trader the best systems are the simplest ones. The more complicated they get the more likely “analysis paralysis” sets in. “Reading the wind in all directions …” is what leads to the latter. Been there and done it myself (and still do more often than I like) by overriding my system based on some “additional considerations” only to miss a great trade that the system picked mechanically. Thinking has cost me more money, mostly in lost opportunities, than just about anything else. The only thing that comes close are the bad losses I took in my fledgling trading days trying to use mental stops and freezing when they were hit.

        Here’s a simple actionable gold approach: Identify the support levels on the chart and buy close to them with a tight stop underneath the support level. Of course this works much better during a correction when the primary trend is up than a bear market, though I guess this is just a detail.

    • Andrew Judd:

      The main problem for Gold is the inability of Gold bugs to understand why QE need not be inflationary, instead people have been screaming from the roof tops that QE is printing money.

      It is actually quite difficult to see that QE is going to be a strongly inflationary process given the huge underlying deflationary forces at work.

      Most Gold sites however are simply not interested at all in the discussion, and even raising it tends to get you the label that you are a bankster apologist and so forth.

      Another problem for Gold was that the gold bug thesis was always talking about a scenario of a very rapid collapse of our current monetary system, and yet these same people seemed usually to have almost no understanding of our current monetary system or explanation why the current vested interests would be so keen to allow it to collapse and so powerless to create opposing forces to delay or prevent that collapse. Indeed often part part of the collapse theory was that the collapse was pre arranged and the organisers were going to position themselves in gold after all of the ‘smack downs’ and so forth etc etc.

  • No6:

    Obviously it is now time to sell all my Gold and get into the equity markets, especially since tail risks are well behind us in Europe and Japan is cured of deflation.

  • zerobs:

    The same parties that yanked their funds from Cyprus banks before the Cyprus banking crisis are doing the same now before the “gold paper-promises” crisis.

    Even if it isn’t the same parties, the reason is exactly the same – get your hands on your cash before your account is seized in part or in whole. Don’t keep all your eggs in one basket – even if you have six accounts in six different financial institutions they’re all just one account to the central bank and the central government. When the bank holiday comes, safe deposit boxes in six different banks are all inaccessible (by you). Slovenia, Portugal, Italy, Spain, Ireland, France… The Union of European Socialist Republics is coming to an end and the same plunder is going to take place. Anyone who lived through the last one is not going to get burned the exact same way again.

  • RedQueenRace:

    I think we can stop calling this a “correction” and label it for what it is – a cyclical (at this point anyway) bear. The majors, HUI and XAU have been cut in half since their 2011 highs over a period of 18-24+ months. As of today gold itself today was down over 20% from its peak established over 18 months ago.

  • jimmyjames:

    Here’s a glimmer of hope- perhaps a bullish indicator for gold–i shorted for a hedge for what might come Sunday night ):

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