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Wednesday, April 17, 2013

Gold sell off

Everybody seems to be out making comments on what the sell off in gold means.  You can read some of the comments in Gold Crashes Most in 30 Years … What Does It Really Mean?

Gold bulls say this is a nice pullback to buy on for higher prices to come from central bank policies that will create a lot of inflation.  Stock bulls seem to be saying it means the central bank policies are working and is a good thing for stocks. 

I thought this chart was a pretty interesting way of putting the magnitude of the sell off into historical perspective.


We have to go back to the 1980s to find gold this over sold based on the 34 week MA.  Look at the blue circled areas in the 70s and 80s that show the other historical instances.  In both cases gold prices went lower for many months before making a significant bounce big enough to see on the chart.  Given the parabolic run up that is now broken, I see no reason for it to be different this time.  The massive follow through selling on Monday greatly reduced the odds that Friday was a stop running exercise.  I think people will be looking for strength to sell into now.

Why did gold break down like it did?  I stated in a prior post what I think.  I have only heard one other person mention that possibility.  If you read the article in the link above you saw this quote from Marc Faber.

“I love the fact that gold is finally breaking down because that will offer an excellent buying opportunity” …. “The bull market in gold is not completed.”

I happened to hear that interview and he also said one other thing I noticed they did not quote.  He said it was possible the break down means we are going to have deflation.  I believe that is the case.  Lets look at some charts.



Interest rates (long and short) are the lowest they have been since the great depression and so is the velocity of money.  The odds of a big inflation event are probably near zero.  The odds of a deflation event are the highest they have been since the great depression.  Is gold now signaling what interest rates and the velocity of money have already been suggesting?

The big move down in gold may cause some margin calls.  You may have heard the old saying sell what you can not what you have to.  With stocks near their highs they could be a target for selling.  Also remember that stock margin debt is very high so a big move down could feed on itself.


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