Weekly Metals Update: Metals Crushed, What’s Next?
by Stephen Penny, FTM Daily:
With the Chinese markets closed and gold perched just above key support, the commercial banks seized the opportunity to dump massive amounts of
paper futures contracts on the COMEX, triggering stops, margin calls, and initiating a flood of selling. Meanwhile, in the physical market, demand surged as smart money was content to purchase additional metal at a discount. It’s important to recognize that metals prices are set based upon the supply/demand of paper contracts traded on the COMEX, where the large commercial banks can place enormous sell orders at illiquid trading hours to nudge the paper price below key support levels. With upside momentum naturally fading and gold and silver just above key support, this week presented an opportune time for the heavily short commercial banks to give price a shove lower. Once key support is broken, momentum-based hedge fund trading algorithms often take over, allowing the banks to cover short positions at a lower price. I believe that is exactly what unfolded this week.
While the metals were due for a healthy correction, and other sectors that are also sensitive to interest rates traded lower this week, none sold off with the magnitude and volume of the precious metals sector.
The subsequent inability of the metals to mount a substantial rally after the inaction of the Fed several weeks ago, combined with the series of lower highs and all-time record commercial bank short positions were the primary reasons for my cautious approach in previous weeks. In hindsight, these signs should have dictated a more aggressive tightening of stops, profit taking, hedging with puts, or some combination of the above. While many of us (like me!) may have given back more gains than we would have liked, the lessons learned and experience gained from weeks like this have the potential to more than offset any monetary losses. As the metals bull resumes, I expect wild gyrations like this to become increasingly frequent. Let’s use wild swings like this to refine and improve our strategy and trading rules to better handle the increased volatility that is undoubtedly forthcoming in the months and years ahead.
On a more optimistic note, gold and silver were each able to close the week above their respective 200MAs. (Gold reclaimed the 200MA by rallying $7 in the after market–not depicted on the chart below. Likewise, silver reclaimed the $17.50 level.) GDX is a few pennies shy of its 200MA. The entire metals complex is very oversold, resting just above key support and due for a sharp bounce. If that unfolds, short of a “black swan” event, I will remain skeptical that a sustained rally to new highs will unfold in the immediate term, as the charts likely need a bit of time to recuperate from the short-term technical damage. As we’ll see in the Commitment of Traders report below, the big banks still have a large number of shorts to cover before the CoT will be back to even a neutral posture.
possibility of a 50% retracement was also mentioned in previous weeks. The 50% retracement numbers are $1225 (gold), $17.50 (silver), and $23 (GDX.) GDX and silver are at those precise levels, with gold about $30 above. Let’s see if we can hold these levels! I’m cautiously optimistic, but lower prices are certainly a possibility .
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