Gold’s big plunge over the last two days is in the headlines as its biggest two-day decline in 30 years, since 1983.
So just for fun (well not really), I went back to see if that big plunge in 1983 was capitulation, and cleared away the selling, preparing gold for a big reversal back to the upside.
As the chart shows that was not the case. Instead it resulted in only a small dead-cat bounce rally, and was actually the first move down in a 50% decline from $500 to $250 an ounce over the next two years.
Not that the previous occasion 30 years ago has any relevance at all to the current situation. But I thought it was interesting to have a look.
The two-day plunge certainly does have gold very oversold short-term beneath its 30-day m.a.
There are a lot of known factors as well as unknowns regarding the additional plunge that has the talking heads hard at work.
It’s known that investor sentiment among speculators had become bullish. Data released Friday showed that speculators had raised their outlook for gold, increasing their exposure substantially in gold futures and options contracts on the Comex and Nymex.
Analysts are saying the bullishness seems to have been a reaction to the short-term increase in gold prices the week of April 9, the time-frame covered by the report. TD Securities says gold speculators also probably added to their long positions in reaction to the weak jobs report, which also fell within the trade reporting period. Managed-accounts reportedly added 5,833 long contract positions and cut short-sale positions by 3,087 contracts.
With gold plunging 15% in just two days that apparently had stop losses repeatedly being hit and a flood of margin calls, resulting in panicked short-covering to close out those bullish contracts.
And pundits seem to finally be catching up to the situations we’ve been warning about for some time; the determined effort by India to cool off enthusiasm for gold in that country, which has been affecting its balance of payments in international trade, the plans by several central banks including Cyprus to sell gold to raise cash for their struggling economies and debt crises, etc.
Gold is now down 28% from its 2011 peak of $1,900, clearly in a bear market.
The deeply oversold short-term condition should result in another attempt to rally. But the big question is whether investors have lost faith in gold being a safe haven and will use any strength to unload before their losses pile up.
As I said in Saturday’s post, we will continue to take bullish calls for gold with a grain of salt for now until our technical indicators trigger their next buy signal.
Sorry but that’s all I have for the free section this morning. Too much to do in the subscribers’ Premium Content area.
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About The Author
Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!
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