"even if we get such a bounce, like in the 2nd half of 2015, we might not have seen the low right now." Here's why ...
by David Brady via Sprott Loan News Lots of traders have been complaining just recently about the ruthless fall in Gold-- and rightfully so-- seeing it lower each time they open their screens in the early morning. Despite having currently fallen ~$158 from its peak at 1369 in April, I am, as usual, seeing an increasing variety of calls for Gold to fall listed below$1000 once again. This appears to take place whenever Gold is up to any level, and this time is no different. With this in mind, I decided to have a look at the other side of Gold today, the case for further downside.I am composing this post completely cognizant of the possibility that this marks the low in Gold.Gold has actually currently fallen$158, as discussed above. In prior cases where Gold has fallen ~ 95
or more, this is what followed ... So in spite of all the doomsayers, it is reasonable to expect"a minimum of
"a healthy bounce soon.Now let's evaluation the technical case ... Suffice to say from the beginning, it's not pretty.TECHNICALS Gold has broken its uptrend dating back to the low in Dec 2015. It has also broken its prior low in Dec '17 at ~ 1240.
The 200-day moving average is now sloping down again, which is bearish. It did this in Dec 2016 also, just before
Gold bottomed at 1124 and took off to 1362.
It was also sloping down prior to its low in Dec 2015.
Gold is very oversold and positively divergent based on its Daily RSI and both MACDs, which would suggest that at least a healthy bounce is overdue.The weekly chart shows that Gold has smashed through its 200-week moving average, which is bearish. Gold would require to break and close above 1235 to negate this breakdown.However, the weekly RSI is also extremely oversold below 30, which also suggests at least a healthy rebound is pending.Both MACDs are negative and falling quick, which is clearly bearish, however a space has actually opened between the MACD Line and its Signal that recommends at least a bounce is possible prior to lower again.In summary, the technical
image is definitely bearish but maybe too bearish, justifying a significant bounce after a$158 drop, which is
reasonable based on such decreases in the past. Even if we get such a bounce, like in the 2nd half of 2015, we may not have actually seen the low just yet.SENTIMENT Gold's area DSI struck a low of 7 on July 2, when it was at 1242. Its lowest level given that it hit 4 on Dec 15, 2016, at 1124 then rallied to 1362 from there.Its 21-day moving average("21DMA ")struck a low of 12.5 on July 2 also. The last time it was lower was likewise in Dec 2016, when it hit a low of 9.7.
Prior to that, you need to go all the method back to Aug 2015, when it hit a low of 12. Could the spot DSI go much lower? Clearly not. But it can spend time here for a while as price continues to fall.Alternatively, utilizing Aug, Oct, and Dec 2015 as a guide( see 2015 chart above), the 21DMA might be indicating a considerable bounce here as it did from Aug to Oct 2015, before falling to a greater low in the 21DMA in Dec 2015 but at a lower cost, i.e. a positively divergent lower low.Sentiment is a contrarian indicator. Suffice to say that Gold is incredibly overbearish, which validates a rebound, but it could end up being more overbearish based upon the 21DMA in Dec 2016, or we might get a bounce in cost and still see a lower low later on this year, as in Dec 2015. Gold is severe oversold on an everyday and weekly basis and extreme overbearish also, however cost continues to fall anyhow for the time being.POSITIONING We have actually seen open interest boost as Gold continues to fail essential technical levels. Is this Cash Managers(aka"Funds ")attempting to purchase the dip and getting hosed by the Bullion Banks, or could it be the Funds filling up short and the Banks ending up being significantly long?
We will likely get some insight from the COT information tomorrow but if the previous, it supports further disadvantage. If it is the latter and Banks are loading up long, then that is bullish after a long decline with extreme oversold and overbearish signals.Last week's COT data, when Gold was at 1255, appears like an eon ago. That stated, Funds were short for the very first time considering that Dec 2015. Cost has actually continued to fall because then, which suggests that Funds are ending up being progressively brief. At the very same time, Banks(aka"Swaps ")and Commercials stayed brief, while Other Reportables started contributing to their long position again-- their 2nd greatest long position on record.In summary, it is challenging to discover much in the placing information that supports the bearish thesis conserve for the risk that Funds are attempting to purchase the dips. Thus the boost in open interest, and Banks and Commercials stay brief. Funds are brief too, however I guess they could end up being even much shorter, which is counterintuitively bullish.Putting all these standard indicators together, prices might certainly continue to fall, however the rubber band is being stretched across technicals, sentiment and positioning, and similar such drops in the past justify a significant bounce quickly
. Nevertheless, I don't believe this means that we have actually seen the lows. This could be the second half of 2015 all over again, with a lower low to come.Such lower lows could be driven by a crash in stocks this Fall. Listen to my interview with Craig Hemke on this subject here: https://www.sprottmoney.com/Blog/i-expect-a-crash-in-the-fall-of-this-year-david-brady.html?platform=hootsuite!.?.!Crashes are deflationary by nature, which could weigh on Gold or we could see a repeat of 2008 with repeated waves of shock selling by the Bullion Banks to depress Gold and support the dollar. Either method, this might precipitate a lower low in cost just like that seen in Dec 2015. If such a crash were to take place
and were followed by a Fed reversal to QE, then Gold would simply explode greater, as it did during QE1 and QE2, only more so in my humble opinion.Returning to the drawback case ... if USD/CNY continues to rise while XAU/CNY stays in a variety of 8200-8360, then Gold might simply keep falling directly down. As I stated in my previous post at https://www.sprottmoney.com/Blog/china-takes-control-of-gold.html?platform=hootsuite!.?.! I do not believe this is likely, since the U.S. would not tolerate such a move. It would weaken the whole function of U.S. tariffs by making Chinese exports more affordable in dollar terms. It stays a distinct possibility, especially given the break of 6.70 this week.At the very same time, the GOLD/SDR exchange rate also recommends a substantial bounce is not only possible, but imminent.On a final note, if we do get new all-time highs in the S&P followed by a stock market crash later this year-- something I have predicted considering that Feb-- and the Fed is required to reverse policy, then Gold will truly take off from that point in my humble viewpoint, regardless of what takes place between now and then.