24
Oct
2008

Gold Investments Market Update – Market Panic Increases as Markets Plunge

It was déjà vu in the Comex gold market yesterday as the recent sharp selloff continued. Bearish sentiment remains at extreme levels and all notions of fundamental value are being thrown out the window as the financial crisis morphs into a global economic crisis. Stock, commodity and many currency markets internationally are in meltdown on panic selling.

Both gold and silver are off another 4.3% and 8% today on massive deleveraging and wholesale panic selling in financial markets. The Nikkei fell nearly 10% overnight and stock markets in Europe are crashing this morning (FTSE down 9% and DAX down 10.5%). Gold remains resilient vis-à-vis stock markets especially over the medium term to long term (as seen in the Performance Table below).

Gold and silver continue to sell off despite still very strong demand, shortages and increasing tightness in the physical market. The tightness is spreading from the small coin and bar market up to the larger bar market and premiums on larger bars such as 5 kilo bars and 100 oz bars are also increasing. Gold lease rates remain very high on increasing concern about counterparty risk in the gold market.

A 1929 style severe crash of some 90% in some stock markets is looking quite possible and some noted commentators are saying that if the panic deepens there will be market closures for a period of time – possibly as long as a week or two.

It is hard to know what such unprecedented actions might achieve besides delaying further sharp falls in markets. But the hope is that some form of calm would be achieved. Although already shattered consumer confidence would likely be severely damaged further if financial markets were actually closed for a period of time in enforced ‘bank and market holidays’.

Technical Analysis

As you can see from the graph, the break of support at $732 (May 06 resistance) opened up a move down to $700 (Apr/May 07 resistance). This strong resistance level proved good short term support with profit takers/short term players positioned just below this level in size causing a short term bounce back over $730. Momentum remains strongly to the downside and we will have to watch very closely to see if momentum wanes between $675 (uptrend support from Jan 06) and $660 (downward resistance from May 06). From the graph you can also see that this was an area of major congestion for the gold price in 07.

Given the still very strong fundamentals and the huge demand for physical bullion internationally, we should start to lose downward momentum soon with a period of consolidation, of undetermined length, before we resume the uptrend. Look how closely the move from Aug 07 to today resembles a larger scale version of the move from Nov 05 to June 06; further, consider what happened after the June 06 low was in.

This is just dollar based analysis and it would be interesting to consider the technical analysis of €/gold and £/gold, considering that in sterling terms, gold was at one stage higher today than yesterday despite $/gold being down a further 4%.

RSIs suggest that gold is becoming very oversold and the usually reliable moving average tenors have been destroyed as support, however these are technically termed “fast markets” with unprecedented volatility, so anything is possible.

OPEC just cut production by 1.5 million barrels a day so watch the rally that should ensue in oil, or at least a halt in the slide, and possible implications for gold.

Mark O'Byrne
Executive Director