Gold & Silver; Watch Out!

Bullion Round Up

Last week, we witnessed some unprecedented events that happened to gold. The main highlight is the major bloodbath as prices broke below the pivotal level at $ 1525 that sparked huge selloff, liquidation and margin calls which eventually take gold to a low of $ 1325. Then we witnessed the frenzy buying as the huge discount in price attracted the general public to buy physical. Gold backed ETFs continue to see outflow as investors are looking to offload their old positions and locked in whatever profit they can obtain. There are many nervous investors who barely made it out before the margin calls. Those who are still holding on their long gold position at $ 1300 or below will see the rebound as an opportunity to offload and take profit. The current sentiment seems to weigh down on gold to move lower and we will not be surprise if the selling starts to escalate again after the rebound hit its peak. We envisage more selling as prices are close to the following resistance level - $ 1425, $ 1456 and $ 1487.

If prices continue to rebound, investors could potentially lock in their profit and start shorting the market for short term gains. The fundamental argument for a higher gold price in the long run has not change. However, the short term sentiment does not support higher gold prices as we enter a correction mode. There is a strong argument which suggests that the 2 day selloff was overdone and a rebound is due. Physical demand is holding prices up for now but the continuous outflow from ETFs and the large short position in the future market said otherwise. The aftermath has left a bitter taste and investors are now more cautious in terms of buying the yellow metal. Most are bruised and confused at the current state which may not bode well for a recovery in ETFs and the futures market that dictate the current price. In case you are wondering, there is a clear disconnect between physical demand and the futures market.

We advise caution this week as we envisage lower prices after this rebound. This is an opportunity for those who were not liquidated to cut loss as well as for the investors to add shorts as the next strategy. Physical buying may ease the price drop but any hope to recover above $ 1500 seems far fetch for now.

Gold Technical

As per our last commentary, if prices break above $ 1405 gold can jump higher to test the 31.8% retracement line at $ 1424 (it reached as high as $ 1425). It did just that and then gave back most of its gain. It dropped back to a low of $ 1398 and prices started to consolidate between $ 1400 to $ 1404 areas. There are several supports at $ 1391, $ 1380 and $ 1370 which we keep a close eye on. A break below $ 1370 will give the short sellers more ammunition to push prices lower and possible to retest the medium term support level at $ 1350.

A rebound is underway after the sharp sell but faced with strong resistance at $ 1424 (31.8%) and $ 1456 (50%) retracement line. Should prices break higher, short sellers will look to add to their position. We felt that the market will resume lower after this rebound to test the previous low before rebuilding a higher price.

Silver Technical

Technically, silver is consolidating after the big selloff and at the moment a short term bottom has been established. However, we fear that the selling could continue further down the line as the silver prices are heavily influenced by gold. This week, silver retested resistance at $ 23.79 and failed three times in a row which indicate a possible cap. The resistance level after the selloff are at $ 24.22 (31.8%), $ 24.91 (50%) and $ 25.59 (61.8%) but the current silver price failed to come close. The lack of demand is a major concern and that there are more rooms to the downside for now.
The prospect of the white metal to rally seems unlikely but a bottom is due.

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22 Apr 2013 | Categories: Gold

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