After melting down for three weeks straight, gold and silver
prices are oversold and finding support at nine-month lows thanks
to short covering and bargain hunting -- even as the U.S. dollar
continues to strengthen.
This suggests precious metals are forming a significant
bottom, market technicians say. Meanwhile, traders await the
February employment report due Friday to assess whether the
Federal Reserve has reason to taper its aggressive monetary
stimulus program, known as quantitative easing, or QE.
The price of spot gold was down 0.5% at $1,577.10 early
Thursday after rising up 0.58% Wednesday. On the
stock market today
,SPDR Gold Shares (
), tracking a 10th of an ounce of bullion, eased 0.4% Thursday to
152.65 after climbing 0.56% Wednesday.
After losing ground for three weeks straight, the ETF is
trading 11% below its 52-week high and 18% below its all-time
apex reached in October 2011. It fell into a strong downtrend in
early February, breaking key price support at its 200-day moving
average, as the greenback rallied off of new lows against the yen
and euro. Japan is purposefully debasing it currency to stoke
inflation and the eurozone's economic malaise hurt the euro.
PowerShares DB U.S.Dollar Index Bullish (
), measuring the greenback against a basket of major foreign
currencies, has climbed for five weeks straight to a six-month
high of 22.52.
Now trading 5% below the 200-day line, GLD is very oversold
and prone to a sudden rally from bargain buying and short
covering. That's when traders betting on falling prices borrow
shares and have to close their positions by buying them back,
At the same time, traders have dumped positions in gold
en masse, a sign of capitulation typically seen at market
bottoms, Tom McClellan, editor of the McClellan Market Report,
wrote in his newsletter Wednesday. SPDR Gold Shares and
iSharesGold Trust (
) unloaded more than 100 tons of gold in January and
"The drop to test the 2012 lows just below $1,600 is causing
some traders to abandon positions in ways that they were not
doing at any time in the past several years," McClellan wrote.
"That kind of extreme stress is usually a sign of a big turning
point, although it is worth noting that just because we are
noticing the stress now does not necessarily mean that the stress
is all done."
Ben Woodward, chief investment officer of Black Diamond
Investment Partners in Atlanta, Ga., suspects forced selling by
hedge fund tycoon John Paulson -- the biggest investor in GLD --
prompted other holders to follow his lead.
"Redemptions have hit his hedge fund complex," Woodward said
in an email. "Investors are worried that he may have to liquidate
against his actual investment desires if he is faced with more
massive redemption. This is something no one can predict, but it
often happens in financial markets."
The most recent reporting period ended Dec. 31 shows Paulson
& Co. owned 21.8 million shares of GLD, valued at $3.3
billion, amounting to about 4.6% of total assets in GLD.
Although investor demand for gold ETFs may have dropped,
interest in gold bars and coins is exploding, dealers say.
"Remember Russia imported 600 tons of gold last year, central
banks are continuing to buy and China is near passing India as a
world gold importer," Terry Sacka, chief strategist at
Cornerstone Asset Metals in Palm Beach Gardens, Fla., wrote in an
email. "The U.S. mint sold more silver in February than four
months combined last year. They actually stopped selling for a
period and have raised prices. That doesn't sound like a market
softening, just shifting."
The gold bugs contend the underlying fundamental reasons to
own gold remain the same.
"With the Fed printing money via the QE programs, the dollar
will devalue, inflation will rise significantly above average
historic levels," Tim Dyer, vice president of Sage Capital
Advisors in La Jolla, Calif., said in an email. "The primary way
to combat this is to own hard assets, including commodities and
The Federal Reserve pledged that it would maintain the current
QE3 program until unemployment falls to 6.5%. As of January, the
headline rate was 7.9% about where it's been since September.
As the year goes on, investors will realize that more
government borrowing will be needed to keep the economy afloat,
which will lead to a "stagflationary economy," says Peter Spina,
president of GoldSeek.com.
He's piled all of his trading accounts into precious metals
and gold and silver mining stocks, which he believes are
"oversold and undervalued."
"There is a lot less risk vs. the metal at these prices, with
many of the miners pricing in a substantially lower gold price,"
he said in an email.
Market Vectors Gold Miners ETF (
) eased 0.8% Thursday to 37.13, reversing from an early gain
after surging 4% Wednesday as it rebounded from a 3-1/2-year low.
Trading deeply below its 200-day line and 32% below its 52-week
high, it's long surpassed the 20% correction indicative of a bear
Spot silver prices slipped 0.6% early Thursday to 28.86 after
surging 1.18% Wednesday.
IShares Silver Trust (
) slipped 0.7% to 27.91 after climbing 1.26% Wednesday.
Global XSilver Miners ETF (SIL) was down 0.6% Thursday after
rallying 3.58% Wednesday to 18.25 from its lowest level since
They also trade deep below their 200-day lines at oversold
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