Bracing for Another Gold Drop

May 12th, 2013
in gold, syndication

From Daily Reckoning

by Greg Guenther, Editor, Daily Reckoning's Rude Awakening

arrow-downI was expecting a relatively quiet morning Friday.  I was wrong.

As I was compiling my notes early in the day, gold futures started to tumble. They had been slowly drifting lower overnight, giving back about $10 by 5 a.m. But it was the action at $1,450 that bothered me. After it crossed below this level, the floodgates opened—sending gold futures sharply lower. By 7:30 a.m., gold had coughed up $40, hitting a low of $1,427.  Before the day ended the price dropped a little further and then rebounded to close at $1,448, down $20 for the day.

Follow up:

Push to the Brink

I know it might not feel like much—especially with the April crash still fresh in your mind. But this move lower puts gold below critical short-term support.

Since mid-week, price has fallen from the high $1470s to the $1,420s. These are levels we haven’t seen since April 25. That’s when gold began trading in a nice, orderly horizontal channel.

A Dire Warning From the Daily Reckoning...

Early Friday, it broke through its price floor on strong volume. Not a good sign if you’re a gold bull…

Here are two important takeaways from all of this:

  • First, it’s important to note that the consensus opinion amongst the chart watchers has been that gold would probably have a fairly mundane summer. I’ve generally agreed with this position. Aside from a little volatility here and there, I was expecting gold to wander sideways for some time after its massive drop. Clearly, it has other plans. You have to adjust your thinking here and prepare for the possibility of another leg lower.
  • Next, the recent action in gold is a great lesson on dip buying—or buying any asset just after it takes a nasty fall. “Buy when there’s blood in the streets” is one of the most misunderstood investment axioms ever. Every asset needs time to recover after a crash. I’m talking about a significant amount of time—not just a few days or weeks.

At this point, too many investors are convinced gold can move higher from here. You’ll want to buy when everyone agrees that gold is cooked. To paraphrase the great technician Walter Deemer:

When it’s time to buy, you won’t want to…

About the Source

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