At its spot future close of $US 651.00 on May 26, Gold is down $US 70.20 or 9.7% from the $US 721 spot future closing high it set on May 11, just over two weeks ago. ALL of this damage has been done over three trading days. On May 15, the spot future price fell $US 26.30. On May 19, it fell $US 23.40. And this week, the really big one hit on May 24 when the spot future price swooned $US 36.20. Add those three numbers up and you get $US 85.90. That's considerably more than the total fall over the period.
These falls are BIG falls. They would have wreaked havoc with a lot of positions on the US futures markets and they would have greatly sharpened the wall of worry up which the Gold price was climbing on its way to that May 11 high. They were certainly the best illustration yet in this Gold bull market of the functioning of what The Privateer has long called the Gold "reverse barometer".
Why a "reverse" barometer? Because a sharp downturn in the price of Gold is not an indicator of increasing "pressure" on Gold, it is an indicator of increasing pressure on the fiat paper money financial system. There is absolutely nothing - no political, economic or financial event - which has genuinely shored up the global paper financial system over the past two weeks and thereby "justified" this precious metals sell off.
What there HAS been over the past two weeks is increasing tension over global stock markets. There has also been increasing tension over what the Fed proposes to do in future with US interest rates. And above all, there has been increasing tension over the future - even the close or immediate future - of the "vital" role of the US Dollar as the world's reserve currency. As we report in the Late May issue of The Privateer (Number 553 - published on May 28), eveybody from the IMF to the OECD has been publishing warnings about the unsustainability of what they choose to call the "global imbalances". For "global imbalances", read US trade, current account, and budget deficits.
Measured merely by the numerical $US Gold price, by May 11, the pressures on the global financial system were as high and as visible as they have been since the latter half of 1980. Those pressures were "alleviated" by two years of 20% US interest rates. Today, that is NOT an option that any Central Banker in the US could get away with. There is NO WAY to alleviate the pressure today without MASSIVE US budget cuts and equally MASSIVE US trade and current account SURPLUSES. None of that is gonna happen. We don't know how long it will take Gold to get back to its May 11 highs. We wouldn't be amazed if it was there - or higher - by mid June. The last three Gold corrections have taken a month or less to play out.
Here are the relative performances of $US Gold, the $US Index, and the Dow since Gold broke above $US 300 to stay on March 27, 2002:
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On May 10, the Dow closed within 80 points of the all time high it set almost six and a half years ago in January 2000. Since then, it has lost almost exactly 400 points. Not as much as Gold on a percentage basis, but the Dow is anything but a "reverse barometer".
Last week, we said that the first thing to watch for on daily Gold chart is whether the 10-day MA can remain above its 20-day counterpart. As you can see on the chart, it could not do so. Not surprising with the massive one day $US 36.20 fall on May 24. While we don't yet have any definitive support point in this chart, the items to watch for to gauge any Gold rebound is any move by Gold back above these two moving averages and, once that has taken place, the point where the shorter-term average crosses back above its longer-term counterpart.
On the weekly chart, Gold shows its second "down" week since the week ending on March 10, 2006. This week, Gold nearly made it down to its 20-week moving average with the big May 24 sell off only to rebound and end the week down only just over 1%. The first support point on this chart has made its presence felt.
The $US 2 x 3 point established a new and much steeper uptrend line in early April anchored at the $US 540 lows. The steepening of an uptrend usually (there is no such thing as "always" in technical analysis) signals an acceleration of the uptrend. The acceleration duly occurred. Now, we have had an abrupt turnaround. Last week, we said this: "The obvious support point on this chart is the double top around the $US 636 level. That does not mean that Gold WILL drop that far. It simply means that if it does, that is where the support should cut in."
The intraday low on spot future Gold on May 24 was $US 637.00. That's pretty close.
Here's another perspective - a comparison between Gold's 2002 low and its present price and the $US index 2002 high and its present "price". All data is on CLOSING levels:
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Last week, the strategic $US 5 x 3 point and figure Gold chart had risen $US 175 in a straight line with no corrections or even downturns whatsoever. There had not been a rise like that since the very late stages of Gold's final push to its January 1980 $US 850 high.
Look at the MASSIVE acceleration on this chart since it broke above the broken red line connecting the 1982 and 1987 highs. Look at the even more massive acceleration since the chart "double topped" at the top of its channel. Finally, look at the massive ($US 250 - 500) base from which this price surge has grown.
As we said here two weeks ago: "We don't know where the next downturn on this chart will take place. It may well take place from $US 720 since Gold has now reached the last but one of the resistance points on the way to its all time $US 850 high. We'll see. But whatever happens, the bull market is - to put it mildly - perfectly intact."
The downturn has come - from the $US 720 level. The last but one resistance point has made its presence felt. Thus far, it has retraced 45% of that vertical $US 175 rise mentioned earlier. That's about par for the course for the size of these type of corrections, although its speed is definitely faster than has been the norm on the bull market so far. But so was the rise which preceded the downturn. As before, the bull market is - to put it mildly - perfectly intact."