Gold Price Volatility

There are very few price areas where risk capital can be invested in gold, with a reasonable degree of confidence that a “significant low point” will be established there.

In my professional opinion, those price areas are major HSR (horizontal support and resistance) zones. 

These key HSR zones are most apparent on the weekly and monthly gold charts.

On this monthly gold chart, note the buy-side HSR in the $1227.50 area.  Even when the gold price “arrived” in this key area, it still declined about $50 further, to $1180.

When there is no major buy-side HSR in the current price area, it is very difficult to make accurate predictions about the next major rally.

Long-term technical oscillators on that monthly chart suggest that the big rally from the $1227.50 HSR zone can continue, but without major buy-side HSR in play now, it’s a bit of a crapshoot to guess when a sustained move higher will commence.

As gold rallied into the $1390 area, Indian gold dealers began mentioning the possibility of a dip towards the $1300 area.  Their bids appear to have diminished in the $1360 - $1390 zone. 

While hedge funds kept buying near the highs, they generally use a lot of leverage.  They have to exit the market quickly when it declines.  Without heavy support from physical dealers, gold tends to experience violent intermediate trend sell-offs around key Western fundamental events like FOMC meetings, comex option expiry, and US employment reports.

That’s a snapshot from the CME website of the Comex April gold option contract.  Those options expire tomorrow (March 26). 

While there are lots of call options outstanding, there are also many put options with a $1300 “strike” price.  Put option holders profit if the price of gold is well below their strike price on expiry day. 

Deep-pocketed banks that hold the other side of that trade are likely to be buyers of gold futures contracts in this general price area, in an attempt to prevent put option holders from making large profits.

That’s the daily gold chart.  There is minor trend HSR at $1308, $1300, and $1280.  Gold is currently trading above all three of those prices.  

Because of the severe drawdowns that many gold market investors have experienced over the past few years, emotions can run very high on any disappointing sell-off, like the current one.  It’s important for investors to fight those emotions and maintain their focus on the big picture.

It’s likely that Indian dealers are already beginning to come back into the gold market, and that should reduce price volatility almost immediately. 

That’s a daily chart of the US dollar versus the Indian rupee.  The dollar broke below key HSR yesterday. 

Breakdowns that occur on low volume tend to be significant, and that’s the case here.  A major decline in the dollar against the rupee would increase the amount of gold that Indians can buy.  That’s bullish for gold.

That’s the daily silver chart.  Note the stokeillator, at the bottom of the chart.  The lead line is at about 20, which is where decent minor trend rallies can begin. 

While Indian dealers have reduced their gold imports over the past year due to government red tape, they have increased silver imports quite significantly.  Silver is my favourite metal right now, and a Narendra Modi win in the upcoming Indian election could help silver prices recover quite nicely.  Modi has been weighed in silver by local dealers, and he is endorsed by all the major Indian bullion associations.

That’s the daily CRB (general commodity index) chart.  The RSI oscillator become massively overbought.  I highlighted that with a red circle.  The overbought condition has now dissipated. 

Note the position of the stokeillator at the bottom of the chart.  It suggests a general commodity rally should start very soon, but that rally is likely to be only a minor trend move.  In the commodity sector, and especially in gold and silver, some patience is currently required, but I don’t see anything to be overly concerned about.

Generally speaking, most technical indicators are oversold on commodity index monthly charts, but a little overbought on the weekly charts.  They are generally “almost oversold” on the daily charts. 

Emotionally, that’s a very tough situation for investors.  Commodities can rally a bit now, but they are unlikely to begin a fresh sustained intermediate trend higher until the weekly chart indicators approach oversold levels. 

That’s the daily GDXJ chart.  The stokeillator lead line is at 25, and the price is near the main uptrend line.  A rally seems imminent.  Most investors in the gold community are junior stock enthusiasts.  The good news is that even if GDXJ fails to rally significantly, many individual issues should bounce nicely higher. 

Once tomorrow’s option expiry day is out of the way, and physical dealers in India are back in the market, the current price volatility should lessen.  The gold market is probably just days (and maybe just hours) away from regaining the “steady as she goes” type of price action that it exhibited on the rally from $1180 to $1290!

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Stewart Thomson 

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