It’s a crazy world that views dollars and Treasury paper, of all things, as a safe haven whenever the financial news turns unsettling. Yesterday’s upsetting story had sales of existing homes falling by 2.7% last month, darkening the mirage of recovery in the housing sector. Home sales had risen over the four previous months, but the distress buying that was driving this statistic appears to be drying up. Skittish traders lost no time connecting the dots, dumping gold and piling into dollar assets. They evidently had concluded – correctly, in our opinion — that the supposed recovery of the broad economy is in jeopardy if housing sales are already starting to fade even with all of the artificial incentives that have been put into place to goose the real estate market.
But why should that make them want to ditch their gold? Considering that dollars are in promiscuous supply, furnished by the Federal Reserve at interest rates approaching zero, we have trouble understanding why traders would panic to exchange bullion for Treasury debt and dollars (which, need we remind you, are themselves IOUs, not money). The traders might as well have gotten themselves rescued by the Titanic two thousand miles out of Southampton.
In any event, by day’s end the inscrutable wizards of Wall Street had caused minor, albeit real, damage to Comex Gold’s daily chart. Notice how the downward spike exceeded two prior lows without a pause. That meets our criterion for a bearish “impulse leg,” and although gold quotes must now do a couple more uncouth things to demonstrate that the selling is serious, the price action thus far has gotten our attention. Indeed, we’d grown so complacent about gold’s ability to surf the waves above $1000 that we didn’t even put out a forecast for Thursday. While we slept, someone in the chat room mentioned that guru Ira Epstein was expecting an instant drop to 996-998 based on gold’s 18-day moving average — and darned if he wasn’t right! Looking ahead, if the selloff proves to have been a fake-out, there could be a terrific, low-risk buying opportunity over the near term. It would be predicated on a failed second leg down, provided the current leg doesn’t breach 983.20. We’ll keep you posted, so don’t stray too far.
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Gold is a seasonal sale here. Selling 993.00 with a 1003 stop.. reversing 913.00 -OCO-November 17. Seasonal low. 8:1 risk reward