Gold, Silver Have Fallen Harder Than Stocks

On Aug. 26, the SPDR Gold Trust ETF (NYSE: GLD ) became the largest ETF in the
world with $77.9 billion in assets. A few days earlier, the medias support of
gold was unbroken. Haphazard headlines, like the ones listed below, no doubt
persuaded innocent investors to chase after rising gold prices: Gold at $1,870
is being seen as haven Forbes Gold price poised to go parabolic to $2,100
Beacon Equity Research Is $5,000/ounce the new target in golds run? Barrons
Gold in portfolio is mandatory MoneyControl.com Three Reasons for Golds Decline
Based on a combination of reasons, I warned of the following via the Aug. 21 ETF
Profit Strategy Newsletter: Gold continues its parabolic move. I dont know how
much higher gold will spike but Im pretty sure it will melt down faster than its
melting up. This weeks r1 is at 1,915, r2 is at 1,975. Round number resistance
is at 2,000. The 150-day SMA is at 1,506 and a potential target to be reached
sometime over the next couple of months. At the time, a 400-point drop for gold
was unthinkable. As of Wednesday, gold already had fallen more than 350 points.
#1: Increased Margin Requirements On Aug. 24, the CME raised gold margins a
step that proved difficult for silver to handle only a few months earlier but
there was more to golds decline. #2: Decreasing Liquidity The reasoning and
warning provided in the Aug. 24 ETF Profit Strategy update is about as basic and
common sense as it gets: Even though gold is the logical fear trade, price
action is also dictated by liquidity. At some point investors will have to sell
holdings to pay off debt or answer margin calls. Commonly the most profitable
asset is sold first. Gold has been the best performing asset for a decade and a
liquidity crunch could produce sellers en masse. It was obvious that liquidity
was drying up. Major stock indexes like the S&P 500, Dow Jones and Nasdaq lost
around 15% in a matter of days. This meltdown reduced global wealth by some $11
trillion. Those losses had to be paid somehow. Its human nature to sell off the
most profitable asset class to cover losses. Thats when sales orders for gold
and silver piled up. All asset classes even mighty gold and silver are subject
to liquidity and liquidity crunches. #3: Simply Technical The chart below is an
updated version of a chart featured in the Sept. 21 ETF Profit Strategy update,
which read: I see a potential triangle thats about to force a break out. Golds
attempts to break free to the up side were thwarted by the 20-day SMA. Tomorrows
performance may well set the stage for the coming sessions. A move below 1,780
would keep the pressure on the down side. (Keep in mind the the target outlined
in the Aug. 21 update was a 1,506.) The very next day, gold broke below the
triangle support. This was followed by a drop below the upper yellow trend line
support and much more downside. Monday nights futures session saw gold prices
tumble as low as 1,535 before recovering. As the chart below shows, for right
now, prices have fund support at the lower yellow trend line and the ascending
moving average. This ascending moving average has provided support on nine
occasions during the past two years. If it gets broken, watch out. Sorry, Silver
If you think the gold chart looks ugly, you might not want to look at the silver
chart.