Gold, Silver Have Fallen Harder Than Stocks

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tdp2664 InvestorPlace 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 media’s 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 gold’s run?” – Barron’s “Gold in portfolio is mandatory” — MoneyControl.com Three Reasons for Gold’s 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 don’t know how much higher gold will spike but I’m pretty sure it will ‘melt down’ faster than it’s melting up. This week’s 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 gold’s 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. It’s human nature to sell off the most profitable asset class to cover losses. That’s 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 that’s about to force a break out. Gold’s attempts to break free to the up side were thwarted by the 20-day SMA. Tomorrow’s 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 night’s 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.