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I recently wrote that the precious metals sector was waiting for a trigger, ready to slide. Gold just broke $4,000, silver fell close to 4%, and gold now sits below this key support (resistance?) level.
The trigger is worth a look, because it was not the one anyone was watching.
The whole week was an inflation story. Consumer prices came in soft on Tuesday, producer prices came in soft on Wednesday, and the odds of a rate hike at this month's Federal Reserve meeting were chopped down to about 10%. Every headline pointed the same way. None of it broke gold.
What broke gold was Thursday's growth data. Jobless claims fell to 208,000 against a consensus of 218,000. The Philadelphia Federal Reserve's manufacturing index soared to 41.4 for July, around its highest in five years. Retail sales came in line. Treasury yields rose, the dollar firmed, and gold gave way.
Sit with that for a moment. Gold does not need the Federal Reserve to hike in order to fall. It needs the Federal Reserve not to cut. A strong economy delivers that on its own, no matter how soft the two inflation prints were. The market spent five days arguing about inflation, and the number that mattered was a jobless claims figure nobody was staring at.
Now the technical part, and it is the simplest thing on this page. Gold broke $4,000, and it stayed below it.
That is the whole point. Gold did not lose the level and snap back over it. It settled near the bottom of its range, and this morning it sits a hair underneath, unable to climb back through. A market that gives up a big round number and then cannot reclaim it has told you the break was real. The level that held gold up is now the ceiling that caps it.
You see, the entire discussion about the trigger is interesting and it gives me something to analyze, but in reality it’s not that important.
The key thing is the trend, and this is driven not by news but by the technical (=emotional) stage of the market. Gold had rallied too far too fast, and it has to decline to continue moving higher. That’s it.
Remember the 2008 silver slide? Silver’s fundamentals before the slide, and silver’s fundamentals after the slide were essentially the same thing. And yet, the white metal’s price was more than cut in half.
Focusing on news while ignoring the technical reality is like looking for keys under the streetlamp even though one lost them a few blocks away where there’s dark. Just because it’s easier to search over there, it doesn’t mean it makes much sense, nor that it will be efficient.
I have described this same mechanic in the USD Index, where price broke above 100, came back to touch the level, and held. Support turns into the floor, and the move carries on. Gold is running it in reverse. Support turned into the ceiling, and the move carries on lower.
And USD’s breakdown? I wrote the following about it yesterday:
One more note about the USD Index – it moved below its rising support line, but the 100 level clearly held. Am I worried about the breakdown below the rising support line? No, and there are two reasons for it:
1. The breakdown is not confirmed yet – we had just one daily close below it
2. We saw a smaller, analogous, breakdown about a month ago – and it was exactly this event that triggered the latest big run-up.
This breakdown was just invalidated. This is the kind of event that triggered the big short-term run-up in early June.
[Silver, mining stocks, FCX, stock market analyses and detailed profit-take levels follow in today’s Gold Trading Alert]
It looks like all the pieces are in the right places, and you’re prepared for what’s likely to come next.
The war gave the metals nothing again, and it was not for lack of trying. Thursday was the sixth straight day of exchanges. American strikes hit an oil tanker deep in the Persian Gulf near Iran's main export terminal, which suggests the naval campaign is widening beyond military sites. Iran fired at bases in Kuwait and Jordan, and Jordan says it intercepted three missiles. Today, the Revolutionary Guard claims it struck American forces at al-Tanf in Syria, which carries the fighting outside the Gulf altogether. Shipping through the Strait has thinned further, the blockade holds, neither side will talk, and Tehran calls American interference in the Strait an unbreakable red line. Oil is higher on all of it. Gold broke down through the middle of it.
Everyone spent the week watching the war and the inflation prints. What broke gold was a healthy economy during a medium-term technical downtrend. That is not a headline that fades by Monday.
As always, I will keep my subscribers informed.
Thank you for reading my today’s free analysis.
Sincerely,
Przemyslaw K. Radomski, CFA