Gold may be on the verge of a major price collapse

Discussion in 'Commodity Futures' started by Cutten, Nov 15, 2007.

  1. Cutten


    After the big move down from 2 decade highs a few days ago, gold rebounded for a couple of days and got back up from $792 to $820. This is fairly typical in the early stage of a potential price collapse, to have 2-4 day bounces after a major down day. However, to confirm the new downtrend, it is essential that the market then has another big down day quite soon after the pullback, and moves to a convincing new low.

    With today's price action in gold, I think we may be on the verge of seeing this. From a high of $819-820 overnight, the market has shown surprising weakness, falling significantly and now trading around the $800 level. The lows of this down move so far were made 2 days ago at $791.70. If the market today or tomorrow breaches that level decisively, moving to say $785 below, then I think it could trigger a precipitous decline in gold. Given that we have record gigantic speculative long positions in gold, according to the last COT report, there is the potential for huge waves of margin call and stop-loss selling. Every trend-following CTA, every gold bug, is long up the wazoo in gold, and a decline of historic proportions is the last thing they are expecting. When they all come to sell at once, there will be a severe deficit of buyers and the price will go down like a lead zeppelin.

    Targets to the downside would be next support levels at $730, and then the major level around $685-690 where gold first broke out 2 months ago, or even down to the prior range lows of $640-650. If we remember the last severe gold decline in 2006, that moved from around $730 down to $550ish, a 25% decline. A similar move here would result in a fall to around $635. As for risk control, there is a really nice close stop just above today's highs of $820. So you can risk $25 and potentially make $70-150 in the next 5-6 weeks on this trade. Alternatively, the out-the-money puts for Jan and Feb look pretty appealing right now as well.

    Market action that would prove me wrong would be a move to say above $825, or a failed attempt to break the low i.e. if it doesn't move below $785 within the next 2-3 days, then bounces hard to say $810 or higher, then it would look like a convincing support level and the trade would no longer be on. I would still have on a few gold puts, but on much smaller size, as the odds of the trading working will be much lower.
  2. I agree. I think stocks are approaching global meltdown and if there's any one commodity that IMO will also become less inflated, it's gold. I could see long grains/short metals as a high risk/high reward play.
  3. By George, Cutten, I do believe you're right. Any sign of strength in the U.S. economy and the speculative support will vanish.
  4. Anything possible of course....but I'd hate to bet on it. Put it this way...if you get the opportunity to buy in the 725-750 type of zone basis Dec gold, you ought to be buying with both hands.

  5. Cutten


    Other trades on this theme are short oil, short the carry trade (i.e. go long Yen vs short AUD/NZD/CAD/EUR), short GBP (nice one this because the Bank of England just gave a dovish rate statement yesterday - since GBP was strong mainly due to high yield, this is a big bear point). I am a long-term bull on grains but IMO anything with trend-followers in right now is risky. I could see corn & beans off 10% - much better than gold/oil, but still some risk. So yeah a spread is one way to play it, but I'd rather be in cash and go short or buy puts on the stuff I am bearish on.
  6. Realist


    Another confirmation that the trend may have ended is that GLD looks set to close under its 20EMA which was tested as support 3 times during the uptrend from early September. If the 20EMA breaks by the close, then I would conclude that a new downtrend is underway. I think the worst case decline would be down to the 200EMA which is right at 700 as of today...
  7. melee


    both the 20 day ema and macd histogram say to sell

    does this mean the commercials were right?
  8. Realist


    Looking very similar to the May '06 top now. Especially as the gold shares peaked out a few weeks back which can represent a foreshock to gold bullion prices. Next stop 700?
  9. plugger


    Right now it seems to be a gold - yen inverse relationship.
  10. AK100


    Always dangerous to forecast the long term trend off just 1 or 2 days action...........
    #10     Nov 15, 2007