Gold & Silver: Respect The Bar

by Stewart Thomson, Gracelandupdates.com

1. At about 4:00am yesterday, gold suffered a dramatic sell-off in just a few seconds. More than 15,000 contracts quickly changed hands on the COMEX.

2. This caught most investors by surprise. That’s because they don’t follow the physical market meticulously.

3. The supply and demand of physical gold is what drives price discovery in the paper market. The leverage involved on the COMEX, SGE (Shanghai), and the LBMA (London) allows the paper market to significantly magnify the action taking place in the physical market.

4. The gold price trends are generally determined by the physical market, and magnified by the paper market. It’s that simple. 

5. Janet Yellen has stated, “I don’t think anybody understands gold.” I disagree. I’ll suggest that anybody who ignores the physical market will find that most of what happens in the paper market feels like an electric shock. It’s not a shock. It’s a magnification.

6. When the major banks stop importing gold into India, even if it’s for just a few days (as it is in this case), a “price vacuum” can occur on the COMEX and/or the LBMA, and do so in just a few seconds.

7. That’s what happened yesterday, and the good news is that gold importers may already be close to getting the clarity they seek on the GST tax. 

8. Gold has a “perky” feeling to it right now, even though the summer typically sees sideways to lower price action!
 

9. I don’t see anything negative on this daily gold chart, and my 14,7,7 Stochastics oscillator is at a point where $50 - $100 rallies tend to begin.

10. There’s also a nice positive wedge formation in play. I’m an aggressive buyer in all current price weakness, with a focus on gold stocks. 

11. Double-click to enlarge this nice GDX chart.

12. Many gold stocks surged higher yesterday, even with gold falling by about $20 an ounce. Are these stocks anticipating a reversal in the multi-decade money velocity bear cycle?

13. I think so, and that’s why my focus for most new market positions in the precious metal asset class is: gold stocks.

14. GDX is trading in a large consolidation pattern, and it has been doing so since February. That’s when physical market demand for the Chinese New Year festival reached a peak.

15. There’s nothing strange or “out of place” with the current GDX price action. Gold stocks don’t need a reversal in US money velocity to outperform gold bullion on rallies, but they do need it to stage overall outperformance that is “here to stay”.

16. Silver demand is beginning to rise, and the commercial traders appear to be keenly aware of this fact.

17. Double-click to enlarge this COT report table.

18. This report shows the liquidity flows in the COMEX silver market through last Tuesday. These flows are positive. In my professional opinion, the commercial players added even more long positions during yesterday’s 4:00am price drop.

19. Double-click to enlarge this daily silver chart.

20. Silver is now in a key buying area. Silver bugs need to ignore the past and focus on the positive demand in China and the solid COT report.

21. I view the entire $17 - $16 price area as a key one for accumulators. Silver bugs can buy every ten cents dip in this zone, and do so with a smile. 

22. Once the Indian GST rollout is completed, I expect Indian dealers to join their Chinese brethren with strong demand.

23. That’s likely what the commercial traders are anticipating, and taking buy-side action now to ensure they are poised to profit from the coming rally.

24. The physical market for gold is a very powerful financial force. When that price action is magnified by leveraged players in the paper market, it can affect price discovery in many other major markets. A well-known coffee company says, “Respect the bean”. That may be good advice, but I think it’s vastly more important for gold and silver bugs to “Respect the bar”!