Inflation! The new ghost for equity as well as commodity markets as they plunge lower will passing of each successive day. Gold and silver completed the 100% retracement from the March to May high. There was panic among the retail investors who have now started exiting their long positions. The fall in gold and silver was expected but not to carnage. Silver was back to its normal form as July futures fell to a low of $946.50. Gold also fell $50 with August futures falling to a low of $557.50. Crude oil July futures fell to a low of 68.00. Oil inventories in the developed world rose to more than 1bn barrels, their highest level in more than 20 years, as high prices are weighing on consumption, according to the International Energy Agency. The oil inventories are higher than the levels seen in 1998, which triggered a oil price collapse to $10 as oil demand growth started to slow.
Liquidity squeeze! This is also the new talk of the money markets. When gold was at $630 in April and silver at $1400 we were continuously writing that higher crude oil will lead to a liquidity squeeze and central banks raise interest rates. Bank of Japan is yet to raise interest rates. Reduction in liquidity results in outflows from the so called assets classes such as real estate, equities and commodities the all sudden one way rise comes to an end. There are even talks of stagflation. This will result in further selling of gold and silver for some time and if the technical support holds then gold and silver should bottom out this week.
Globally in our view traders and investors started going long from yesterday. In India there are huge long positions in MCX gold august futures between INR 8980 - INR 8820. Our view for these traders is that if you are a long term investor with a 6-8 months investment time then they will definitely get profit. In silver there are huge long positions in July futures between INR 16400 – INR 16000. Long term investors should roll it over in September futures. Whenever silver had a great slide is taken a few months for it rise. Short term MCX traders who are long can exit at the current levels. Lower stop losses will be useless as there is room for further butchering of gold and silver in the short term.
Fundamentally nothing has changed. It’s just that the hot money which drove up commodities is now driving it down. Demand still outstrips supply and the rally in metals may resume. This is not the end of the commodities rally. There's still a bull run in gold and silver and traders will soon start buying gold and silver. The bottom in gold and silver are nearing. Our experience is that the 400 day MA over the past few years in every financial market has been held. Spot gold has a 400 day MA at $486.40 while spot silver’s 400 day MA is at $837.60. Silver looks more vulnerable than gold. Gold’s worst case bottom will be limited to $486.00.
GOLD
Gold needs to hold $533.50 on closing basis to prevent a re-test of $512.10. On the higher side $570.10 and $578 is the initial resistance with $602.30 as the key resistance.
SILVER
Silver needs to hold the 400 day MA of $837.50 to prevent further losses to $770.00. On the higher side $1008 is the initial resistance with $1060 as the keys short term resistance.
Happy Profitable Trading
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