Metals Capitulate on Flight to USD

Precious metals have had a volatile week with the gold price in USD breaking south of 1,200 per ounce and absolute chaos in Forex markets saw the AUD/USD plummet to around US 72.00c. Gold in USD is currently in capitulation mode and dropped as low as $1,165 during the week.
 
The flight to safety this week was not into gold, but was away from risk-on and emerging market currencies into those seen as safe havens, and the best of a bad basket is the US dollar.  The USD can act as a short-term safe haven at times, as the easiest option to get out of failing currencies quickly. We saw dramatic moves in the Turkish Lira, with Erdogan saying Turkey is in an ‘economic war’, showing no signs of backing down in a standoff with the U.S as the country slips into a financial crisis.

The Turkish Lira dropped to an all-time low, tumbling some 11%, before rebounding later in the week as Qatar pledged to invest $15 billion in the country to help it ride out of its currency crisis. The crash in the Turkish Lira lead to somewhat of a contagion as we also saw the South African Rand dropping around 10% during the week, and some emerging markets currencies also suffering. Gold in Turkish Lira and South African Rand long term charts below highlight the destruction of purchasing power over the long term.

The problem if the Lira continues to slide is that Turkey now owes an amount of debt in foreign currencies that is equivalent to almost the entire size of the Turkish economy.  Global markets assessed the prospect of contagion fears and the potential domino effect of multiple currency crises having a significant impact on foreign exposures held by European Banks, with Spanish banks having the highest exposure to the Turkish financial system.

Source: Business Insider

One might expect gold to be benefiting from the chaos in currency markets, but as we saw in the beginning of the GFC, sometimes the first flight to safety is toward the US Dollar, not gold.  So we have the USD index spiking this week, which pushed gold down through key support, triggering further selling.

Senior Trader Technical Comments

XAU/USD:  Last week’s somewhat cautious tone noting: “From a technical perspective, it is far too early to sound a clarion call signaling the end to downside price action”, with the benefit of hindsight has proven warranted. The region between the psychological ‘big figure’ at USD 1200.00 & the 10th July 2017 low at USD 1204.50 was always going to be critical in terms of support and once this gave way on Monday, the 10th March 2017 low at USD 1195.00 and levels down to yesterday’s low at USD 1160.00 (the lowest level since January 4th 2017) were tested quickly as XAU/USD fell into an open elevator shaft. Whilst XAU/USD posted a solid rebound out of yesterday’s low (registering a long-legged Doji candlestick) and it is possible that further advances back to previous support (now resistance) at USD 1195.00 can’t be dismissed, equally probable at this point, is further downside price action - with little by way of technical support until the mid-December 2016 lows at USD 1125.00. One factor, which may mitigate this downside risk, is the considerable level of speculative short positioning, with everyone seemingly now on the “same side of the boat” in terms of being short, and at risk of being tipped overboard.  
  
Read Andre Lewis’ full technical update here.

Gold Capitulates!

Gold in AUD is currently experiencing extreme levels of volatility, with a huge trading range between $1,610 and $1,660 this week, as we currently sit at $1,620 at time of writing. Last week we talked about the excessive bearishness in gold leading to us trading in very oversold territory in the $1,630 range, and yet we continue further south this week. For the first time since September 2017, three 1oz ABC gold cast bars are less than $5,000.

Gold is at extremes at present and we can see this on the commitment of traders chart below, which provides a breakdown of both long and short positions of speculators. You can see that as at the 7th of August, Managed Money longs sat at just 10.584 million Tozs with Managed Money shorts ramping up to 17.197 Million Tozs.
 
We see a huge spike in short positions as a representation of sentiment being extremely negative towards gold currently, as the USD index spikes.

The commitment of traders chart can be used to identify times of excessive optimism or pessimism among traders in an asset class, and can often be a leading indicator for reversals. We can see with corresponding net positions chart and gold chart below, that the last time the net-long positions were this low everyone had given up on gold, as we hit a price around USD$1,050 per ounce, before rallying around 30% in six months.

The excessively bearish sentiment in gold at present is really highlighted in an article from Forbes this week: “It’s Time for Contrarians to Get Bullish on Gold”.

Recent times have seen sentiment seem about as bad as it gets, with Vanguard even changing the name of one of its funds from ‘Vanguard Precious Metals and Mining Fund’ to ‘Vanguard Global Capital Cycles Fund’.
 
Gold remains a contrarian’s dream, as you don’t often see these levels of negative sentiment at market tops – you see them at market bottoms. In fact, the last time Vanguard removed the word ‘gold’ from a precious metals fund, the change coincided with a decade-long bull market which saw gold rally form $271 per ounce in 2001 to $1,900 in 2011. As we are currently in capitulation phase, it is impossible to know when the knife will hit the floor, but we are in an environment that is very similar to December 2015, where extreme pessimism in the sector provided the lowest buying price in years.
 
It is uncanny how often we experience a very large spike in volume at ABC Bullion during the days of significant lows, as we saw on Thursday 16th August this week with one of our busiest trading days of 2018. It’s too early to tell, but we’ll be interested to look back on this date in the future, and one can see the sharp drop and recovery in the hourly gold chart below.

Cryptos Crushed

The last few months have seen a massive sell off in the crypto currency market, with most of the damage across the alt-coins, as speculators must start questioning what it is that they’re actually holding. There is no doubt there are some investors that did not heed our warnings and piled in at the top of the market, as trading volumes across all cryptos peaked early in 2018.
 
For an article outlining what was happening during the midst of the bubble you can read back on this November 2017 post here.

During the peak of the bubble, many of those with vested interest were claiming that if you got in now, you are an early adopter as institutional investors were yet to step into the market in a big way. The latter claim was true, but the former was a lie, as we were actually in the late stage of mainstream participation at the peak, and early adopters were in at the start of 2017 or before. Those that believe we are yet to see mainstream adoption fail to realise that 95% of people interested in the market were purely in it to make a huge cash profit, and not actually use cryptos in replacement of government issued currency.
 
Things move very quickly in this space – as you can see in the table below, Ripple rose an astonishing 50,000% from the start of 2017, so one could have made 500x their money if they were clever enough to do the perfect trade and sell the top. No wonder this market got as popular as it did.
 
Up until the start of 2018, there were really only winners, but just like all speculative bubbles, there had to be losers eventually. Timing is everything, as seen from the drawdowns from the peak; one could have lost 92% of their investment in Ripple if they were unlucky enough to buy the top.

So what does one do if they are sitting on a massive loss in the crypto market?
 
It is a difficult question to answer and no one can say with certainty whether we recover from here, but what the table above highlights is that prices are still a lot higher than 1st January 2017 before the bubble really began, and only around 18 months ago. So technically it is possible that they have a long way to fall yet, if they retreat back to where they started.
 
The biggest benefit the crypto market provided is that it at least got people talking about money and questioning alternatives to central bank issued fiat currency, but for a new cryptocurrency to have any sort of stability it would need to be backed with something tangible, such as gold.
 
Until next time.
 
John Feeney & Andre Lewis
ABC Bullion

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