The week has ended, leaving behind a plethora of messy gold charts and goldbugs with fingernails bitten to the quick. Now, the real sweating begins, the dry-heaves, the can’t-swallows, the insomnia. The irony: they got what they came for, and now they’re scared to death.
We all know that gold is up, yes? Way up. Steepest quarterly rise in Q1 2016 in nearly 30 years. In the past week alone, about a 5% rise to $1296.85 per ounce. So why are the goldbugs burning the midnight oil this weekend?
What’s troubling our little aurophilic friends for the near future is a triad of very clumsy giants whose errant footsteps may crush them at any moment. In no particular order of danger, they are: the charts, China, and BOJ (Japan’s central bank).
Charts, gaps, selloffs
As of today, April 29, gold charts are the pits, from a technical perspective, whether for the metal or the miners. They’re all coming up on tests of major resistance. If they blow through, hooray for gold and another breathtaking run. But the Dailies have posted gaps this week. And gaps can spell trouble if the market decides they should be filled before a retest of resistance. Meanwhile, Direxion Shares Gold Miners Bear 3x Shares (NYSEARCA:DUST) has been posting some extraordinary selloff volume since early February, culminating this month in the biggest monthly selloff volume in its five-year history and its lowest price at $1.31, down from an August 1, 2015 $40.00 high, and that may finally mean it’s reached a bottom.
Once the goldiggers have pored over their charts, satisfied themselves- in spite of everything- that their decision to hold was wise, and gulped down another fizzy antacid concoction, they’ll turn their attention to how the yen has been slapping the usd around lately. They’ll note that gold is mainly denominated in dollars, which has been to their benefit in the slapping session, with the usd/jpy ratio driving the dollar index (DX) steadily downward and, therefore, gold upward. Then comes that nasty thought that’s haunted them for weeks: The only thing standing between them and disaster is a little piece of law that Japan’s legislature could pass overnight, one that would enable the BOJ to start some serious quantitative easing to bring down the value of the yen. More antacid. Gulp, next item.
China has ’til now been a major player in helping the goldbugs scale this wall of worry. As a land where buying and keeping gold metal is a long-held cultural tradition, China has leveraged tradition into powerful economic policy by encouraging its citizens to increase their gold holdings. As PBOC governor Zhou Xiaochuan recently explained, “At present, up to 12 trillion yuan stays in domestic residents’ saving accounts. The launch of individual gold investment… will allow residents to change currency assets into gold assets… thus adjusting the money supply…”
In further support of that idea, China recently instituted the Shanghai Fix for gold pricing, in direct competition with London and New York. It had profound impact, and caused a spike in gold prices.
So for goldbugs, that’s the good news about China. They sip their coffee and tell themselves it’s going to be just fine. Then they remember a couple minor details. One, a rise too steep and too long in gold prices could mean further declines in China’s already ailing stock market. Two, just how much premium is China willing to pay for stabilizing its economy- and for how long? Might they choose this moment, at a key resistance level, to temporarily turn the tables by halting buys of foreign gold so they can buy at lower prices later? It’s imponderable, and scary.
The panic card
To the goldugs, the whole place is a tinderbox. One spark and whoosh go their positions. For them right now, no news is good news. The slightest whisper out of Japan that the Diet might do the unthinkable and allow helicopter cash, or any sign that China is considering a less aggressive gold posture, and the stampede will begin. The goldbugs’ minds are screaming at them, It’s the chart, stupid! People are always jumpy at resistance!
So bet the VIX
I’m not betting either way this time around, but if I did, I’d bet on a serious, if only temporary, correction in gold by the end of the coming week. But a more certain bet, I think, is on another super-spike in the VIX, perhaps not quite like last August’s, but good enough. Bring up any gold chart you like and compare VIX spikes to gold prices at or near resistance levels. Hand-in-glove is what I see. So the Barclay’s S&P 500 VIX Short Term (NYSEARCA:VXX) or its options could make a lot of sense right now- and a lot of money.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of FinancialPress.com. Readers should not consider statements made by the author as formal recommendations to buy, sell or hold any financial instruments and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: www.financialpress.com/legal-disclaimer/.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of FinancialPress.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://financialpress.com/legal-disclaimer/.