Thursday, May 20, 2010

Big Fall In Store For Gold?

Daryl Mongomery, over at Seeking Alpha, points out that the current spill was evident at the time by a gold and silver mining stock ETF failing to make a new high when gold did.
When trying to determine what gold is going to do, it is a good idea to look at mining stocks. These almost always lead the metal both on the way up and the way down. Interestingly, GDX, the gold and silver ETF for the major mining companies, failed to make a new high and break out in the days around May 11th. This non-confirmation was disturbing at the time and is even more disturbing now. GDX almost touched its 50-day moving average in the almost $30 drop in gold prices yesterday. The more volatile GDXJ, the junior miners ETF, convincingly sliced through its 50-day and closed well below it. The technical indicators on GDXJ are starting to look quite sickly. The juniors are clearly breaking down and it makes sense that they should lead the way for the complex. If so, bullion itself could be in a lot of trouble soon.
He ends by pointing out the risk of a cash squeeze for gold: gold leasing, which provides funds at a low rate that can be turned into currency by selling. Since a gold loan has to be paid back in gold, the price being driven down that way is actually advantageous for the borrower.

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