Another Capitulation …

Early on Monday in Asian trading, someone (or something, like a trading algorithm) sold quite a bit of gold in the futures market. Apparently the sale was so overwhelming that circuit breakers were triggered twice. Someone seems to have developed an odd predilection for selling a lot of gold futures at precisely those times when futures market liquidity is at its thinnest – as the same thing happened again after the close of official COMEX trading on Monday, in what is nomally a “quiet period”.




There are many ways in which such a seemingly strange trade (which ensures one doesn’t get the best price) can potentially pay off. For instance, it could generate a big profit for outright short positions taken at an earlier stage, by triggering the sell stops of other traders. It could also pay off if a large options position was previously bought, either on gold futures directly or perhaps on closely related instruments like gold stocks or ETFs on gold stocks.


1-$HUIA second capitulation after the 2014 capitulation move – click to enlarge.


The most interesting action took indeed place in gold stocks. The HUI Index produced an RSI of slightly above 11 on its daily chart, after declining for a record 10th day in a row. This RSI reading is the lowest in the history of the index (the previous record low was produced in 1998 at about 16). Moreover, gold stocks have now broken every historical bear market record in the sector. Not only is this by now the biggest decline on record, the sector (as measured by the BGMI) is also trading at a record low relative to the gold price – undercutting the previous record low established in 1942 in the mini-crash following the Pearl Harbor attack.

The reason why this move deserves to be called another capitulation is that it has something in common with the 2008 and 2014 capitulation lows: in both cases record high trading volume was recorded (not in all gold stocks, but in selected stocks, resp. ETFs). This time it was the turn of the GDX, of which nearly 170 million shares traded on Monday, dwarfing all previous trading volume spikes by a huge margin:


2-GDXTrading volume in GDX explodes – click to enlarge.


A number of the declines in individual gold stocks seemed downright silly – e.g. ABX, the world’s largest gold miner by output, saw its shares decline by almost 16%. This is remarkable even by the sector’s standards of volatility, but it is even more so if one considers that ABX was already trading below its low of 2000 before Monday’s decline. When ABX made its low in 2000, the gold price was at $270. We are not particularly enamored of ABX by the way (we think it has way too much debt), we’re merely using it for the purpose of illustration here.

Naturally, there is no evidence yet that a low is in – but one can certainly compare the current situation with similar events in the past. Irrespective of whether such extremes were recorded during bull or bear markets, a sizable rebound has tended to happen very soon thereafter.

This is to say, traders can probably look forward to a playable and possibly quite respectable bounce fairly soon, regardless of the market’s longer term direction. The caveat to this is that just as usually happens in a blow-off move in a bubble, very large percentage moves tend to occur in the final stages of anti-bubble blow-off moves as well, and a mere one or two days can make a big difference with respect to the entry prices on offer. Usually it is best to wait for some evidence that a turn in prices has actually begun.


Support Levels, Sentiment and Fundamentals

We have recently discussed gold’s lackluster reaction to the (for now) fast receding “Grexit” threat (see “Gold and the Grexit Threat” for details), and on this occasion pointed out that it was certainly possible for the gold price in dollar terms to move to the next major “price attractor”, namely the support/resistance level established in March of 2008 near $1,040-$1,050. This level was almost reached on Monday morning (the low was around $1,080).

We presented a few sentiment and positioning data as well in that article, several of which will only be updated later this week. We have near real time data on Rydex precious metals assets, which have declined by another 15% to a new record low, as well as the CEF discount to NAV, which stands at minus 10.30% (CEF is a closed end bullion fund holding both gold and silver bullion). This is not quite a record yet, but a pretty extreme reading nevertheless. People are prepared to voluntarily sell you gold and silver bullion at a more than 10% discount, a sign that they remain very bearish indeed.

It is a fair bet that a number of other sentiment and positioning indicators will also produce new negative records this week. Kitco reported on Friday (i.e., before Monday’s clubbing) that in its survey “68% Of Main Street And Wall Street Are Negative On Gold”, which if memory serves is quite an extreme unanimity of opinion in this particular poll as well.

Not surprisingly, the mainstream financial media have been brim-full with bearish pronouncements on gold over the past two weeks, and the grave dancing by assorted gold bears reached something of a crescendo on Monday as well. Here are two examples:

Gold Slump is Here to Stay” (sure?), or the droll

Let’s Be Honest About Gold, It’s a Pet Rock

There is no need to discuss the usual canards forwarded by mainstream gold bears again (“gold is only worth what someone is prepared to pay for it” – duh!), but we would note that most of the grave dancers somehow failed to grace us with their opinions while gold rallied from $250 to $1,900 between 1999 and 2011.

It is certainly true though that the fundamental backdrop for gold (credit spreads, the steepness of the yield curve, inflation expectations, money supply growth rates, performance of alternative investment assets, the US dollar’s trend, faith in central banks and other central planners, etc.) has tended to be slightly bearish and at best occasionally neutral over the past two to three years.

Obviously, this applies somewhat less to gold in terms of currencies other than the US dollar; for instance, the ECB is inflating the euro area’s money supply at warp speed, and this certainly has an effect on the gold price in euro terms. The ministrations of the BoJ have also left their mark on the yen gold price. Although the recent decline has also led to a decline in gold prices in these currencies, prices remain a good sight above their previous lows.


3-Gold in euro and yenGold in euro and yen terms – click to enlarge.


Whether one thinks of the recent decline as an opportunity – or at least a developing opportunity – depends on more than just the short term fundamental and technical picture though. In our opinion, it is apodictically certain that the current global experiment in central banking on steroids will end with a major denouement. Very likely it will dwarf all the busts we have witnessed in the post WW2 era to date.

Of course this opinion is quite contrary to the widespread new-found faith in central planning that has reigned in recent years (investors evidently have very short attention spans). However, this misguided faith is only one of the elements driving the situation. In the short to medium term, it may even appear justified to observers focused on various indicators of economic activity – just as Greenspan’s easy money policy seemed to “work” until it didn’t anymore.

Underneath the superficial data, the economy has been and continues to be severely undermined by distortions in relative prices, the associated falsification of economic calculation and the malinvestment this engenders. It was easy to buy “too early” in the cyclical gold bear market since 2011. However, we believe that a day will come when this will hardly matter. On that day, the price at which one has bought will be secondary to the question of whether one actually has any gold at all.

Obviously, this latter remark reflects only our personal opinion and will depend greatly on the future actions of policymakers, which cannot be foreseen with certainty. However, what we have said above about the effects of loose monetary policy on the economy is definitely not just a matter of opinion.


4-Capital vs. consumer goods productionAn empirical indicator of the imbalances in the economy’s production structure due to credit expansion-induced malinvestment: the ratio of capital to consumer goods production – click to enlarge.



For those already invested in the gold sector, the current breakdown is undoubtedly painful, but this shall pass. Those not yet invested or holding only little exposure should definitely regard the situation as an excellent opportunity. Even for short term traders a chance to play a sizable rebound is likely not too far away.

In the longer term, this downturn remains in our opinion comparable to the mid-1970s correction, which was of roughly similar size. Back then the press was also full with gold obituaries, but the price took off again because the underlying economic problems had not been solved.

Have the underlying economic problems been truly solved this time around? We really don’t think so. Global debt levels have increased sharply since the last major crisis, which was likewise induced by a combination of too much debt and enormous capital malinvestment. We would argue that the underlying economic situation has gotten worse, not better. Economic activity by itself is telling us very little – during credit expansions it merely tends to mask capital consumption. Gold will therefore shine again, even though it has obviously greatly disappointed its fans since 2011.


Charts by: StockCharts, St. Louis Federal Reserve Research


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10 Responses to “Gold Panic”

  • Cashabis:

    I see this oversold butt kicking event for gold at this time,with high possibilities of a lot of short covering,or should I say a short fry coming bringing the gold price higher for a short while. One of my BIGGEST concerns is : Not this so called capitulation in gold,but the next one coming,when the US Oil Shale industry hedges run out in mid Sept bringing huge debt defaults with it. The large U.S.Markets to me, seem to be in La La land.With this coming large debt carnage and possibly a fed interest rate hike,I see a high percentage chance of a mind numbing stock market correction in the cards for Oct. Gold fell fast like a stone in the last big market correction of 2007/08,I see a good chance of a repeat of this happening again.Will it retrace its $690 Low? Never say never! If it does(buying op) it will also be the first commodity to rise back up,in favor like it did before. So I’m watching oil prices going into the fall,if it stays under $60 I cannot see how the piper will not have to be paid in the US oil shale industry.Any one else concerned?

    • HitTheFan:

      Gold has been moving opposite the stock markets for four years now. In a risk off environment, gold will rise. Now is as good a time as any to fill ones boots, it may not go any lower.

    • APM:

      I concur with your assessment. Based on the situation in EM’s, commodities might well keep crashing, with some short covering rallies in between. USD and Treasuries strength would keep pressuring gold and silver in such a scenario. I have a target of 700 for gold before a long term bottom is in. Market participants seem to believe that crude has to rebound eventually, due to more QE rounds, but Japan offers empirical evidence of secular declining equity and real estate prices in spite of two decades of QE. The potent directors fallacy is alive and well. It will be completely crushed before this is over.

  • fazsha:—Jim-Grant

    Jim Grant says that Jason Zweig, who recently wrote a nasty piece about gold being like pet rocks, back in 2011, within 2 weeks of the top of the gold price, wrote a positive article about gold stocks in the WSJ.

    And indeed he did, which makes him just a momentum hack:

  • fazsha:

    On July 23, 1999, gold was $255.30. It ended that year at $290.25. Gold almost always goes down in summer and up by Christmas. You cannot panic. I think it’s had this pattern 13 out of the last 15 years. I have been buying Barrick and gold eagles; it’s a fabulous time to buy, and you just have to keep cool and realize a lot of people are being scared out of the trade, even though they realize the trading has been designed specifically to get an emotional reaction out of you to sell. Do you think gold will stay down there? Even the dumpers don’t think that, and I certainly don’t.

    You look around the world and you see exchange rates are properly disorderly, when you look around the world of lending and borrowing — we are in a regime of price control by another name, so-called zero percent rates and quantitative easing by the world central banks – we are in one of the most radical periods of monetary experimentation in the annals of money,” Jim Grant told Kitco News Thursday. Grant added that it could be that it all works out, albeit a very “low probability.” “You want to have exposure to the reciprocal asset of the paper assets that are the most popular – so gold, to me, is now the conjunction of price, value and sentiment, and I am very bullish indeed.”

    “Mr. Market having a sale,” and added that the downward spiral is “terrifically vexing but a wonderful opportunity.” He explained that no one knows the bottom for the metal and that should not be the sole focus. “The important thing to recall is why those of us who own it, bought it. What is it about gold that ought to make it appealing – when it seems to be absolutely the thing you don’t want to have.” He added that gold thrives in the face of monetary turmoil, disorder and uncertainty, noting, “I think we have all three of these things.”

    I agree. Barrick, Sandstorm, Klondex – all wonderful companies, with varying amounts of debt, but lots of gold.

  • APM:

    The bottom for gold is unlikely to be in, as the USD seems to be at the beginning of a new secular bull market. The action in gold and commodities post 2008, with the 2011 echo bubble peak and subsequent collapse supports that view. The brewing crisis in EM’s, reflected by weakening local currencies and struggling stock markets is another factor in favor of USD strength. Also, retail investor participation in precious metals is still too high and the mood way too bullish for having hit a bottom: Zerohedge and similar are full with the comments of retail investors who keep buying on weakness i.e. going full in. The previous gold bear market lasted 19 years, so the current one might have several more years to go, with some rallies in between of course. From here the market might well rally in the short term and then start declining again, or keep crashing eventually followed by a rebound. But the long term is down and so far there are no signs of an impending change of trend. The strategy of investing 10% to 20% of total assets in gold and silver is sound, provided one is prepared to stick to such strategy even in case the current bear market lasts 10 years longer.

  • No6:

    Obvious manipulation. Probably with no direct Fed involvement but I suspect that the manipulators have been given the green light to manipulate downward for profit with no repercussions.

  • Kreditanstalt:

    So “gold” is only REACTING to something? Really?

    What has long puzzled me about the “poor fundamentals/China’s announced reserves/pet rock/rate hikes” rationale for falling USD gold prices is that this whole entirely counterinituitive (paper) waterfall started PRECISELY, almost to the day, when Greek tensions exploded in around May or early June.

    Just when credit DID face a threat, gold was SILENCED. But it speaks volumes nevertheless.

  • philc2:


    Bron Sucheki at the Perth Mint has a post here that shows that the selling actually started at the Comex:

  • therooster:

    When one stops to consider what’s more important to the banking class, when it comes to the price of gold, liquidity is likely a resounding favorite over price level. If we are ever going to see a “lifting of the price lid”, I suspect that some measurable effect that bullion based liquidity has on the economy will be a supportive justification. Bankers are apt to be fearful of a rising price without seeing any appreciable economic help from bullion based monetization and circulation. I think that will have to come first before that fear subsides.

    People tend to be creatures of habit which is likely a deep concern when it comes to the habit of hoarding and treating bullion strictly along the lines of a storeof value or an investment.

    We didn’t go through the Bretton Woods saga and the depegging of gold just to watch it sit around and linger, did we ? Gold is now a real-time, debt-free currency. It needs to now show its social proof. Move it ! The market will figure out that worth as it sees fit.

    As a “voice in the wilderness”, I see “21st century fishes & loaves” to be in our foreseeable future, God willing.

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