The panic selling in gold and mining shares has accelerated and the Gold Miners ETF (GDX) is the clearest example of how sharp the selloff has been, down more than 2.5% midd-day as I write. On Minyanville's Buzz and Banter on July 24, I noted the potential head and shoulders pattern that was forming on the weekly chart:

Buzz and Banter, July 24:

Here's a weekly chart of the Market Vectors Gold Miners ETF (GDX) showing a deferred potential TD-Sequential 13 sell signal.

Click to enlarge

As well, we could be seeing a potential head and shoulders pattern form. A key to identification would be neckline violation on expanding volume. The right shoulder has already recorded a weekly volume bar that was greater than the left shoulder volume bar peak, and that increases the probability of the formation completing in my interpretation. I should also note that the GDX has given a double bottom point and figure sell signal (1x3 chart) and violated a trendline from the May lows.

Now that this has transpired, the question is: What's Next? 

The GDX has blown through another retracement level that could have served as a potential stopping point. This is an important session today. A close below 34.43 would increase the probability that the selloff is not done and note we still have an unfulfilled DeMark TD-Sequential buy countdown in place, this bar currently on 8 of a potential 13. A close above that level and next week the ~33 area may provide a trading point for longs as the fulfillment of the downside count from the head and shoulders.

As for gold, I would like to be more positive on the metal itself, but I believe this selling is related to a buildup of longer-term deflationary pressures in the credit markets that will dwarf the inflationary mask of (formerly surging) food and energy costs.

When debt and leverage are this excessive, cyclical inflation simply accelerates the deflationary outcome and makes the unwind more severe. Watching the Consumer Price Index is like driving over a cliff with your eye on the rear view mirror. Deflationary pressures will cause bids to evaporate and disappear as financial assets that must be sold to repair balance sheets and destroy debt overwhelm the capital available to compete for them.

Few see this coming because the leveraging of debt in our economy simply to get it to work has been so massive, so all-encompassing, that the vast majority of market participants have forgotten what normalcy is.

I most certainly believe gold will eventually be an asset to own in coming years. However, at the onset of deflation, gold will be sold indiscriminately - like all assets - to pay down debt and repair balance sheets.

The initial asset price inflation and central bank reflation efforts that made gold seem attractive during the building of the asset price bubble sow the seeds of the selloff as speculators attracted to the metal simply as a detached, non-fundamental momentum play will need to unwind their leveraged bets. Weak holders will be shaken out and ultimately replaced by those seeking a store of value. That is why the selloff won't make sense on a fundamental basis.

I show on the metal itself DeMark exhaustion sell signals on the long-term quarterly and monthly charts. But, the only people that should really be concerned about whether gold is going up or down right now - other than in the macro sense - are those very people who will likely need to sell and therefore be resonsible for it overshooting on the downside. I expect in the next few years for gold to retrace part of its long-term move, perhaps coming below 600 and, in the worst case, possibly even coming below 500. A 50% retracement of this major bull move would be about 458. But that doesn't change the long-term, secular bull market for gold.