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A Low May Be Forming in Gold


Especially if the short squeeze in the dollar has run its course.

Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial).

Unfortunately for gold bulls, the yellow metal broke below the Dubai low of $1135.80 and to as low as $1125 after the COMEX close yesterday during the thin electronic session. Interestingly though, that breach of the Dubai low didn't trigger an avalanche of stop-loss-related selling like one might have expected. And the metal even bounced into the equity close to go out back up at $1130ish, which makes one wonder if this late-day slide was bears leaning on the price in the thin electronic session, looking for stops to run. After all, based on the record volume in the 2x short gold ETFs (GLL and DZZ) over the past few days, the shorts have been extremely active in gold.

Now fast-forward to this morning. As usual, we saw dip buying in India overnight and gold has now recovered back above that Dubai low. Thus, it increases the odds that we've potentially seen an exhaustion of sellers.

Now let's take that information in conjunction with a potential exhaustion signal in the GLD yesterday:

The GLD gold ETF slumped 2% on Tuesday, which was its fourth straight down day on extra chunky volume, so much so in fact that the GLD has now turned over roughly 44% of its shares outstanding over the past three trading days.

Meanwhile, the GLD ETF's bullion holdings slumped by nearly 14 tonnes (over 1%) yesterday, which interestingly triggers the possibility that we saw some exhaustion among the sellers yesterday.

I say that because while it hasn't happened in some time, we've noted before that important lows over the past year or so have often been marked by one-day liquidations of bullion by the GLD that are equal to1% or more of its holdings.

As you can see from the chart of the GLD's holdings above, one-day 1%+ sales of that kind are not only rare since the GLD's inception, but also only appear to occur around important lows since 2008. GLD investors apparently "puke" to some extent, which then shows up as these 1%+ dumps of physical gold by the ETF.

Now, there's certainly going to be some point in the future where this "indicator" won't work, and a sale of this size is just the beginning of more sales to come. But the trend is your friend for the time being, and I don't believe we've seen the sort of reckless speculation to warrant chain selling in gold yet, either.

When we put it all together, it begins to paint a picture of a low possibly forming in gold, especially if the euro's rally today, despite Spain being put on credit watch, is telling us that the short squeeze in the dollar that began last week off the jobs data has run its course.

I, for one, still expect the gold stocks to recover faster than the metal from this four-day swoon, given that they never discounted the last $200 of gold's rally. But time will tell if that expectation is correct. For those that care, I doubled up on my NEM Jan calls yesterday after having bought the first batch a little early on Friday.
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