Earlier this month – when the Fed's QE taper plan was still a complete mystery – I published a technical analysis of the gold and silver market in which I showed key technical support levels at $1,200 and $18 respectively that I said needed to hold or a severe decline would ensue.
The Fed's taper plan that was announced on Wednesday came as a surprise in many respects: it came earlier than many expected, the $10 billion per month QE reduction was less aggressive than many expected, and the heavier emphasis on forward Fed Funds rate guidance was more dovish than many expected. While global equity markets surged on the dovish implications of ZIRP for a longer than expected period of time, precious metals – which thrived on the Fed's money printing in recent years – did not join in on the festivities. Gold plunged today by $47.40 or 3.84% to $1187.50, while silver fell by $.84 or 4.18% to $19.22.
In the past few hours, gold sliced right below the $1,200 support level that I showed earlier this month:
Source: Finviz
Though silver took a hit, it's still above its $18 support, but it's a fast-moving market, so a break below this level can happen quickly:
Now that gold broke below its support level, another sharp decline – including what I call a "waterfall-style decline" – is looking increasingly likely. I suspect that another wave of selling may commence when the Asian precious metals trading session starts in a few hours from now (it's Thursday afternoon in New York as I write this). If I was planning to short gold, I would make sure that I have a stop-loss order in place to exit the trade in case gold manages to rise back above the $1,200 level, creating a bear trap.
As I showed in my last gold and silver analysis, gold mining stocks experienced a serious technical breakdown in late-November, and I said that gold mining stocks have a tendency to lead the gold market. It looks like this indicator is on the verge of proving its worth once again, even though it is still early.
Source: Stockcharts.com
If gold's technical breakdown fully plays out, the next support level (and thus price projection) is at $1,000, which is both the 2009 highs as well as a psychologically important round number, which matters a great deal in financial markets:
Why is gold dropping despite all of the central bank money printing in recent years? I have a very different take on this issue than most commentators: I believe that global central bank stimulus is creating what I call a Bubblecovery or a bubble-driven economic recovery that is fooling the whole world into becoming less fearful, which is reducing demand for gold as a safe-haven. I believe that the eventual ending of the Bubblecovery will cause another global economic crisis that will prove to be highly beneficial for gold, even though gold may have further downside in the meantime.
As a reminder, if gold manages to break back above its $1,200 support level, I would no longer be inclined to hold a bearish short-term view on it.
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(Disclaimer: All information is provided for educational purposes only and should not be relied on for making any investment decisions.)
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