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Charts & Analysis

Charts: Gold Crashes, Crude Slows

Gold just fell below $1,500, seemingly on news that Cyprus may sell some of it’s gold to finance it’s bailout. Of course that has very little to do with fundamentals, because what Cyprus owns is about 14 tonnes of gold, which is, in comparative terms, tiny. India recently bought 200 tons – around 14 times the total holdings of Cyprus, and that didn’t really do much on the upside of gold.

The chart shows the carnage recently.

 

Gold price chart

Technically, this is a sell. One could wait a week or two to see if the price will recover, but it looks like multiple strong trendlines are broken and the only hope for the metal is above it’s 50 day moving average (currently $1600).

This augurs well for India’s current account, since Gold is our second largest import.

One of the main problems such a fall creates is for companies like Mannapuram and Muthoot that provide credit based on gold collateral. Now, if people believe that the gold is worth less than what they’ve borrowed, they might just choose to default and let the finance companies take the hit.

Those that make jewellery, like Gitanjali Gems or Titan, may be impacted.

The price of gold in India is less than 28,000 rupees for 10 grams, which is not yet 20% off the highs. I own gold (ETF) and it’s time to cut my position down; I’ve been immensely lucky in that I’ve been purchasing since a price of 12,800 or such, but a technical reversal, once it’s confirmed in a couple days, is a sign to exit.

Crude Also Collapses

The price of Brent Crude has been coming down consistently. Here’s the chart:

Crude price chart

 

The fall in these two commodities should impact the current account deficit by reducing it.

While this could be true in isolation, we must remember that the Indian current account deficit has only been bridged by capital flows. If the reasons why gold and crude are falling will also lead to reduced capital inflows, the impact will have been fully negated. I’ll have to do a post on that separately.

A lower crude price, however, helps a lot of companies. From the public sector oil marketing giants, to auto ancilliaries to plastic manufacturers, a lower crude price is hugely beneficial.

Another thing that might happen now is that as these commodities lose out, money might finally shift back into equities. I won’t hold my breath for that (it can take years) but some reallocation is already happening in the west, and I wouldn’t be surprised to see markets enjoy this move if it lasts.

  • Arul says:

    Hi,
    I know nothing about technical investing, so my question is likely naive: the 50day MA and 200day MA crossed earlier in 2012 april, and gold did rebound, right? so why is it a sell now?
    thanks.

  • Murty says:

    Remember the encouragement given to the OIL Marketing Companies to mitigate their losses. The Petrol and Diesel Prices were de-regulated and were told to be linked to the INTERNATIONAL SCENARIO!
    But what the F? The Crude is available @less than $100 a barrel, but the Government seems to be in no hurry to reduce the retail pricing of Petrol/Diesel. What do you call this? Public Looting? When the Crude went up from the pricing of petrol hiked from 60 a litre to 72 a litre, and then to reduce the loss of oil companies, it sore again, but it is not coming down.Please correct me, if the figures are not correct.
    What goes up , must come down. and what comes down , eventually has to go up. But is it so?????????

  • Guruprasad V says:

    Gold has broken its 2011 low of $1545. Trend is completely down and trends are more powerful. I believe that fall in Gold is giving a sign that few of the alternate assets could follow with it by simply getting crushed in the markets. Only time would tell. Except US, Japan and UK most of the equity mkts are pretty weak and or in distribution pattern (CAC & DAX in this context). Its pretty early days. By the way Silver also have given its support of $26.

  • feltra says:

    Yes, Deepak ji, I too was considering selling off once the weekly 20 crossed below the weekly 50, but waited because I thought it may be bottoming out etc… Today’s fall of more than 6% (in ETFs) gives pause however. It’s now below all averages and is dropping like a stone.
    Looking at global conditions however, I would say the time to buy in bulk is coming soon… Nothing seems to have changed for the better w.r.t Western countries, and we don’t have anything good to say about our own either. So, this sudden dropping seems to be a co-ordinated move…
    There are some articles elsewhere saying how availability of cheap gas will be the engine that re-starts US manufacturing – but was fuel availability the problem in the first place? Japanese PM has apparently kick-started investment but its an export market – just who are they going to sell to? the Americans?
    So, assuming nothing has changed globally (and in fact may be becoming worse if Cypress/depress like situations (tax on deposits) happen for many countries), THIS may be a the last time gold comes down – before going up leaps and bounds. For my own sake I hope this is true, while for the world’s sake I hope it turns out false….
    Btw, thanks for ALL the articles – of late your articles carry lot of insight into things (or maybe it was always like that and I am becoming a better reader!)… Please continue the good work.
    Best Regards,
    -feltra

    • Thanks feltra-ji for your kind comments! very much appreciated!
      You may be right that this may be a temporary pause only. I agree with you on gas – despite all those pipelines exactly how many cars in the US run on nat gas? Answer: next to zero. Even industry will find it difficult to suddenly start a gas based manufacturing plant if the salaries they have to pay are sky high.
      Japan is, like John Mauldin says, a bug looking for a windshield 🙂
      I think gold might rebound hugely also. But the technical guy in me says it’s time to sell 🙁

  • Inder says:

    How does Gold look fundamentally now –
    1. being a hedge against inflation
    2. Japan printing Yens and devaluing its currency compared to $
    3. Eurozone is not yet out of the woods
    Is this a buying opportunity or fundamentals too (along with technicals) have become weak ?

    • Gold’s fundamental attractiveness are a run to safety and a hedge against inflation. While in India inflation continues, inflation in the west is dead, so it’s not much of a short term factor. On the other end, it is still what people will run to for safety. But given governments have taken an insane stand to flood the market with money no matter what happens, that is again a lesser fear now.
      Having said that, just a small pin prick can destroy everything very fast. Gold is likely to become very desirable as a commodity then.

  • Phoenix says:

    I would encourage readers to avoid the gold hype after 12 years of run. Forget the fundamentals, etc. It is all the more worrisome to watch it drop inspite of nightmarish fundas.
    Retire to cash for now. Go for a holiday….summer has arrived !