A Melman Minute — April 12, 2013
| By | Leonard Melman |
|---|---|
| Date | April 12, 2013 |
If a picture - or chart - is worth a 'thousand words', then on occasion two pictures - or two charts - could be worth even more. I believe this is one of those times. Please note the following two charts on gold and the Dow Jones Industrial Average.
Please note that during the past six months or so, virtually every recent rally in gold has been quickly met by selling and this has confined the price of gold to a narrow, down-trending channel which now threatens to break below important chart support just above the $1,500 level.
At the same time, the chart of the Dow Jones Industrial Average is tracing an opposite pattern where every recent attempt at selling has been met by heavy buying and the average is trading within a narrow up-channel and has, in fact, recently surged above previous resistance to all-time high levels.
In my OPINION, this recent combined action smacks of manipulation. Admittedly, manipulation of any sort takes place sub rosa, out of sight, and is therefore exceedingly difficult to ever prove, but the coincidence of the gold market encountering great difficulty at the very same time that the general securities markets are roaring ahead - despite the fact that overwhelming fundamental information suggests that neither should be presently occurring - offers at least the suggestion that some unusual forces are at play.
We will do our best to follow up on this thesis and report whenever important information becomes available.
TODAY'S DEBACLE IN GOLD AND SILVER
When I wrote the above thoughts early this morning, I knew gold was having a weak day, but quite suddenly, between 7:00 AM and 8:15 AM PDT, severe selling set in for both the precious and base metals - and their associated shares - as one support level after gave in. The daily charts for both gold and silver clearly illustrate what is happening and we append the chart on silver below.
Over the past few weeks, I have written about the growing chart weakness in both the precious metals and their shares and I quote from our Melman Minute of April 3:
"...there is an accumulation of...technical information pointing to a potentially very difficult situation for both the metals and the junior mining shares over the short to medium term... The gold chart clearly shows that the recent rally in gold which twice reached a top near $1,620 has now turned soft, with gold down by about $60 from those peaks as this is written...If anything, the chart on silver appears even weaker. While gold did manage to put on a $60 bottom-to-top rally during the recent move, silver was hard-pressed to simply move horizontally and during the past week, a series of declines appears to be indicating the onset of a new down-leg for the white metal.
It is difficult to write this, but, again in my opinion, the intermediate term chart appears to hold more negative potential. One of my favourite financial writers over the past several decades has been Richard Russell, noted author of the "Dow Theory Letters" published in San Diego, California. Russell once coined a phrase to indicate a chart pattern where a huge top had been formed, naming such a formation a "giant overhanging top."
When I look at the five-year chart of gold, the last two years' trading appears to be taking on the appearance of just such a top. It must be noted that charting is truly an inexact science and it also must be noted that some of history's greatest market rallies have begun just when the picture looked bleakest. Be that as it may, I still must admit that the five-year gold chart, in my interpretation, gives me cause for substantial concern...
I consider the zone between $1,500 and $1,520 to be technically important. Should this decline break through that support, my interpretation would be that the gold (and silver) market was vulnerable to considerable weakness which is exactly the kind of news the junior shares do not need in this time frame.
Nothing would please me more than an immediate and powerful rally in gold, silver and the other precious and base metals. But if "The Melman Report" is to have any true value, I must 'call them as I see them'.
Unfortunately, those words turned out to contain some truth and now we are faced with a greater question in the form of "Do these new sharp declines portend the end of the great precious metals bull markets which have been in effect for virtually all of this century and which have seen gold rise from barely $250 per ounce to almost $2,000 and silver soar from under $4.00 per ounce to a peak of $50." I plan to subject as many metals charts as possible to close analysis over the weekend and will report my preliminary conclusions on Monday.
FUNDAMENTALS, FUNDAMENTALS AND MORE FUNDAMENTALS
The most ironic segment of the whole metals situation is that while the technical picture indeed appears to be breaking down, the fundamental case, based on prior history associated with past metals bull markets, appears to be growing more positive with the passage of time.
The budget proposed by President Obama is a case in point. Despite pledges to the contrary, US government spending is projected to rise sharply over the coming years from a proposed $3.78 trillion in the coming year to $4.45 trillion jut four years down the road - an increase of almost twenty percent over four years, far, far above the 'official' rate of inflation. If that is truly an austere, conservative budget as it is being called, then perhaps George Orwell's "New Speak" is really coming to pass.
In addition, the situation in Cyprus is now becoming explosive with the projected size of any 'rescue' increasing by the hour and now, just this morning, we are receiving reports that the entire banking system in Cyprus is at risk.
As of 9:20 AM PDT, gold and silver are rebounding moderately from their compression lows of earlier this morning. Gold is now trading near $1,507 after hitting a low of $1,491 while silver has improved to $26.45 from an intra-day low of $25.96. Financial markets are lower in Canada and the USA with the Dow Industrials down by about 40 while Canada's resource-sensitive TSX Index is off by 160. Base metals are trading sharply lower as are mining share indexes.
In other markets, Crude Oil is down by more than $2 per barrel to near $91; the US Dollar Index is virtually unchanged while long-term interest rates are once again trending lower.
All quotes US$ unless otherwise indicated.
Next "Melman Minute" scheduled for Monday, April 15, 2013