A Dead Cat Bounce

A Dead Cat Bounce

  
The precious metals sector certainly got more interesting last month when the levels of long term support were broken in dramatic fashion, something I had spoken about in my March post (http://kiwiblackers.blogspot.co.nz/2013_03_01_archive.html) entitled ‘Gold revisited’. In it I said there was a danger of a co-ordinated attack by the ‘professionals’ on both the gold and silver price, and we certainly got it!

  In a classic move starting on Friday the 12^th April, gold was sold down aggressively closing the day at $1475, well below the $1530 support zone. Fridays are always the preferred day to initiate the move because it gets maximum coverage in the weekend press and builds up the selling pressure for the Monday morning opening, and by the close of business on the Tuesday gold had fallen as low as $1321. Silver had moved in tandem with gold as per usual and suffered a similar fate, falling over 20% in just three days and hitting a low of $22, pretty painful moves for those investors caught ‘long and wrong’.

  Since that selling stampede both precious metals have staged a rally, albeit an insipid one, with the buying coming from some investors looking for a quick bargain and others buying back their ‘short’ positions established at higher prices.

  So have prices already hit bottom and is this the start of a prolonged bull run?

  The answer is, I very much doubt it.

  There are a number of things that suggest we have unfinished business on the downside: 

•  At a genuine low we should expect the rebound to be strong with good volume as buyers return to the market and chase the price higher. Whilst this could still occur, thus far the recovery off the lows has been relatively weak with low volume.
• As was discussed in 'Gold Revisited' the move through the long-term support level in gold has triggered a downside price objective of $1070 and whilst this might not eventuate, it is far from a positive development.
• On a price move as violent as we witnessed I would have expected the 'commercials' to have aggressively covered their short positions, but the latest COT data below shows that although they have bought back some of their 'shorts' it has hardly been dramatic, suggesting to me that they expect another bite at that cherry.   

•  Lastly, we are entering the weakest period of the year for precious metals. Traditionally gold prices enjoy three bullish periods within the calender year driven by demand for physical gold, the first of which is the buying induced by the Chinese New Year celebrations around January/February. The second period is around August/September when Asian farmers harvest their crops and invest the profits into physical gold, and lastly the Indian marriage season that lasts from September through to November which creates the biggest demand spike of all, as gold is a hugely important part of most Indian wedding ceremonies in its form as a dowry. This May to July timeframe is absent of any drivers of physical demand so we often witness weakness in the precious metals during this period.

Although the evidence points to more weakness ahead, the rally may well continue a while longer yet before it runs out of steam. When big moves like this occur, price often retraces a part of the fall, sometimes even retracing the entire move and getting back to the point where the collapse began. However, having been 'underwater' on their investment and then seeing the price approaching their breakeven level, the temptation to sell is great and many investors will leave orders in the market to try to sell at these prices. This has the effect of changing what was for so long a level of support, into a level of resistance and becomes hard to break through, the buyers ultimately are outweighed by the volumes on offer and the price starts to fall again.
 It is this tendency for anything falling hard enough to bounce once it hits the ground that spawned the term 'dead cat bounce'.





The key will be what happens when the price once again approaches the low $1300 level, if it holds we may see a more meaningful rally develop from there, albeit with the risk of another serious collapse a bit later on, but if it fails it opens up the $1070 target again.

I would much prefer to see the price collapse down to these lower levels, forcing out the last of the sellers and turning investor sentiment very bearish. This would make the investment decision very easy by creating a major bottom and setting the scene for a multi-year rally that should take it through the all-time highs.

For now we watch and wait