The move must be put in context of the larger trend.
Gold and Gold Stocks
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Yesterday we saw a sharp drop in gold prices and mining stocks as gold fell down towards 1300 an ounce after having been over 1400 an ounce just the other week. In my view gold and mining stocks are still in the process of forming a stage one consolidation base after making a bear market bottom in June, which should come to an end soon, probably this month after next Thursday's FOMC meeting.
Gold stocks slipped Tuesday as news came out that suggested that a diplomatic solution may be on hand to avert President Obama's drive for a new war in Syria. For a year elements in the United States have been pushing him to support the "rebels" in Syria for a "regime change" operation. Men such as John McCain and Lindsey Graham have hungered for US intervention in Syria while some members of Obama's administration have also sought to get involved there.
It takes a market going up for a year after a bottom for people to get interested in it again. But if in a year from now gold goes up as much as I think it will you'll start to see interest in gold and silver investments grow - interest that could become a mania in a few years.
What is going on with gold stocks? Yesterday gold went up, but gold stocks and the mining stock HUI gold bugs index all dropped.
Over the past few days we have seen gold stocks and the HUI miners index dip. The HUI actually went up over 34% from its June low. It now appears to be pausing and forming a base to launch a new rally off of.
The game is on for gold. Yesterday was a historic day, because it marks the beginning of a new bull market for metals and mining stocks that will likely last for several years.
People are scared to buy them now just like they were scared to buy Europe a year ago because the TV told them to be scared. Well markets look six months ahead and we are going to see inflation explode in the US in a few years. So you buy when things are cheap and when the "fundamentals" haven't hit the news yet.
We are in a key transition phase right now. European markets just broke out into new bull markets and metals and mining stocks are next. Check out the charts in this video presentation Dave Skarica and I just did. Once you do I think you will understand why we think the next few years will result in a bubble boom for mining stocks.
We are in a critical August of transition in which huge new bull runs are starting in commodities and European markets while the S&P 500 begins to lag these markets after having already run up so much this year.
Hedge fund managers are still scared of gold and gold bulls are weak. Many are bailing out already on the current move up in gold. There is widespread skepticism over whether or not this is the start of a new gold bull market off of a major bottom or just a fake trap move. As a result few can hold and most just jump in and out.
This chart takes the long position and subtracts the short position from it. Commercials are large mining companies and huge players in the market. They aren't traders. Most of them use the futures market to hedge their positions. While traders and the masses tend to be long at key market turning points the long-term commercial players tend to be right.
Gold is falling this morning before the open - taking a big hit. I'm getting lots of emails from people asking if I think gold is now in a bear market or if they should sell.
In this podcast Dave and I talked about George Soros and his activities in the gold market. The media put out a story in April about how Soros was selling gold by selling off his GLD position.
I just did this podcast with David Bannister of www.activetradingpartners.com.
In this podcast David and I talked about the recent action in gold and his trade in MUX.
Last Thursday Dave wrote an article saying that it was time to be brave and get into gold stocks. He listed ten reasons why he was bullish. You can read them here.
This could turn out to be a key day for gold. After last month's gold crash I thought that gold and mining stocks would rally back up for a week or so and then come back down to test their lows. After that I thought they would go back up and consolidate to put themselves in a position to breakout into a new bull market. I wrote about this scenario right after the gold crash here.
Normally after a big crash like this and such a fast bounce a market will lose momentum. It is simply unreasonable to expect gold to continue to rise at the rate it has in the past two weeks.
"The Supply and demand of gold is very important. That is why it is money, because gold is used elsewhere and it is commodity. The supply and money of paper is the culprit. That is the one that is causing all the trouble. People ignore the supply and demand of paper."
"What we just witnessed in the gold market, in my opinion, was a panic liquidation that has no predictive value and which occurred in the teeth of the most wildly gold-friendly fundamentals the world has ever seen. Unfortunately, this is a lesson of markets sometimes being perverse and doing whatever they want to."
Anskar Belke, chairman of macroeconomics, University of Duisburg-Essen, talks with Bloomberg's Mark Barton about an alternative to gold reserve sales for Cyprus. He speaks on Bloomberg Television's "Countdown."
Jim Rogers, chairman of Rogers Holdings, talks about global commodity markets and investment strategy. Rogers also discusses the outlook for the U.S. dollar. He speaks with Rishaad Salamat on Bloomberg Television's "On the Move."
Interest Rate Observer Founder and Editor Jim Grant discusses the economy and the price of gold on Bloomberg Television's "Money Moves."
Every hedge fund in the gold trade was down and every investor who bought gold themselves since then was too. Losses lead to panic. That is why the 1550 level was so important - and why it has led to this current gold crash. Every computer program yelled sell once the 1550 level was breached and the selling built up into a crescendo - into a crash.
This isn't to endorse all of his beliefs, but skip to the six minute mark and you can see why this person sent me this video - and why its relevant for the struggle gold investors are facing today.
What you are witnessing in the gold market right now is the final liquidation of the gold bug. On Friday gold fell $84 an ounce for a 5.38% drop while the HUI gold stock index fell 6%. Big bad moves. What is worse these drops have come after months of falling gold prices all while the S&P 500 has gone higher.