Gold: dissecting today's sell-off

Before y'all put your bear hats on, allow me to drop a couple cents for the bulls (across all time-frame). Just because we had a $25+ sell-off doesn't mean the fundamental picture for gold has changed one bit (see below). I love short-term technical trading, but fundamentals provide a floor to the market, and it's what drives the market in the end, especially for an asset like gold (that's right Gartman, gold is an ASSET). So I must disagree with any calls for a drop below 850. I'd go as far as to say that gold will not go below today's low (875), but hey...if it does, then the strong hands will be backing up the truck. Mining stocks seem to support my view, as they actually posted a gain for the day.

Again...before putting on your bear hats, let's dissect what led to the "big" sell-off in gold this morning. It was initially triggered by a very weak manufacturing data release in Europe, which led to a sell-off in EUR/USD. This led to a sell-off in gold, which accelerated/exaggerated as stop-loss orders were hit with no buyers to be found. Moreover, today's drop may have also been nudged a little harder by those who are massively short 900 calls that expire this Wednesday.

I attached a chart to depict the vacuum that gold fell through this morning. The chart shows the volume traded at each price level since last Thursday's close at (898). I chose this time-frame because Thursday's breach through the down-trendline (since the end of May) attracted some fresh longs (of course, these longs are now out of the market). Indeed, we can see a decent volume of fresh longs (above 900) made across the global market up until Friday's close. But the up volume was by no means significant, because the strong hands are waiting for the FOMC meeting, and that's also why gold fell through a vacuum this morning.



Wrapping everything together, I think today's sell-off was a re-test of last Thursday's breakout. A re-test is always healthy for a significant breakout, and a break above the infamous 910 resistance level, and ultimately the larger down-trendline since mid-April, should confirm a new medium/long term up-leg.



Fundamentals, fundamentals, fundamentals...why buy gold?

1. Oil: Peak oil is here, and here to stay.
2. Dollar: Forget about raising rates...Fed may have to cut even more.
3. Money Supply (i.e. inflation): Gold is rising against all currencies because all central banks are printing fiat like there is no tomorrow.
4. Safe haven: US treasuries will soon lose its status as an "artificial" safe haven due to rampant inflation. Gold has been a safe haven for 5000 years.
5. BRIC: Don't underestimate gold demand from BRIC and the Middle East.
6. Supply: On top of rising production costs for gold producers, there hasn't been any new major discoveries...hence the coming merger boom in the mining sector. Got junior?
7. Insert obvious gold fundamental here.