 Submitted By Gary Tanashian
This from a guy I like and respect, Kevin Depew of Minyanville:
Panic Selling in Gold: What's Next?
As for gold, I would like to be more positive on the metal itself, but I believe this selling is related to a buildup of longer-term deflationary pressures in the credit markets that will dwarf the inflationary mask of (formerly surging) food and energy costs.
When debt and leverage are this excessive, cyclical inflation simply accelerates the deflationary outcome and makes the unwind more severe. Watching the Consumer Price Index is like driving over a cliff with your eye on the rear view mirror. Deflationary pressures will cause bids to evaporate and disappear as financial assets that must be sold to repair balance sheets and destroy debt overwhelm the capital available to compete for them.
Few see this coming because the leveraging of debt in our economy simply to get it to work has been so massive, so all-encompassing, that the vast majority of market participants have forgotten what normalcy is.
I most certainly believe gold will eventually be an asset to own in coming years. However, at the onset of deflation, gold will be sold indiscriminately - like all assets - to pay down debt and repair balance sheets.
The initial asset price inflation and central bank reflation efforts that made gold seem attractive during the building of the asset price bubble sow the seeds of the selloff as speculators attracted to the metal simply as a detached, non-fundamental momentum play will need to unwind their leveraged bets. Weak holders will be shaken out and ultimately replaced by those seeking a store of value. That is why the selloff won't make sense on a fundamental basis.
I show on the metal itself DeMark exhaustion sell signals on the long-term quarterly and monthly charts. But, the only people that should really be concerned about whether gold is going up or down right now - other than in the macro sense - are those very people who will likely need to sell and therefore be resonsible for it overshooting on the downside. I expect in the next few years for gold to retrace part of its long-term move, perhaps coming below 600 and, in the worst case, possibly even coming below 500. A 50% retracement of this major bull move would be about 458. But that doesn't change the long-term, secular bull market for gold.
...and this from Bloomberg (while we're at it):
Gold Heads for Biggest Weekly Drop in 25 Years as Dollar Gains
By Pham-Duy Nguyen
Aug. 15 (Bloomberg) -- Gold fell, heading for the biggest weekly slide in more than 25 years, as the dollar surged against the euro, reducing the appeal of the precious metal as an alternative investment. Silver dropped as much as 14 percent.
The dollar headed for a fifth straight weekly gain against the euro as economies in Europe slow. Gold generally moves in tandem with the euro as an alternative to the dollar. The metal plunged into a bear market this week, declining as much as 25 percent from a record $1,033.90 an ounce reached on March 17.
``There's just a lot of long liquidation,'' said Joel Crane, a metals strategist at Deutsche Bank AG in New York. ``Commodities are priced in U.S. dollars. There's no getting around that.''
Gold futures for December delivery fell $22.70, or 2.8 percent, to $791.80 an ounce at 12:43 p.m. on the Comex division of the New York Mercantile Exchange. A close at that price would mark an 8.5 percent drop for the week, the most since Feb. 25, 1983.
Earlier, the price touched $777.70, the lowest for a most- active contract since Nov. 20. Gold has fallen every day this month except for a 2.1 percent gain on Aug. 13.
Silver futures for December delivery fell $1.37, or 9.5 percent, to $12.99 an ounce on the Comex, after earlier reaching $12.305, the lowest since September. Before today, silver sank 3.8 percent this year while gold lost 2.8 percent.
The dollar touched the highest against the euro in almost six months and climbed to an eight-month high versus the yen. Investors sold commodities and bought U.S.-denominated assets on speculation the slowdown that began in the U.S. will spread to other countries, analysts said.
Economic Slowing
``People are not clamoring to the dollar because our economy is strong,'' said Tom Hartmann, a commodity analyst at Altavest Worldwide Trading Inc. in Mission Viejo, California. ``We've already started slowing and it's going to catch up in other countries.''
A housing slump and a credit crisis that threatened to push the U.S. economy into a recession spurred the Federal Reserve to cut the benchmark interest rate 3.25 percentage points between September and April. The federal funds rate is now at 2 percent.
While the U.S. cut rates, the European Central Bank held their main rate steady at 4 percent from June 2007 to July 2008 to fight inflation as commodities such as oil, corn and gold soared to records. After raising the rate by 25 basis points to 4.25 percent in July, policy makers kept the rate unchanged at their August meeting.
The euro traded as low as $1.4663 today. It reached a record $1.6038 on July 15.
``We are saying this is euro weakness, not dollar strength,'' said Crane of Deutsche Bank. ``We're not convinced that the U.S. dollar can stage a meaningful rebound. At these levels, a lot of these commodities are looking attractive.''
Silver Falls
Silver, which has wider industrial applications than gold, has fallen 27 percent this month as commodities plunged on concern a global slowdown may cut demand for raw materials. Crude oil traded as low as $111.34 a barrel today, down 24 percent from the July record.
``It's just stops cascading into stops,'' said Frank McGhee, a head dealer at Integrated Brokerage Services LLC in Chicago, said of silver's decline in overnight trading. ``There was no event. This was just throwing in the towel out of exhaustion.''
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