For the last 11 days, Gold has received a merciless beating. So bad, in fact, that the "barborous relic" temporarily breached the $1,100 level on both Thursday and Friday, an event I very much did NOT expect.
In so doing, the peak-to-trough loss amounted to nearly 10%, accompanied by a drop in Gold and Silver miner indexes of nearly 20%!
I mentioned in yesterday's blog to temporarily ignore the advice to sell Gold if it fell below $1,100. I'll explain my reasoning today.
First of all, the breach was "immaterial". In general, a good rule-of-thumb in determining materiality is 3-5% accompanied by some reasonable amount of time during which the "stop loss" remains in force. The twin drops to $1,096 or so that occurred, met NEITHER of these criteria. Since I hadn't explained this before, I felt it important to elaborate. Both Thursday's and Friday's breaches were very temporary and accompanied by extremely rare market circumstances.
On Thursday, the downward penetration occurred in the last 15 minutes of trading, amidst rumors of heavy liquidation by a large hedge fund and happened during extremely light trading. On Friday, the downside break transpired during what's known as a "quadruple witching day". These days occur on the second-to-last Friday of a calendar quarter and are known for freakish volatility. Quadruple witch days happen when 4 series of derivatives expire: Stock options, stock index options, stock index futures and single stock futures.
Looking down the road, Monday ought to be a better bet for evaluating whether to employ the $1,100 rule.
My belief is that BOTH Thursday AND Friday were flukes, intentionally orchestrated by space aliens in order to make me look bad! However, my "big picture" standpoint remains unchanged.
I continue to maintain my posture that we have concluded the initial stage of a violent bottoming process, which still may take a few weeks to completely conclude. I DO NOT expect the $1,100 level to be re-visited, but I do believe that we will witness some additional sort of "yo-yo" action prior to the launching of a SUBSTANTIAL move higher.
For now, I'll defer on details as to how high I think the next major top will be. However, I wish to remind everyone involved in Gold and Silver, that the higher we go, the more nutty trading will become. What's transpired so far has been EXPECTED, as it is reminiscent of the internet bubble, which I FOUGHT tooth and nail, much to my chagrin.
The point of this is to assist you in avoiding the very mistakes I made back then. This type of volatile action makes it extremely difficult to stomach. But endure it you should, because in my opinion, those of you prepared to ride out this roller coaster will be rewarded handsomely.
Have a great weekend! If you have any questions or comments, please leave them below.