Physical Demand? Not So Much…

We talked recently of the fact that Gold had fallen too-far-too-fast and was due at a minimum for a brief dead-cat bounce or perhaps even a prolonged, full-fledged snap-back rally. Fair to say the mid-April to early-May upward move was in fact a pretty decent snap-back rally. Certainly scared lots of peeps into believing they’d miss out on a great buying opportunity if they didn’t get in right away.

Low and behold, Gold came off its mid-April meltdown low of roughly 1,325 in quick fashion to challenge key resistance at 1,500. Yep, the bulls were excited and mocking the GS call that many say prompted the original meltdown. It was “buy time” on a big-time dip that was actually a gift.

Oh yeah, there was also all of the chatter about physical demand being at what some estimated to be a 30-year high. With such pent up demand, surely we were looking at a very prolonged period of upward price movement!

Not so much…

Apparently that demand was filled…in a matter of mere weeks. Moreover, there was that pesky little issue of ETFs… Yes, if memory serves, they were actually the big buyers and holders of Gold over the past number of years as it ran to record heights. So, it only makes sense that were they to collectively head for the door, the precious metal would take a header…and they did…still are…and it did!

Recapping a bit so we gain perspective in an attempt to figure out what’s really occurred and where we might be headed moving forward, it’s worth noting that the April meltdown saw the price of gold retreat to a level that represented a 50 percent retracement of the entire Gold run from the ’08 lows to the September 2011 high approaching 2K.

Yes, there was rhyme and reason for where Gold pulled a U-turn in the midst of a somewhat historical freefall.

Furthermore, that U turn recovery move, while impressive, stopped exactly where most peeps looking at the map (who weren’t long and/or caught up in the euphoria) would have expected, given that there was a key fib level at 1,490, followed by the 1,500 mark, which had been a key support level previously. We obviously can surmise that lots of those peeps watching the map were confident enough to lay down some big bets that the rally would go no further…and they’ve been duly rewarded.

K, so now what? Well, seems apparent that whatever the level of physical demand might be now, somebody from the bull camp better get to buying the metal quickly or it’s gonna round trip the entire breakdown recovery move…which would see Gold back to the 1,325 level.

Shouldn’t come as a surprise that confidence is gonna get tested big time IF that occurs…and both gravity and history won’t be on the side of the bulls in such an event. Regardless, gold bugs are gonna have to hold that level on a test. IF they do so, we should see some decent upside…for a bit. The same resistance levels as this last time around will serve as the real upside test.

Alternatively, if the level does get tested and the bulls fail to hold, then we’ll likely see an accelerated breakdown move to another key fib level near 1,150 in very short order. That’s not far above the level Credit Suisse Group just predicted this week – 1,100 over the next year and 1,000 five years from now…Ouch!

We shall see…

~LH