Eoin Treacy's view

I have longs in gold, silver and platinum and they are all underwater. I bought because I believed at the time they had fallen enough, that they had already unwound enough of their overbought conditions relative to the trend mean and that the medium-term bull market environment overall was powerful enough to confine reactions to reasonably tight consolidations. I was wrong. Today’s sharp decline has accelerated the corrective phase and all three of these precious metals touched or exceeded their respective trend means today. 



It’s never a pleasant experience when positions go against you but I have to ask myself if this is wholly unexpected action and were my initial tactics too aggressive? The answer to both is yes. We often see a ranging phase follow an impressive trending phase. That allows the overbought condition, relative to the trend mean, to be unwound in a relatively orderly fashion. Occasionally, we see breakdowns from these ranges that complete the reversion to the mean in a single day. That’s what happened today in the precious metals, particularly gold. 

What happens next is important because if the medium-term bullish environment is to be reasserted then gold, silver and platinum are now trading the region of where we could reasonably assume demand will return. A clear upward dynamic, similar to that seen in early June, would signal a low of at least near-term significance. 

The Dollar Index has been ranging since hitting a medium-term peak near 100 in early 2015. However a triangular pattern has been developing this year with a progression of lower rally highs evident since December, while a progression of higher reaction lows has been in evidence since May. This compression of trading activity is likely to be resolved by an emphatic breakout. If that occurs to the upside it would be a bearish outcome for precious metals, would act as a headwind to a rebound and could spur additional declines. If on the other hand the Index fails at this level and falls back toward 90 it could act as a bullish catalyst. This helps to reiterate that both the Dollar and precious metals are at an important decision point, with the metals having already at least partially priced in a stronger Dollar. 

Against the deep short-term oversold condition I decided to increase my long positions in both gold and silver. The basis for this decision was that I asked myself if I did not have a position would I buy and my answer was yes.  I might yet be wrong but I doubled my silver position buying the December contract at $17.92 and increased my gold position by 150% buying the December contract at $1274.7 including spread-bet dealing cost.