Gold is broken

Two weeks ago, I wrote, "don't count out gold just yet," as it had not yet violated key longer-term levels nor triggered longer-term sell signals. Needless to say, that all changed on Friday and Monday. 

Source: Stockcharts.com

As a reminder, a sell signal is generated when 1) gold falls below its 36-month moving average and 2) when the RSI falls below 50. Vice versa for buy signals. With Friday's close, a dual-sell signal was triggered.

You've read the reasons given for why the plunge in precious metals: Cyprus to sell its gold to raise money, which kick-started panic selling on fears of other regional countries doing the same, which set off margin calls forcing investors to sell, which continued to break key technical levels thus triggering computer algos to sell, etc. In total, lots of knock-on, cascading forced-selling, something that eventually goes too far, setting up for a decent bounce -- which we're currently witnessing.

Technically, gold is now a broken chart (and the same holds for silver, which over time is highly-correlated with gold). This current reflex-rally off the lows is a very common occurrence after a massive bout of selling. If it continues to follow the playbook, we should see a pause in this rally as remaining bruised and battered holders sell into the rally. A retrace then ensues back down towards the prior low. Hopefully we'll then see gold/silver hold at or above the prior low level, setting up what could be a double-bottom (W-shaped). It would be surprising if gold/silver were to keep rising from here, creating instead V-bottoms.

The bottom line is gold and silver now face significant headwinds to get back to prior elevated levels as there exists ample overhead resistance to get through. The charts have suffered severe technical damage which will take time to repair. It's going to be a long road ahead, it would appear.

Gold/silver will undoubtedly circulate through the bull/bear evolutionary cycle, with this recent leg down qualifying as the move from Hope to Panic. Other reasons now being suggested for gold's decline include: moderating inflation, US interest rates may go up, QE will end sooner than expected,  and investors are in risk-on mode and thus shedding safe-haven assets like gold/silver. But as the list of bearish reasons for the decline grows longer – many of them likely not based on anything that is actually causing the selloff in gold/silver – and as this list gets bigger play in the media, eventually landing on magazine covers, the closer gold/silver get to a bottom that will hold.