There was a lot of central bank bearish activity Tuesday morning: two Fed governors were speaking hawkish on rates yesterday and today, there was a rumor of potential BoJ activity to weaken the Yen, and the ECB is now discussing tapering of their QE program. To make things worse we saw a very thin market without a lot of bids, most selling is into a vacuum hence the sharp volatility. 

Gold bullion broke the $1300 level around 8:15, again a very illiquid time in the market. The trigger was likely the Yen weakening on BoJ rumors. The Fed’s Lacker gave a speech urging higher rates to head off inflation around 9:00 am leading to more selling. Selling further accelerated around 11:30 when the ECB started discussing tapering of their QE program. By then we were into heavy selling as USDJPY backed up to 102.8 and yields started reversing globally. Yields however remain well below key resistance levels with daily and weekly trends still heading down. JPY probably does not break until the 106 level. The 5 year TIPs yield remains below key resistance still. 

Sentiment has clearly changed very quickly. However, our primary models still show gold bullion and gold equities should be trading at much higher levels and unless there has been a radical change in the correlation patterns observed over the past decades we believe this will lead to a buying opportunity shortly. The technical support for bullion is now at $1250/60. October is also a seasonal low period for gold with mid-October usually marking the intra-month low. All our equity indicators were oversold prior to today and now even more so. 

We believe this is a correction within a secular bull market. So far we do not see any the developments as the catalyst for a bear market. The real issue is the lack of liquidity due to holidays (Rosh Hashanah, Passover, and China’s Golden Week) and skittishness of where central bank policies are going. We do not see the end of negative interest rates and we do not see monetary policy giving way to fiscal policy (if it happens) to be gold bearish either. 

If you have any questions about this article, please contact your Sprott financial advisor at 800-477-7853. 

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