Diwali Is Here
For thousands of years, Indians have been the biggest buyers of gold in the world. Much of this buying occurs leading into Dussehra and Diwali. Dussehra falls on the 13th and 14th of October 2013. Diwali falls on November 3rd.
In some ways, Diwali in India is similar to Christmas in the Western world. The major gift that Indians like to purchase for Diwali is gold or gold jewelry.
The Indian wedding season is ahead. In a typical Indian wedding, the bride is given lots of gold jewelry.
The point is that this is the time for high demand for physical gold and silver in India, but gold and silver do not run.
Why Gold And Silver Do Not Run?
Gold and silver do not run because at this time they are not trading on fundamentals. Gold and silver are presently trading on technicals with a bias to the downside for the most part because a lot of gold and silver is in weak hands. The weak hands on the long side are the momo crowd. The momo crowd is quite distinct and different from gold bugs. The gold momo crowd buys gold and silver simply because everyone else in their social circle is buying gold and silver, they think it is going up, and they are scared of monetary policy pursued by the Federal Reserve. The gold momo crowd keeps up the ruse that they understand inflation and history, but in reality, my experience is that unlike gold bugs, their knowledge is superficial.
On the short side, weak hands are Johnnies-come-lately speculators, hereinafter called “lately crowd.”
Our algorithms at The Arora Report analyze trading data from across the globe and these algorithms tell us that the lately crowd started shorting gold aggressively when it broke $1300 and continued to short into the recent lows. The zone where the lately crowd shorted is shown on the lower right hand side of the long-term chart. The average short price of the lately crowd is around $1230 for gold. The point is that the lately crowd has significant unrealized losses. These losses will get bigger if gold breaks out of the near term resistance. Such a breakout may lead to massive short covering which may provide fuel for a spectacular up move. However, for the time being, the lately crowd has panicked and has been buying to cover shorts.
Let us take a closer look at the short-term annotated chart. The chart shows the zone where the lately crowd was selling. According to our algorithms that monitor gold trading on a worldwide basis, a majority of the rise in the price of gold in September was due to the lately crowd panicking and covering their shorts in the zone shown on the chart. Once the panic short covering was over, the rally fizzled.
It did not help that according to our algorithms smart money was aggressively selling during the price spike in August, this is shown on the long-term chart.
When the Federal Reserve postponed the taper, there was an immediate spike in gold. As shown on the short-term chart, the spike was weak, it made a lower high than the prior high and never came close to the down sloping trend line. The bounce in RSI on no taper was weak and ADX did not confirm as shown on the short-term chart.
On the day the government shutdown, gold fell more than $40. The good news is that as shown on the short-term chart there was no volume confirmation and ADX showed it to be a weak trend as well as that the support shown on the short-term chart is holding.