Gold's bearish pattern 16 years in the making

Published Mon, Jul 20 20151:28 PM EDTUpdated Mon, Jul 20 20153:54 PM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

The Federal Reserve and powerful chart signals are forces that could send gold skidding toward $1,000 per ounce before the metal is able to stage a turnaround. Gold futures hit a five-year low early Monday, after a trade of 5 tons of gold in Shanghai stunned the market and exaggerated already bearish moves. Traders said the seller dumped the equivalent of a fifth of last week's daily volume within minutes, and while it could have been a fund, there were no specifics. The precious metal recovered some of its losses, but not before nearing a level watched by some as the 50 percent retracement of a move from its 1999 low to its 2011 high. Robert Sinche, chief global strategist at Amherst Pierpont Securities, said $1,086.60 per ounce is the 50 percent retracement of the move between the Aug. 27, 1999, low of $252.50 and the Sept. 9, 2011, high of $1,920.70 per ounce. The 1999 level was a 20-year low. Source: FactSet Because the move to the retracement level was in a thin, disorderly market, along with a mystery trade, Sinche said it will not be technically trusted until it closes below that level. "You have to discount it a little bit. If it can't get back below that level, that says it's a false Sunday night break," he said. Sinche said if gold does close below the retracement level, it would be set up for a battle for the $1,000 an ounce zone. "In the background of all of this, you've got the market concerned about higher interest rates and a rising dollar," said Bart Melek, head of commodities strategy at TD Securities. The prospect of a Fed rate hike that would continue to boost the dollar has contributed to declines across commodity markets, and especially in gold. Read More Gold bulls in retreat after spectacular plunge Melek said he sees $1,000 per ounce as a possibility, after spot gold broke key support of $1,142 and now trades near a new cyclical low. "For my purposes, there's support around $1,045. ... There's not much stopping us from going there. Are we likely to have an outright rout where we go meaningfully or materially below $1,000 at this point? At this point, we don't think so," Melek said. "The Fed moves should be modest, and inflation should pick up later in the year." Read More Global miners face succession crisis Strategists said news Friday from China 's central bank about its gold holdings was also a negative factor in the market Monday. The People's Bank of China ended years of speculation about its official gold holdings, revealing an almost 60 percent jump in its reserves since 2009, but that was less than expected. "I looked at it in a completely different fashion. If Beijing wants to make the renminbi a reserve currency, it has to increase its holdings in gold. They have to buy twice as much in the future. I see that as being quite bullish," said Dennis Gartman, publisher of The Gartman Letter. Read More China breaks six-year silence on gold reserves The PBOC reported it held 1,658 tons as of the end of June, compared with 1,054 tons reported in April 2009. "I was surprised when people were taking it as a bearish indication," said Gartman. "It is a bear market and all news is bearish. ... The problem that gold faces is the fact that the dollar is as strong as it is. We're only in the third, fourth, fifth inning of a nine-inning ballgame of a strengthening U.S. dollar." Gartman said he holds gold, but it is still higher on the year in terms of the euro.

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The Federal Reserve and powerful chart signals are forces that could send gold skidding toward $1,000 per ounce before the metal is able to stage a turnaround.

Gold futures hit a five-year low early Monday, after a trade of 5 tons of gold in Shanghai stunned the market and exaggerated already bearish moves. Traders said the seller dumped the equivalent of a fifth of last week's daily volume within minutes, and while it could have been a fund, there were no specifics.

The precious metal recovered some of its losses, but not before nearing a level watched by some as the 50 percent retracement of a move from its 1999 low to its 2011 high.

Robert Sinche, chief global strategist at Amherst Pierpont Securities, said $1,086.60 per ounce is the 50 percent retracement of the move between the Aug. 27, 1999, low of $252.50 and the Sept. 9, 2011, high of $1,920.70 per ounce. The 1999 level was a 20-year low.