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Why Gold Has Further To Fall
Though a gold bull, I called for a correction late last year and believe more downside is likely from here. There are three reasons to be cautious on the near-term outlook: 1) gold has historically performed weakest during the March-July months 2) sentiment towards gold has turned somewhat, yet there's been little capitulation, particularly from the world's central banks 3) the current correction has been relatively mild - remember that gold slid 47% during its 1970s bull market before peaking in 1980. It makes for reasonable odds that gold will dip below US$1500/oz in the first half of this year. If that happens, it will be a major buying opportunity as there remains a strong case that the bull market in gold is far from finished.
Overdue correction
In December last year, I suggested that the odds favoured a more serious decline in the gold price. After 12 straight years of annual gains, a sharp correction was overdue:
"The recent correction isn't as severe as the 2008 correction of 29% of the 2006 correction of 22%. Corrections of +30% during bull markets are more common than not.
During the 1982-2000 U.S. bull market, the U.S. market had many corrections along the way, including a 34% correction in 1987. It didn't stop that bull market. And gold itself corrected 47% from 1974-1976 before rising more than 8x to US$887/oz in 1980.
The point is that the current correction isn't unusual and isn't severe. And a more serious correction in gold at some point, perhaps now, could happen before the final phase of the bull market begins."
I went on to cite a few warning signs indicating there might be an imminent correction. At that time, speculation in gold had reached extreme levels. At one point in the fourth quarter, the number of call options - betting on a rising gold price - outnumbered the number of put options - betting on the opposite - by 2:1.
In addition, the accumulation of gold by the world's central banks warranted caution in my view. Traditionally, central banks had been terrible investors. In effect, those banks buying gold was a contrarian signal.
A confluence of negative events
Since that time, there have been a number of things which have contributed to pushing the gold price lower. There's been a growing view that the U.S. economy is recovering and rising real rates are on the way. This would be bearish for gold, which has benefited from negative real interest rates - low yields on alternative asset classes makes gold more attractive. I've taken issue with this view on several occasions but, nevertheless, it has been a factor in the falling gold price.
Also, the U.S. Federal Reserve has signalled that it may consider slowing asset purchases as worries emerge over fuelling asset bubbles. Obviously, slowing central bank balance sheet expansion would be negative for gold. How anyone believes that the Fed will reduce money printing soon is beyond me, but it's a view that's being taken seriously nonetheless.
Receiving much less coverage has been the fact that gold demand has been falling. In 2012, gold demand fell 4%, despite central bank gold purchases reaching 48-year highs. Gold purchases by the world's largest gold consumer, India, fell 12% as a rising rupee and higher import tariffs took their toll.
Hat tip: Frank Holmes, U.S. Global Investors
Gold also breached several key technical levels at US$1,600/oz. It entered a so-called death cross in February, where the 50-day moving average price crossed the 200-day moving average. Pity the death cross has no predictive value whatsoever, as pointed out by asset manager and blogger, Barry Ritholtz!
Lastly, speculators who had been piling into gold last year started to trim their holdings or head for the exits. For instance, billionaire George Soros cut his stake in GLD, the U.S.-traded gold ETF.
Gold below US$1,500/oz?
There are good grounds to think that gold may have further to fall. March has traditionally been the worst performing month for gold. The second quarter isn't usually much better. The March-July period coincides with weak seasonal demand for gold. Demand picks up in the second half of year in the lead-up to India's Hindu festival of lights, Diwali.
Also, gold is very close to breaching key technical support levels. If it goes through the May 2012 lows of US$1,536/oz, it would likely trigger a wave of selling. The next support level beyond that is US$1,400/oz.
While sentiment among gold speculators has turned more cautious, there hasn't been the outright capitulation that you usually see during serious corrections. Breaching US$1,536/oz levels could trigger this capitulation.
And as mentioned previously, several corrections of +30% during bull markets are perfectly normal. Gold's steepest decline during this bull market has been 29% during 2008. It would hardly be surprising to see a sharper fall. If gold was to correct as much as it did during the 1970s bull market, it would fall close to US$1,000/oz. That said, I don't expect it to fall to those levels during this correction.
Remain long-term bullish
If I'm right about a further correction in the price of gold, the coming months will be a test for even the most ardent gold proponents. It's worth keeping in mind though that the current bull market in gold is likely far from over, for the following reasons:
- Commodity bull markets have lasted an average 18 years over the past century; the shortest bull market was 14 years. We're into the 13th year of the current gold bull market.
- Bull markets always end with parabolic spikes. For instance, gold went up 4x in 13 months during 1979-1980 and the Nasdaq climbed 171% in 17 months before peaking in January 2000. Gold hasn't had this spike this time around.
- Retail investors have minute exposure to gold. During bull markets, the general public invariably gets enamoured with assets whose prices are rising. We just haven't seen this kind of enthusiasm towards gold.
- More fundamentally, gold remains the best hedge against currency wars. My base case remains that the extraordinary money printing from the world's central banks is unlikely to end well. Historical experience says so. I expect the experiment with money printing will end when sovereign bonds are no longer considered safe havens and government bond yields spike as a consequence. It's then that quantitative easing and the current fiat monetary system will be discredited. And that gold will once again be viewed as the ultimate safe haven.
Though short-term caution is warranted, I eventually see gold testing, and possibly going well beyond, its real all-time high near US$2,400/oz. If you're looking for alternative ways to play precious metals, silver should outperform gold from here given the current gold to silver ratio is 56:1 compared with the 16:1 long-term average.
This post was originally published at Asia Confidential: http://asiaconf.com
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This article disqualifies itself by not distinguishing between paper and physical gold "prices".
Our distinguished visitor has arrived at his conclusions through identifying gold as a 'commodity.' Since this description is erroneous, it follows that his conclusions will be stamped with the same mark.
That does not, of course, prevent him from making scads of paper profits from trading the yellow metal as a commodity...it's just that the value of those profits will go to near zero value by or about Labor Day 2013!*
*based on my seasonally adjusted bull-sniffer pattern analysis(free to try! Register here! etc etc.)
I have been trading gold since the day Mayor Beame clipped the ribbon to start trading gold in August 1974. Commodities always go back to where the runup started from ,in this case $1200.00/0z. I expect that level to be reached by Memorial Day 2013. (based on seasonal bear gold market seasonals)
Coffee is the commodity to buy. 1.47 stop close only. Minimum target 4.25,within 9 months,and above 8.20 within 2 years.
Via what arbitrary process did you decide that the current gold runup began at $1200?
Why not go back to $255 in 2001, or $35 in 1971?
I have a real problem with those who use nominally-priced charts over multi-year periods, as they are all but meaningless until the ongoing depreciation of the currency is taken into account.
There is no 16:1 long-term average. First, mining techniques & yields have changed & will continue to change what ratio comes out. Second, market conditions always change which changes the need of gold vs silver. Third, the 16:1 ratio enforced by fiat decree in several royal kingdoms of the past is NOT a measure of any market, need, benefit to society, industry, etc., and has no reason to happen ever again.
Finally the plunge we've just had from 1900 and volatility matches up well with 2006-2007 and so we're due for the giant rise that came - http://flic.kr/p/dQ9ops - this is the bottom and it's not a smart plan to wait.
Think of all those suckers waiting to buy gold at 500 and at 700. They're still waiting, aren't they?
wait...you're saying, sell my physical gold, at spot, now? into a broken market?
eeeh I'll wait it out, thanks.
those still in paper gold must have balls of steel LOL
I see the prolonged flat period we have had since the 2011 top, along with the recent decline, as equivalent to a 30+% correction. Given how much money has been printed since then, and how much more one can expect to be printed, staying still is equivalent to falling behind. I don't see gold below 1500.
First of all, I switched from AU to AG back in 2009 (and I am 75% into PM) - so in that respect I agree with the final paragraph of the article. That said - Yes, maybe PM prices will go down another 20% before we see the inevitable economic colapse. But with accelerating currency wars and all the money printing going on (QE that CANNOT stop without directly triggering the colapse) - WE KNOW that the coming currency crisis is just a matter of time, it could be anyday, it could be tommorow... Are you willing to take a chance that that eventful final day (when it will be too late to get in) finds you waiting for that lowpoint in the price of PM´s? To each his own, but I for one sleep alot easier knowning that when that day finally arrives - I´ll be ready. I dont worry about the price going down, in fact I´m much happier when it does so that I can buy more - everytime it goes up hard I worry that ¨this is it!¨. I appreciate and am even thankful for TPTB´s obvious manipulation to control the upside, it gives me more time to aquire more silver (and platinum lately). People need to stop rooting for PM´s to go through the roof, because the day that happens will mean that the world as we know it will be no more. Enjoy what life has to offer now (while you stock up on physical PM´s) - one day many of the comforts we have available may be hard to come by even for those of us that invested wisely. Stop worrying so much and enjoy the show.
Whenever anyone suggests that the current trends in gold are indicative of a typical "bull market", and predicts a typical and inevitable "blow-off top" in gold, I am always inclined to rhetorically ask them when (and more pertinently, if) the "blow-off top" occurred during the Great Zimbabwean Gold Bull Market of 2000-2009?
Charts in nominal fiat currency prices can be very misleading.
Gold has been in a decline sense October 2012. Trend signal changes have been registered by the Mercantile, Money Manager, And Non-Report categories. The legacy categories of Commercial and Large Speculators have also given trend change signals. Forecast models are indicating an up move.
https://docs.google.com/file/d/0B16Nxp5pgJBzaE5pNGNFN1FIVFE/edit?usp=sharing
www.CommitmentsOfTradersAnalytics.com
here's my forecast models, also up-moves
goldpricemodel 2013 roc 52-week
goldpricemodel 2013 projection
2013 goldpricemodel 277 week ROC 04 price mapping
2013 silver price model 277 week ROC from gold price projection
I believe this is very good advice.
However, if the biblically prophesied Iran War starts.
Buy all the Gold you can, as fast as you can, do not delay!
Why is there always somebody willing to try and predict the future?
I see gold going up and down in the coming months. Can I haz blue ribbon now?