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“I Can’t Deny It – The Outlook For Gold Isn’t Pretty Right Now”
“I Can’t Deny It – The Outlook For Gold Isn’t Pretty Right Now”
by Dominic Frisby
Today we turn our attention to the precious metal that once brought joy and riches to its owners, but now seems to bring nothing but despair and disappointment. I’m talking, of course, about gold.
Dominic Frisby
There’s no point fighting it – gold is in a bear market - Money Week
It’s taken yet another tumble. After a miserable early summer, which saw new lows at $1,080 an ounce, gold enjoyed a pleasant August to October with a nice 10% rally. But it didn’t last writes Dominic Frisby in his just released article for Money Week.
Why it is I’m not sure, but the second half of October rarely seems to be a good time for gold – and so it proved this year. All those late summer gains have now been given back and, once again, gold is flirting with its lows in the $1,080-$1,090 area.
For all the excitement, it was just another ‘dead cat bounce’ – a so-called ‘suckers’ rally’, as the Americans so cruelly put it – in an ongoing bear market.
I’d love to tell you that $1,080 is the low – that this is the mother of all buying opportunities, that you should all max out your credit cards and buy every flake you can possibly get your hands on.
But gold-lover though I may be, that is not what I see next.
Until Monday’s stabilisation, we’d had something like 13 down days in a row, which is extreme, even by the standards of this bear market, so some kind of steadying of the ship is likely.
But the bottom line is that this is a bear market. And the trend is down. Fighting the trend is no more effective than fighting the tide or fighting the wind. You’re better off accepting it for what it is, and going with it.
How far could gold fall?
I still have $1,050 as my target for this year. And I suspect we’ll get there. This target is based on nothing more than price action.
Below is a ten-year chart of gold. I have drawn an amber band in the $1,000 to $1,050 area. On the way up it was a wall of resistance that lasted for almost two years. Let’s hope it is a similarly strong wall of support on the way down.
The question is, which of the two – the downward trend or the wall of support – will prove stronger?
Ten year gold price chart
I’d also draw your attention to that dashed red line I have drawn. This is the 52-week simple moving average – it shows the average price of the previous 52 weeks, the previous year in other words.
In a bull market, it is sloping up. Rallies will often retrace to this line before the next leg up (they did this between 2001 and 2009). Post-2009, the bull market was so strong, rallies did not even retrace that far.
In a bear market however, the opposite happens. It trends down – because prices are getting lower and lower. Bear market rallies – or suckers’ rallies – tend to retrace to it before the next leg down. It marked the point at which the latest rally petered out. It’s a useful long-term indicator.
Sure, it is not declining as steeply as it did in 2013, but it is still declining. Before we can declare “the bear market is dead” and “long live the bull market”, we need to see that line flatten out and then begin to rise. It will happen one day – just not yet.
If that amber zone of support does not hold, then, based on price action alone, the $850 area comes into play, and after that $730. Even in my current bearish frame of mind I’d be surprised to see the latter, but we’ll have to see what happens over the next few months.
One reason to worry about gold
I don’t want to put the wind up you. I know how negative I’m sounding this morning. But here is something that really concerns me about the gold price.
Relative to other commodities – and, please, don’t let’s get into an argument about whether gold is a commodity or not – the gold price is still very strong. It may not feel like it, but it is. This is the chart that every goldbug does not want to see.
It shows the price of gold relative to the price of commodities – as measured by the CRB, the world’s oldest commodities’ futures index – since 1980. When the price is high, that means gold is expensive on a relative basis. When the price is low, gold is cheap.
Gold price relative to commodities
Compared to other commodities, gold is not far off all-time highs. That’s because, of course, commodities – be they oil, natural gas, base metals, softs, grains – have all fallen dramatically in price. Most are at multi-year lows. Gold is ‘only’ down 40%.
For that ratio to come back to its long-term averages – in other words if we are to see some sort of reversion to the mean (and there is no guarantee we will) – either gold needs to come down a lot more, or commodities need to rise.
I’m not sure that, with deflationary forces abounding in the world, commodities are going to rise in price by anything that significant any time soon. I may be wrong, of course. But the environment for them isn’t so great, I’d say.
So there is one reason gold could still have further to fall. It is overvalued on a relative basis [to commodities].
I’m hanging on to my gold hoard
I’m not selling my physical. I’m pretty confident a day will come when I’m mighty glad I own it. I also have a few positions in mining companies that I’m not currently selling – I’ll tell you about those in a future Money Morning. I’m actually pretty excited about a couple of them.
But I’m also sitting quite heavily in cash. And in my trading account I’ve been shorting gold, silver (as I mentioned last week), palladium (as mentioned about a month ago) and various gold mining indices (as a hedge). This has been working well.
I closed out most of my shorts on Monday, in expectation of some kind of respite rally. I’ll check out the action over the next week or so, before deciding what my next move is.
Editor's Note:
Dominic Frisby is one of the more informed analysts on the precious metal markets and this is why we have had him on our webinars. We share his concern about prices in the very short term particularly for those trading markets. However, taking a longer term perspective we see gold and silver as being undervalued at these price levels.
While gold may be overvalued versus the wider commodities complex which have collapsed, arguably it is undervalued versus stocks, bonds, property, art and other markets many of which are near or at all time record highs … floating on a sea of artificial QE induced liquidity.
It is important to note that the current weakness of gold and silver is primarily in dollar and sterling terms. For investors in Canada, Australia, New Zealand and of course the EU - who have seen their currencies depreciate - gold is higher in local currency terms and once again acting as a hedge - see table above.
Still depressed gold prices are providing an opportunity for those seeking to get an allocation to bullion and as we advised on our recent webinar - dollar cost averaging remains prudent.
As ever, it is important to use gold and silver bullion as risk hedging assets and financial insurance in a diversified portfolio.
Read more on the GoldCore.com blog
Must-read guide to international bullion storage:
Download Essential Guide to Gold Storage in Singapore
Download Essential Guide To Storing Gold In Switzerland
DAILY PRICES
Today’s Gold Prices: USD 1088.60, EUR 1013.17 and GBP 718.36 per ounce.
Yesterday’s Gold Prices: USD 1092.50, EUR 1017.23 and GBP 723.50 per ounce.
(LBMA AM)
Gold in 1 year
Gold closed down $2.70 yesterday to finish the day at $1088.70. Silver closed at $14.42, down $0.14. Platinum lost $12 to $898.
IMPORTANT NEWS
Gold rises for 2nd session in a row on technical ‘bounce’ – MarketWatch
China’s industrial production falls to six-month low – The Telegraph
Gold edges up as dollar dips, still near 3-mth low on US rate view – Reuters
Gold Holds Near Three-Month Low as Rates Outlook Buoys Dollar – Bloomberg
U.S. wholesale inventories post largest gain in three months – Reuters
IMPORTANT ANALYSIS
Greek debt deal would encourage mass write-off calls in Spain, claims finance minister – The Telegraph
Portugal Is Potentially A Very Big Deal – Dollarcollapse.com
U.S. banks said to hold $10 trillion of ‘risky’ trades – Gata.org
London’s property market is Britain’s Hunger Games – The Guardian
Why investors are shorting Canada’s housing market – CNBC
Read more News & Commentary on GoldCore.com
Breaking News and Research Here
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...however treasuries pay interest and have very low transaction latencies and costs and zero keeping cost...
<<<
You might want to be careful of the 'treasuries - safe haven' argument if you are a non-US holder.
FWIW, while I think the US dollar will get much stronger, a combination of:
the deflation mentioned above;
too high debt/GDP;
loss of reserve currency status to China;
no desire/ineffectiveness anyway of raising taxes in a recession;
means a very real possibility of 'selective default' to overseas holders.
Of course, 'postponement' of capital and coupon repayments will only be 'temporary'.
With regard to gold:
It got to USD 1,800.
Most bubbles do at least 2/3 down from high (implying 1,800 *(2/3) = 600).
Some bubbles (1929 US crash, 1989/90 Japan) do much more.
PLUS Look at the last big buyers: Not retail (for once), but central banks.
CB's have (1) political pressure from electorate not to sell (2) Possible internal pressure going same way if no marking-to-market (3) zero financing cost (so no cost-of-carry pressure).
So their 'hopium' for the gold price is not offset by normal commercial considerations.
Watson
What the people know and rarely mention is that all this "central bank gold" is actually OUR gold.
It is being pissed away to prop up a failing fiat paradigm. When the memberships to the new international system are doled out will we, the goldless fiat huggers, have a seat?
We all laugh at 'stupid' Venezuela, selling theirs for toilet paper.
What did we get for ours?
Gold and silver are the place to park funds when your interest is Zero and below
You don't get it: the market punters, "players" and bettors (whom government also allows to set "the gold price") are YIELD-DESPERATE. They CRAVE, lust for, and NEED US$-denominated returns: otherwise, they go out of business (eventually!). Think: insurance companies, annuity providers, pension funds, mutual funds, bond funds, hedge funds. (BTW, if economic growth doesn't start up soon, and ZIRP end, they and their business models are toast.)
They will chase ANY "cash flow", bet on ANYTHING going UP, SELL anything going down and they can borrow limitless amounts of paper dollars for free to make those bets...
Of course. Which is why the Fed won't and can't raise interest rates. It would compress their spreads and basically put them out of business. Of course most of the FIRE sector is going to go out of business anyways on account of severe over-capacity, but the Fed will do nothing to accelerate that.
At the moment, delusional Yelen appears to be trying to shake out bond longs so her cronies have long-term assets to buy cheaper.
How seriously can one take this article when the extant central/bullion bank [paper] gold market m-a-n-i-p-u-l-a-t-i-o-n is not even hinted at, much less mentioned.
I think this guy is WGC type disinfo agent, or honey pot.
Yep he ignores the obvious.
Last week there was a massive amount of new open interest on CRIMEX and not one ounce of gold was added to the register inventories. It called naked shorting purely to manipulate.
Meanwhile only banks can take the outflow from GLD. Short paper gold and steal the phyzz cheap. Blatant criminal scam.
Same is true with SLV.
Dec is a big delivery month. Will definitely need more popcorn for this one!
The author of this article is not expressing "opinion". He is simply presenting facts and he is absolutely correct. I am definitely a gold bug, but the author is being refreshingly realistic. I rate this article among the best lately.
I don't know if he's correct or not, but he's:
A) studying the path of price action and trying to profit off of it, not commenting on the causes or propriety of the decline, and
B) citing key facts via sound economic analysis (assessing gold's value in terms of the commodity goods it commands).
I also appreciate KingTut's response above drilling deeper into why commodity prices may be artificially depressed, artificially making gold look expensive vs. commodities. This is the sort of intelligent, honest line of analysis that should be taking place when trying to pick the best times to buy gold vs. hoard cash with which to later buy more gold at lower prices.
It is somewhat odd that an article with this theme is allowed to be associated with Gold Core or reprinted on Zero Hedge. Price is a very long way below that $1,800 price of several years ago. Those forecasts of $2,000 in a few months and $10,000 next year were simply hype for the suckers to keep them buying.
Lately the reports have been of massive buying by China and Russia to support their joint plans for a new currency and new version of a World Bank or IMF. More feeding of the suckers who cannot understand a chart with the price line sloping down to the right.
Rocks, I miss your Hindenberg commentary. Wish you would restart that.
Hells yeah cheap gold, more money for hookers and blow!
Gold pessimism approaching another high. All we need is for the last few holdouts to throw in their towels and declare it dead. A leg down to the low $1000's should do it.
Agreed. Pessimism often spikes just before a bottom.
If one believes that gold is still the most important part of the international monetary system then things could be viewed as looking good.
The amount of gold in the banking system available to satisfy buyers is dwindling. Large countires continue to add to their central bank reserves. When buyers can't be satisfied then something must change. That change wil likely come in the price of gold. Real physical buyers can't be happy with mere paper promises, they want real gold. Also as central bank reserves lose value there could be a push to revalue gold upward to help the balance sheet.
These changes could come in an instant. The BIS or a large central bank could anounce a buying program. It would probably only take a few thousand tons (less than a couple of hundred billion dollars) to severely raise the marginal price of gold to levels that would shock even gold bugs. GLD's inventory levels are below what they were 7 years ago. Since the banks can get access to this gold it serves as a private stash for them....and the stash is shrinking.
The end could come in many ways but a problem in the gold market is definitely up there right with a derivative 'glitch'.
Sweet! I love a good sale. Bring on $900! Keep stackin'!!
I'd just like the answer to one question:
Even though thousands of tonnes of gold (metal) are bought and sold worldwide yearly, why is it the only time "the gold price" moves at all is from 9-4 EST when US markets are open? And when hardly an ounce of actual metal changes hands?
For the sixteen hours US "markets" are not open "the gold price" does absolutely NOTHING.
Actually the aftermarkets that trade are much more easily manipulated than the regular hours Crimex. 2 am is a great time for the Raiders, and the after market from 1:30-5:00 pm EST lately has been almost doubling or more whatever has gone on in the Comex on an average day. Less volume has its priviledges when it comes to manipulation. That said its been pretty much a 24 hour affair as of late but the 6:00 pm market EST has typically been up last few weeks until the AM markets get going. I'm as frustrated as everyone else but am still gritting my teeth and buying a couple times a month. Not going to stop as long as prices are below the costs of production.
BTW I have appreciated your picture for years can you tell me who it is....very nice
Brigitte Bardot
You're quite correct...the four or five hours before the Comex playpen opens have been very revealing over the last two weeks, haven't they? Regular as clockwork...DOWN WE GO.
The photo...? Is (was) Brigitte Bardot, ca. 1968...and anyone THAT anti-Eurocracy cannot be all that bad...
Gold? IMO. "In a time of universal deceit, one word of truth resounds as a pistol shot in the night"
"The photo...? Is (was) Brigitte Bardot, ca. 1968.."
same picture in 1024x768:
http://ri.pinger.pl/pgr327/189d3f4100144d4a52d43725/049.jpg
It's a global market and XAU is 10 times bigger than comex and price comes from multiple souces all referring to XAU. No conspiracy.
and 100 times bigger than GLD.