“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” [15]

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 [16].

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.