Thursday 22 December 2011

What Next For Gold?

The stock markets are on auto pilot. They are grinding higher despite all the doubts and walls of worry. But that is the plan for the next nine days. There may be a small correction in between just to shake out the weak hands and correct the overbought conditions but the ship is on course. So lets talk today about something else. ”Gold”.

There was a time when we could say for sure that USD is on one side and everything else on the other. That means when USD would be up, all commodities, which includes oil, precious metal  and equities, would go down and vice versa. Which also mean that if Equities would go up, it would be somewhat reasonable to expect that gold would also go up. Of course the degree of up or down would vary. But of late that correlation is breaking down.

Spot gold prices had a freefall on December 12. But it is still within the long term rising trend line as you can see from the GLD chart.

However, it is now showing some signs of weakness. The following chart shows the futures for various months in CME. This is when the SPX is on fire and dollar is not doing much.

There is red everywhere as far as eyes can see.

Let us look at the daily chart of the gold futures for the month of February 2012.

After the massive correction it reached an oversold condition and had a dead cat bounce for few days. And now that momentum has gone out. We can see that loss of momentum in the GLD chart as well where the stochastic RSI is turning down.

Before the correction, I had discussed about the negative gold rate and I did short “gold”. Made some money shorting it and then closed the short position. You can see it here; .  When the Santa rally started, I went long precious metal again. Instead of gold I purchased call option on its more emotional and temperamentally unstable cousin, silver, SLV.  Then I repositioned on December 20th and December 21st. During the repositioning I went out of precious metal altogether. And my reasoning, logic and indicators are proving to be correct so far.

While physical demand was encouraging in some markets, India, one of the biggest markets for spot gold is not showing much enthusiasm. For one, Indian currency is depreciating quickly vis-à-vis US dollar, making gold more expensive for average consumers in India.  Next to India, people are trying to guess the demand out of China. But with home prices down and stock market not doing well, affluent consumers in China may not be feeling very flush either.

I think it is time to be cautious on precious metal sector. If GLD breaks down below $153 in the coming week, I would be very worried. Or maybe I would short gold and silver again. The following paragraph is from Jon Nadler of Kitco. Please do not send me hate mails. The opinions are his, not mine. I just keep an open mind. So do not shoot the messenger.

Investment Protection Solutions’ Dominick Paoloni, who had held 10% of his clients’ funds in gold, sold 90% of those positions off last week. Albeit in the bigger scheme of things the $8.5 million liquidation by IPS is but a drop in the proverbial gold market bucket, the possible developing trend ought to keep some up at night wondering what it is that such money managers see out there.

Perhaps they are becoming convinced that gold is less appealing amid developing deflationary conditions, perhaps they are tying its performance to the beleaguered euro, perhaps they have come to realize that gold’s inability to overcome $2K amid perfect ‘storm’ conditions this fall means that something has changed in the market’s psychology.

Indeed, consider the fact that the euro has come under an existential threat, and that certain governments are running up debt tabs faster than you can say “bailout!” Gold has not responded ‘properly’ to such alarming news or to the fact that there has been a trend by a few central banks to buy the metal despite record or near-record values. If the situation appears puzzling to some, then they ought to look no further than the US dollar and its supposedly impossible ‘revival’ lately. This is because if there is one asset that the European crisis has indeed bolstered (and then some) then that would be the supposedly moribund greenback. Given the divergent paths that gold and the dollar have been on since the Fed pushed rates to near zero, the current state of affairs should not surprise too many (yet, it does, and to a degree that is astounding).

Veteran market observer and publisher of the Value View Gold Report, Ned Schmidt notes in his latest missive to subscribers that “denial has been rampant in the markets for some time.” He points to silver as an example of a metal which “has been in a bear market since April, though some continue to deny that reality.” Mr. Schmidt diagnoses the current market paradigm as the “withdrawal of inflated expectations” (the double-entendre of ‘inflated’ should be noted here). He calls the previous forecasts for 2.5, 5, and 10K gold just as “irresponsible” as those that had promised is $100 per ounce silver to be a concrete reality by now.

According to one market forecasting tool that Mr. Schmidt includes in his latest analysis, there is additional pain to come in the precious metals’ space. However, noting that “markets do not go down forever” either, Mr. Schmidt goes along with the projection that gold might yet make a run to new highs, perhaps in late 2014/ early 2015. However, “that high may not be significantly above the highs already achieved” concludes Mr. Schmidt. As for the current or near-term bottom in gold, the author of the VVGR does not expect that to be put into place until about April of 2012 and the figure could be as low as $1,110 “if no events positive for the price occur.

I am not sure whether we will see gold go down that far but if it does, at $ 1100/ounce, it sure will be a super value buy. I think long term Gold will reach $ 2000 or even cross it. But I do not want to be invested in gold now and see the price go down 30% from here. That would be such a terrible waste of the opportunity value of money. Remember those poor souls who went long gold in 1980. They had to wait for over 20 years to see their money back.

Did I hear someone just said;” This time is different”? Ya, yes, of-course!

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  1. Nicely written. I hope you realise those who bought gold in 1980 are probably still underwater adjusted for inflation. Look up tution costs or gasoline costs now vs 1980 and it will become painfully apparent. That said the magnitude of debt is beyond comprehension. What cannot be paid will not be paid. It will be interesting to see if politicians can swallow deflation for long.
    How long before Japan says screw it and starts printing outright. How would that translate into gold price in yen? Interesting years ahead.

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