Ongoing Correction

Last week, gold's rebound was cut short after Goldman Sachs and Morgan Stanley concurrently issued bearish reports on the gold price, which were widely trumpeted in the press (although it is such an allegedly unimportant asset class, gold gets an unusual amount of attention in the financial media – and there is almost always a bearish spin associated with the reportage. This is largely independent of whether the price is in trending up or down). It is of course de rigeur on Wall Street to hate gold, unless it is really overpriced, in which case it gets a little love out of sheer necessity.

As Steve Saville recently pointed out, it is not possible to assert that Goldman Sachs' analysts have any special insights into the future of the gold price. Apparently they raised their gold price targets more than once when the price was just about to suffer its biggest correction of the entire bull market. In other words, they loved gold when it was trading at $1,700 and $1,800, but they hate it at $1,300. Not that this is a big surprise, but those trading on the grounds that GS issues some arbitrary price target (whether higher or lower) should perhaps check their premises.

Saville also mentioned that the analysis offered by GS was at least correct in its basic assumptions (meaning, with respect to gold price drivers), as the forecast was based on the idea that the US economy will (once again) 'strengthen in the second half'. Every year, analysts engage in this 'prosperity is just around the corner' ritual, which is fatally reminiscent of the Harvard Economic Society and Herbert Hoover in the 1930s. However, we agree that if the big if in this 'if-then' proposition were to come true, it would be a bearish development for gold, and definitely more important than how much gold is moving from A to B, a point stressed far too often by many gold bulls (such as gold moving from COMEX warehouses to some other warehouses elsewhere in the world).


In fact, as we have previously pointed out, it is actually erroneous to regard declining COMEX inventories as a bullish datum, mainly because they never have been one in the past. On the contrary, these inventories tend to rise during bullish phases and decline during bearish ones, so gold bulls should actually root for rising inventories. They are evidently a coincident signal of speculative and investor demand for gold.

Regardless though of why gold declined recently, in the wake of this decline a few ugly chart pictures have been painted. Probably the bottoming process is simply a mirror image of the topping process, which likewise took its sweet time. Ugly as the charts look, a few small divergences have recently emerged. Whether that will be meaningful remains to be seen, but at least we should soon know:


GDXJ, GDX, Gold, Silver

GDXJ, GDX, gold and silver. Divergences have formed at the recent lows – click to enlarge.


Gold is meanwhile at or near a region of support:


Gold, cash, daily

Cash gold: close to short term support – click to enlarge.


Sentiment Remains Stuck in the Dumps

Looking at sentiment as expressed by Rydex precious metals assets and cash flows, we get a sense where the biotech sector will eventually end up (since both the biotech and the gold sector at one point represented close to 35% of all bullish Rydex assets – in fact, the enthusiasm for biotech was even more pronounced near the recent peak). Gold stocks are barely clinging to the 5% mark today:


Rydex pm fundSentiment on the gold sector remains as depressed as it ever gets in terms of the Rydex precious metals fund. These are levels last seen in 2000 – click to enlarge.


The Even Uglier US Dollar

As bad as gold looks right now, it is at least still slightly above its (recently rising) 200 day moving average and the 50 and 200 day averages have just had a theoretically bullish crossover (unfortunately the 'golden cross' doesn't exactly have very convincing statistics as a bullish indicator). Still, none of this applies to the dollar index, which is all the more remarkable as numerous emerging market and commodity currencies have been bushwhacked over the past year or so, along with the yen. The dollar is stuck below both its 50 and 200 day moving averages, both of which are declining to boot. The reason for this dismal performance it that the euro has been the by far strongest major currency, and the euro represents the biggest component in the dollar index:


USDThe US dollar index: the more often the shelf of support at the 79-79.50 level gets tested, the more likely it becomes that it will eventually break – click to enlarge.


In other words, if gold looks bad, the dollar looks even worse. Keep in mind that the Merrill Lynch fund manager survey found a record 83% of fund managers to be bullish on the dollar last July. This is historically a very reliable long term bearish signal. Conversely, a large bearish consensus (above  70%) can bring about rallies lasting a decade – as has happened with the yen for example. Let us not forget, even though the pace of money printing is slowing down now, the dollar money supply has grown by multiples of the euro and yen money supply since 2008. This relative pace of monetary inflation is by far the most important long term factor in relative currency valuation.



Gold bulls will probably have to be patient – we previously discussed how long it took for a number of other widely despised sectors to bottom out, and how much volatility was associated with the process. Coal stocks (another sector that has been decimated) are still struggling as well, but have lately perked up a bit.

If the choice is between buying a sector that has already lost 70% from its peak and is widely hated, or one that has gone up 100ds of percent and is loved by everyone, history suggests that one will almost certainly fare better by buying the cheap stuff no-one wants.




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4 Responses to “Gold Looks Ugly, but the Dollar Looks Uglier”

  • matslinger:

    The multitude of tools use separately or in conjunction almost always involve FOREX manipulation.
    Two weeks ago the USDX fell deep into 79 territory elevating gold….then, on Monday open the
    Bolivar was annihilated by 88%, elevating USDX above 80. The very next day food rationing was
    announced in Venezuela, and gold began to fall again as the dollar rose.

    I’ve been watching the USDX regulator control gold since 2002, only then, just a few tenths of a point
    sent it crashing for a month or more….now, it takes a whole point just to keep Gold in
    it’s cage for only a week.

  • ManAboutDallas:

    But you know what ? The “smash jobs” are having less and less effect, and this has been so since 12-31-2013. Oh, they’re still trying, of course. But watch carefully. Since 12-31-2013, every attempted “smash job” has been met with the appearance of buying support coming in and arresting the decline. ( would that the “arrests” could be real, but I digress ) It’s very subtle, but is there, nonetheless. I’ve come to call this “crew”, whomever they are, the “Backstop Boyz” because they’re clearly stepping up and back-stopping these attempted “smash jobs” whenever the CrimNakes try to perpetrate one. The strategy and tactics of the Backstop Boyz have the fingerprints of Sun Tzu all over them, so The Usual Suspect here is obvious. It also tells me we’re closer than many of us imagine to the day China announces to the World that the Yuan is, henceforth, going to be backed by some percentage of gold. The Long Night is nearly over.

  • No6:

    Gold dumps in overnight trading have resumed, this with coordinated bearish forcasts from the usual suspects is telling me that the financial elite want to break Golds resistance at $1180 before reversing any course on QE.

    To protect the Dollar the US will simply ramp up tensions around the globe.

  • Kreditanstalt:

    “The USD gold price” is not the main thing being manipulated.

    Right now I am watching the usual (Pacific Standard Time) afternoon whittling down of that price. We started at US$1290 an now have reached $1286.50 at twenty-five or 50 cents a change… Starts 30 minutes to an hour after markets close and continues relentlessly, slowly and perniciously until about 7PM PST. (This would be evening Eastern time.) This happens day after day, always at the same time, and has done for months or years.

    The purpose and effect of this -and the well-documented wee hours low-volume takedowns – is not only to reduce the dollar price but to change market expectations.

    Daytime market participants are greeted at opening with a new, lower price and set their own expectations and assumptions about demand FROM that price. Down, down, down it goes: these days, pundits seem to feel that @US$1330 would equate to “gold soaring”, forgetting that some time ago there were very valid fundamental reasons why US$1800 was considered a BARGAIN…

    Manipulation consists not only of the breaking and bending of rules. It’s not only the London fix, either…the very STRUCTURE of the Comex, which permits endless paper games, must be changed. It won’t, because the governments and regulators are complicit in the present structure.

    This game will go on as long as unbacked paper contracts are permitted and will only end when the next panic into physical bullion erupts. No certainty given the manipulation: gold has become “the dog that didn’t bark”.

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