Can 1976 Give Us Insight
Into Gold’s Price Behavior?
By Przemyslaw Radomski, CFA
The Wall Street
ran a piece delineating the two sides of
the gold debate giving five reasons why the gold bulls are right and five
reasons why the gold bears are right.
Here is the
5-point gold “Bull” case:
Fears that Cyprus may sell its gold
The exuberance in the equities market
will fade as soon as there is a major correction and investors will turn to
The monsoon season in India will end,
the marriage season will begin and with it the traditional gold buying frenzy
which will contribute to long-term demand.
Banks in India count gold as part of
the bank’s liquid ratio. As the asset base of banks will grow, so will demand
Physical demand for gold is high.
We added a few
more reasons that they didn’t think of.
Central banks in various countries are
buying the dollar to lower the value of their own currencies. That’s a
Central banks are still net buyers of
gold and we don’t see any signs of abatement.
Central banks are flooding more and
more fiat money into the system. The more they do, the more it loses its value.
Gold cannot be printed and there is a limited amount that can be mined each
Gold is money.
Owning gold isn’t necessarily about
buying low and selling high. Sometimes, it is about owning a long-term insurance
We don’t see a balanced budget in
sight. We are not buying the economic recovery and the “recession is over”
Here are the
five-point “Bear” case.
The U.S. Fed could cut the stimulus
sooner than later.
Investor sentiment for gold is poor,
to say the least.
The U.S. dollar is strong which
dampens gold’s appeal for other currency holders.
Indian gold demand faces risks in the
near term before the wedding season begins.
There could be further liquidations of
first point, comments from Ben Bernanke to Congress last week suggested the
central bank may begin tapering its bond-buying program in coming months. On
Wednesday morning, stocks had rallied after the release of Bernanke’s prepared
remarks, in which he said that
premature tightening in policy could strangle the economic
recovery. However, in the question-and-answer session,
Bernanke said the Fed could slow the pace of asset purchases in the “next few
meetings.” That comment sent the markets gyrating downwards making for a
volatile and interesting day for precious metals. The sector moved slightly
higher, then soared, stayed high for several minutes and then crashed with
stocks following more or less the same path. The USD Index did the opposite. The
Fed’s bond-buying program is one of the major factors underpinning the stock
rally. There is no denying that there was a time when it directly helped gold.
In Thursday early trading gold bounced back as the dollar fell sharply and
European shares dropped after weak Chinese factory activity added to concerns
about a delayed recovery. According to the Market Watch report, Thursday saw
safe haven gold buying, something the yellow metal has not experienced in a
manufacturing data issued Thursday came in weaker than expected, which is
bearish for commodities. The fact that gold rallied in the face of this news
suggests there was “solid safe-haven demand for gold Thursday,” according to
savaging of the gold price no doubt has left new gold investors shaken. But the
reasons that led to the bull market in gold have not changed. If anything they
are stronger than ever. Unless governments suddenly start balancing budgets, or
unless central bankers suddenly stop printing money, there is definitely a good
case for those who side with the gold bulls. But as of now, Japan and the US
have embarked on a record quantitative easing policy. The speculators have been
shaken out and gold has moved into stronger hands who have been buying up the
physical kind to keep and to hold.
We think that the
gold bull market will resume its upward trajectory shortly. It is, however,
vulnerable to further weakness in the short run.
gold’s fundamentals, let’s move on to today’s chart section to see how the
technical picture of the yellow metal looks like. We will start with the very
long-term chart (charts courtesy by
Gold prices moved
higher last week but from the long-term perspective the rally is really not
significant. It is barely visible here as it seems to simply be the expected
period of consolidation which we have written about in the May 20 Market Alert
we sent to our subscribers:
there was a pullback in gold before it moved below the initial low. We could see
this type of action shortly. If silver and mining stocks consolidate below their
previous lows it will simply serve as a confirmation of the breakdown and an
indication of further declines.
turning point is now quite close and it
still seems that a bottom will be formed relatively soon but it is not
necessarily in just yet. The reverse parabola trading
pattern remains, so the possibility of a
sharp drop in price is still in place for the yellow metal. The next support
level, the 38.2% Fibonacci retracement level is around $1,285 and could be close
to the level where the bottom finally forms, but a sharp intra-day or intra-week
drop below it, would not surprise us either.
Now let us have a
look at two important ratios that show gold’s performance relative to other
important groups of assets. The first one is the Dow to gold ratio chart which
is a proxy for a ‘stocks to gold’ ratio.
changed in this ratio last week and it seems that the comments we made in
last week’s essay
Here, we saw an
important breakout above the declining long-term resistance line. This has
bearish implications for gold. (…) The next resistance level for this ratio is
at 12.5 and with it currently at 11, declines in gold will surely be needed in
addition to higher stock prices in order for the ratio to move this much higher
(it seems that a move higher in the general stock market will not be enough for
the ratio to move that high soon). The implications are, of course, bearish.
important ratio that we’d like to discuss today is the gold to bonds ratio.
Let’s have a look then.
In this another
important ratio for gold, some strength was seen last week. Overall, however,
this is not enough to change the outlook at this time and the short-term trend
remains down. The next support line is the 61.8%
Fibonacci retracement level, at 3.79, more
than one-half a point lower than Thursday’s closing ratio level of 4.31. This is
also equal to the level of the 2008 bottoms in terms of the closing prices.
up, last week a pause was seen in the decline around
the level of gold’s previous bottom. This is what we expected as it is very
similar to what was seen way back in 1976. History does seem to rhyme here and
since back then a bigger decline followed this type of move, we expect to see
the same once again.
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Thank you for reading.
Have a great and profitable week!
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All essays, research and information found above represent
analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits'
associates only. As such, it may prove wrong and be a subject to change without
notice. Opinions and analyses were based on data available to authors of
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above is based on careful research and sources that are believed to be accurate,
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