GOLD HEADING TO 1300
This article also featured on Forbes
A simple answer to a question that I have received with increasing frequency over the weekend. On August 21st, I wrote an article entitled, "A Note To Gold and Silver Bulls: Your Gig Is Up". In the article I outlined the reasons I believed gold and silver had no catalysts, other than developed economy and governmental Armageddon, to drive the prices forward.
Looking at gold following Friday's historic plunge, it is now apparent that gold is technically broken. Rallies from this point forward will be sold with increasing frequency. A historic move down in an asset class that has received an abundant amount of publicity - whether on the radio, through newsletters or at the corner "Cash 4 Gold" stores that are popping up everywhere - does not simply end with a one week spike down, followed by a move to new highs.
What Friday marked was a beginning in the trend down rather than an end. The mission of gold has now switched from rinsing the pessimists to ruining the optimists. It's a process that will take months, not weeks. It's a process that will have gold heading to 1300 before sentiment shifts to a point where the calibration between buyers and sellers becomes fine tuned sufficiently to support a multi-month attempt at another run to the upside.
From a fundamental standpoint gold continues to lack catalysts to put together a sustained move to the upside:
- The inflation trade: Finished. It has now become a deflation trade. Emerging markets are underperforming. The US Dollar is in full bull mode. The commodity sector in general is being reshaped as a result. Gold is a commodity with rabid groupies that have nude posters of the metal posing in a safe deposit box. Because of this fact, gold is seen as being immune from the rest of the lowly commodity sector. Once emotions and obsession are allowed to separate themselves from reality, it will become clear that gold is not immune and is in fact more vulnerable due to the emotion surrounding the commodity.
- The fear trade: One of the primary reasons gold was a screaming short above 1800 per ounce was due to the fact that it wasn't responding to the consistent anticipation of Europe dissolving into a sub-continent of China. We're at a point currently where the anticipation of the dissolution of developed economies and governments is at a peak. Yet gold just had a historic week to the downside. Short of Europe and the United States plunging into the dark ages in the coming weeks, there is little that can propel gold via any type of fear trade.
- The bearish US Dollar trade: Goes hand in hand with the inflation trade. In fact, a shift in the US Dollar changes the foundational support and backbone for all established relationships between assets classes that are perceived as true. I outlined this in my article from September 18th with the following:
Commodities have faded to the background instead of asserting their role as a leader of the current rally. The new uptrend in the US Dollar dramatically shifts the landscape of established relationships between the various asset classes. I would like to see commodities rally alongside equities as this what I have grown comfortable with over the past couple of years. However, it is important to keep an open mind and realize that the US Dollar is THE foundational support for the established patterns that exert themselves in the macro world. A change in trend for the US Dollar will therefore shift the patterns into temporarily unrecognizable mush. Commodities may fall into this mush for the time being.
Thinking that gold is immune from this dynamic is both naive and dangerous. Again, it is in fact more susceptible, as this past week showed, due to the fact that an abundance of emotions are involved in the gold investment thesis amongst the army of gold investors that currently exist.
The past catalyst that drove gold to a near two thousand dollar per ounce price tag will not have any influence until the current cycle of investors is rinsed from the picture. It really is as simple that. Once a complete rinse of the pervasive bullish sentiment surrounding gold takes place - being instead replaced by a pervasive sense of doubt and skepticism - only then will the fundamental realities of the gold trade be allowed to be perceived as the reality of that moment. For the time being, however, the fundamental realities of the gold trade are false.
