In the not-so-distant past arguing that precious metals prices were setup to fall generally elicited a response which was not real pleasant. In fact, during gold’s infamous bull market rally on several occasions I called for pullbacks which regardless of the accuracy of my call generated hate mail that seemingly never ended.
Fast forward to the present and hardcore gold bugs remain transfixed on the idea that precious metals must rise. The gold bull market has ended, at least for now and those still holding the bag are looking at large losses from the all time highs set back in 2011.
These same gold bugs will cite a litany of reasons why gold should be moving higher from the unprecedented printing of money by global central banks to the deficit spending and eventual fiscal day of reckoning facing most Western nations. I do not disagree with the gold bugs that in the long run gold prices will rally above the all time highs, but in the short to intermediate term there are several forces which have the potential to drive gold prices lower.
Gold prices cannot rise continually,regardless of the macro-economic backdrop. Nothing, not even Apple Computer (AAPL) or Priceline.com (PCLN) will rise forever. Eventually prices will come back down to earth and revert to the long term mean. It has happened in gold and it will happen to Apple Computer and Priceline.com at some point in the future, it is simply a matter of time.
Before I discuss my reasoning as to why gold and silver are likely to pullback in the intermediate term, I need to remind readers that I remain long-term bullish of precious metals. While the long-term remains bright, the short-term is especially murky and dark.
The first primary concern for gold bugs should be the price behavior of the U.S. Dollar Index recently. The Dollar has rallied sharply higher after carving out a higher low on the daily chart (bullish). The Dollar is on the verge of breaking out above a major descending trendline on the daily chart. Once that breakout to the upside has occurred it will become likely that the recent highs will be tested and possibly taken out. The daily chart of the Dollar Index is shown below.
Dollar Index Daily Chart
The U.S. Dollar’s price action shown above is not indicative of bearish expectations. In fact, I would argue that the Dollar is, and likely will remain in a bull market in the short and intermediate time frames. However, it is important to recognize that strong periods of volatility will persist as Ben Bernanke and the Federal Reserve will continue to try to break the Dollar’s rally as it tries to grind higher.
The Federal Reserve hates deflation, and a stronger Dollar will push risk assets like equities lower and right now that is not part of the Federal Reserve’s election playbook. QE III will likely be announced at some point in the future as an attempt to break the Dollar’s rally and to put a floor underneath stock prices.
The Federal Reserve has used QE I and QE II to help prevent economic disaster. Recently “Operation Twist” has also been used to increase liquidity while keeping the bullish game going. Low interest rates and additional easing adjustments have staved off disaster before and they will likely be utilized again by the Federal Reserve.
Ultimately the free market and cycles will exert their will and the Federal Reserve will be left helpless. The day where monetary easing has no major impact is coming, but we are not quite there just yet.
In addition to the strength in the Dollar Index, the gold miners have been under major selling pressure. In fact, the gold miners have recently broken down out of a major consolidation zone that will likely lead to lower prices in the near term.
Unless gold miners can regain the breakdown level on a major reversal this coming week, the most we can hope for is a backtest of the support trendline sometime in the near future once the miner’s become significantly oversold. The weakness in the miners is just another example as to why lower prices for gold appear to be likely in the short to intermediate time frames. The weekly chart of the gold miners ETF is shown below.
Gold Miner’s (GDX) Weekly Chart
The gold miners are likely to lead equity markets lower in the near term, but lower prices for gold miners is certainly not positive for gold either. Obviously there are several economic factors which could still see gold prices working higher such as a collapse of the Eurozone, however at this moment the likelihood of that outcome in the short to intermediate term is not likely.
The European Central Bank and the Federal Reserve are not going to give up that easily. The process of admitting defeat will take time and global central banks will print money until they feel they have papered over the issue. It is the culmination of either QE III or other monetary easing around the world that will eventually move gold back above the all time highs. Unfortunately the short term price action of gold will most certainly remain under selling pressure barring any major unexpected announcements. The daily chart of gold futures is shown below.
Gold Futures Daily Chart
As shown above, I believe that short term targets to the downside are likely somewhere in the 1,475 – 1,525 price range. I think gold will find a major bottom near these levels and a strong bounce will play out. For long term buyers, I would take advantage of the forthcoming pullback. However, I would be mindful that further selling is quite possible before gold finds a major bottom.
As I said before, the longer term is bright for gold. However, the short to intermediate term will likely see more selling pressure. Until either the Dollar tops or some form of major quantitative easing is announced, I would anticipate lower prices in the yellow metal.
In the near term gold does not look attractive, but the longer term the catalysts for a major move above recent highs are present. The real question has become when and where will the Dollar top? When the Dollar tops and gold finds a major bottom, the potential for a monster move higher will become likely.
Until then, risk remains high.
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well this one got buried in a hurry! LOL
"Please keep that in mind when the media's version of chicken little screams the sky is falling" it is time to mortgage the house and buy a boat load. http://edegrootinsights.blogspot.ca/2012/04/sky-is-falling-indicator.html
I hate to break this to the author of the above article, he apparently lives on another planet.
QE to infinity! He forgot to factor that into his logic.
When everyone, that also includes my mom, goes bearish on any commodity, that is time for me to buy into that commodity. We've got a bunch of suckers on this board that they are willing to fool themselves into believing anything that matches their investment portfolio. LOL
Start thinking out of the box and you will do just fine. Thanks uncle Ben/Helicopter Ben.
Good luck to everyone!
Did you even read the article, or just post a pre-conditioned response to the title and first two paragraphs 😉
Key points:
"I do not disagree with the gold bugs that in the long run gold prices will rally above the all time highs, but in the short to intermediate term there are several forces which have the potential to drive gold prices lower."
"I need to remind readers that I remain long-term bullish of precious metals. While the long-term remains bright, the short-term is especially murky and dark."
This is a trading blog, not an investing blog. Thus, if you read the comments of us "suckers" you'll find that we are all on your side and believe PMs are going much, much higher due to the exact reason you put forth. The question is about timing and short-to-medium term technical chart patterns which are very negative (defying fundamental sanity IMHO, but then again the PTB have proven themselves to be insane over and over again, so why should it be any different this time?)
Keynes said, "The markets can stay irrational longer than you can stay solvent". I found that out the hard way with PM stocks back in Sept/Oct '08, and have been repeating those same mistakes to a far lesser degree with cheap April and May call options... I do not want go "all in" until there are signs of stability in this sector. Buying NUGT now expecting a 50% gain in a month is extreme gambling. I really do hope it happens, 'cause it will bring my call options back to life, but it's more likely to drop another 30% before finding a tradable bottom IMO.
Good luck to you too.
Thanks for the in depth perspective. Your views on gold/silver ratio would be interesting.
As long as the Gold and Silver markets continue to be manipulated JPM and 3 others. They can paint the tape as good as any one. HFT allows this rigging on the COMEX to take place. BTW ... the CME is the regulator .. how cozy ... look at when all the declines happened ... early sunday morning in the thinly markets .. who can time better. What will stop this paper shorting will be a physical demand shortage ...watch the shorts cover!
I do not trust fiat currency run by bankrupt countries.
Holding gold and silver assets when the SHTF moment
will pay off eventually.In this instance i don't care what the
charts are saying. I want to have a core gold and silver
portfolio and trade the rest.
Don't forget about bitcoin. Seems as likely to rise in any SHTF scenario, and maybe even sooner (much less crowded than gold/silver). Also not as easy for TPTB to play their paper games with the bitcoin price.
I can't believe this article. Selling gold stocks at this point would be a disaster. I am buying all the NUGT at these prices. I expect 50% rise in less than a month. The printing presses will never stop. The US and the world have accumulated debt beyond repayment. I have been in gold for 10 years now. Sold my physical gold at $1750 so I am not a fanatical gold bug. But this is going to come roaring back....
I'm afraid I have to agree with the general conclusions of this article, but disagree with one key point. The author says,
"... a stronger Dollar will push risk assets like equities lower and right now that is not part of the Federal Reserve’s election playbook."
Check your premises! I believe that is exactly what the Fed wants right now for one and only one reason - to put out the $100+ bbl speculative oil fire that has pushed gasoline prices close to or above $4/gallon in key democratic and swing voting states. Think about it - as recently as 6 weeks ago the mainstream press was saturated with news about impending conflict with Iran over their supposed nuclear ambitions. That story has since been off the radar, buried on page 2 or 3 with the most heated rhetoric being about where to hold negotiations! Then, a couple weeks ago the $USD gets a miraculous 1% boost within minutes of the Fed minutes being released, despite them basically revealing pretty much what Bernanke had already said previously - no real new information.
Inflation is a double edged sword, and I believe that team Obama/Bernanke can afford to tap the brakes on the equities markets temporarily, which is what we are seeing now, in order to calm the oil/commodities markets going into peak refinery margin season - May/June. So, while your conclusions may be correct on gold and silver, etc., it won't be due to market forces. How else do you you explain a sector (PM miners) being sold off aggressively despite being the most oversold since November of 2008, having record profit margins and having the primary cost-of-production factor (oil/energy) coming down in price rapidly?
I am not a true "gold bug" per se, but I recognize manipulation when I see it, and do sympathize. I suspect that gold and PM stocks are being sold/shorted simply because they are vulnerable and enough insiders know the plan. When the weak hands are flushed out, they will be a buy of a lifetime!
Way oversold. Look at the RSI's and sentiment. Going to be a big move up in gold soon. Dead cat bounce or new rally... who knows but anyone selling here is going to be disappointed.
Your silver or gold ain't going to save you in the end. But, he who saves little by little will have plenty in the end.
We are sticking to 1440 ~ 1450 as our target to re entertainment gold position.
I remember hearing something about "sell in May and go away" and I think that was said about gold. But I heard that one back a few years ago. I'm wondering if that (is really true) and if it will be the same this summer.
I couldn't agree with you more on this one. I'm a gold bug but I'm waiting till mid may or June to re enter, or after what looks like a correction.
while i'm a True Believer in silver and have 100% of our
assets in silver bullion, jeremy is right about the short
term. the HUI is in shambles (new 18 month low)
and silver and gold are
most probably going to fall further- at least back to
the december lows and maybe worse.
THAT MAKES A BUYING OPPORTUNITY. be thankful!
take advantage of it. silver is going to $400 and beyond.
roger in wilmington, nc
Interesting article Jeremy, thanks for posting it. Great points that I will be watching out for...
An intelligent analysis, Jeremy.
As one who firmly believes in the long term future of PM's I, too, recognize the path of nominal pricing as being tortured and frustrating to perma 'bugs'. Emotionalism in these markets is prescription to failure, fear and panic.
There are many potential, fundamental flash-points in Forex volatility from Euro, Yen and Yuan moves that may run counter-intuitive to a perpetually declining $ in the intermediate term, and translating into PM weakness.
The bottom line, imo, is that successful short and intermediate term trading requires both defensive discipline and refined technical strategy. Otherwise, acquire physical gold and silver on opportune weakness with the clear expectation of it as a necessary tool of long term capital preservation and savings.
Cheers, and thanks for your persistent efforts to make navigating these treacherous water a bit less perilous, Jeremy & Adam.
I agree, the HUI looks terrible. I closed all my long positions in gold equities last week. As for the dollar, pull the chart out to the Sept 2010 high. I will be convinced of a sustained dollar rally once the downtrend line drawn from the Sept 2010 through the Jan 2012 high has been breached.