Gold’s tough road is too congested to last

by Chris Becker

It’s been a tough road for those long gold, particularly in USD terms, with the “precious” metal losing over $100 per ounce in the last two months:

This is part of a secular decline, with gold being in a bear market for over seven years, having peaked at $1920USD per ounce in September 2011. The last two years has seen a small resurgence back up to ca. $1400USD per ounce, but it has failed twice now to breach that key resistance level, setting up a multi-month bearish double top pattern, presaging a fall back to its recent terminal lows at just above $1000 USD per ounce:

With the Federal Reserve hell bent on “normalising” interest rates, there’s also the added pressure of hedge funds putting on drastically short positions in gold, now net short for nearly two months:

The upside? Note how the last time hedge funds were literally caught short in late 2015, gold suddenly reversed and put on a 30% plus rally.

With crowded market expectation about the USD, inflation and US economic strength it’s fashionable to join the crowd here and despise gold for its safe haven status. But one thing learned hard from years of being knee deep in markets is to always be suspicious of low volatility and crowded positions.

Comments

  1. Costello sold 1/4 of Australia’s holdings at $300 an ounce because he called it a relic. Bank of England did the same. It’s still a relic. That net short position is tiny, and I add this article to the very many I receive saying buy gold. Might bounce a little but it’s going way lower.

    • If it is merely a relic then why do the central banks keep thousands of tonnes of the stuff?
      What does a lump of metal have to do with expert management of finely-tuned modern economies with computers, models, and all that jazz?

      • If it is merely a relic then why do the central banks keep thousands of tonnes of the stuff?
        Given central banks are now in the business of managing fiat currencies, rather than gold backed currencies, I’m guessing out of habit, and due to tradition.

      • The reason to own gold is because ‘economists’ are trying to manage the economy.

        Failure is pretty much assured.

      • Yep. Right on Dom.

        I hold a lump of gold and I don’t need to explain the value of t to anyone. It is understood.

        Just like if I brandish a machete, I don’t need to explain the danger/threat to anyone. Understood.

        It’s not right or wrong. It just is. Thousands of years of history make it so.

      • Even StevenMEMBER

        Slow down there, Dennis – perhaps you should try being a little more indirect, like asking how big it is first. You wouldn’t want to waste your time travelling over there.

    • On a longer term chart it looks like its breaking down from a consolidation pattern for another leg down. See if it can bounce at $1200, if not could start to fall quickly,

    • The Penske FileMEMBER

      Agree it’s a relic. But I keep a little bit under the bed…. in case I’m wrong. If it’s ever worth anything major we’ll be in the po0p.

      • I find that a good spot for a gold stash is near the shotgun.

        Just in case all this post-relic society doesn’t quite live up to the promise.

  2. futures positions may be flat but known eTF holdings are massive, around 2,150MT. They’re falling around 5-10MT/week at present as Mums and Dads get squeezed out of their positions. Seems a pretty bearish picture to me and too early to counter trade …

  3. The Federal Reserve always gets it wrong.
    They have already tightened too much, and it won’t be too long before they are easing.
    The smart thing is to do the opposite to what the Fed is doing.

      • Arrow2, you are right, but give it a year or 2 and it will be obvious to everyone that the wheels are falling off in the US as well.
        There will be weakness everywhere, and the fed will ease.

  4. i own a little gold because i like it as something nice to have but it doesnt generate a return like stocks or real estate so is kind of dead money

  5. “We have explained on a number of occasions how the Federal Reserve’s agents, the bullion banks (principally JPMorganChase, HSBC, and Scotia) sell uncovered shorts (“naked shorts”) on the Comex (gold futures market) in order to drive down an otherwise rising price of gold. By dumping so many uncovered short contracts into the futures market, an artificial increase in “paper gold” is created, and this increase in supply drives down the price.”

    https://www.paulcraigroberts.org/2015/07/08/big-banks-using-derivatives-suppress-bullion-prices-paul-craig-roberts-dave-kranzler/

  6. Chris, I totally agree. I been buying gold since 380 and still going. Through the last 18 years there have been more upside than down, especially as an AUD currency hedge.That’s said I had paused for about the last 6 months but just last week I hopped back in getting my usual weekly increments. Does anyone have any view on silver? I’m sitting on quite of bit of physical silver too. It hasn’t moved much in a while and is way off the highs. Either way I think its more valuable than the Australian peso.

    • IMHO the silver gold ratio tells and interesting story.
      In the last few decades it has reached an inflection point in the high 70s early 80s. Shortly thereafter silver rallies hard but so too does gold (just not as much). On this indicator it looks to me like we are in for higher prices.
      Also the charts above show that the last time net shorts were super bearish in late 2015 the gold bottomed and the price took off.
      Finally when the next GFC hits, the worlds central banks will likely implement massive QE and money printing to deflate debt. Gold and silver should at least retain their real world purchasing power as fiat expands.

  7. The price of gold in AUD still looks pretty good to me. Some of our locally based goldies are making very good money mining the stuff.

    At present its best to hold a lot of cash, and only keep those goldies with a strong growth story to counter a possible lower gold price.

    There should be a seasonal bounce coming soonish but I suspect that it will be muted in the face of the US/China trade dispute, two expected 2018 Fed rate hikes and slowing global investment demand. Perhaps December may be a better time to deploy money into this sector, after the expected Fed rate hike.

    I speculate on the goldies and not on the price of gold directly. Done well since late late 2014 when the collapsing AUD coupled with lower input costs for producers (fall in oil price and much less pressure on wages) vastly improved the operating profits of companies such as NCM, SBM, RRL, NST, EVN, SAR. Even little doggies such as SLR, RMS and MOY came alive. However, the easy money in this sector has happened, and unless the AUD drops back while the POG in USDs falls (as some predict), their profitability will be hurt and so will their share prices. Ultimately one has to trade all the goldies since they tend to run up too far or fall to low, depending on a range of factors.

    Some thoughts on the direction of the gold price

    https://seekingalpha.com/article/4195402-chinas-yuan-policy-prove-pivotal-gold