We are at an interesting and perhaps critical juncture with respect to the direction of the gold price as it approaches a key support level. There are many mixed signals out there and the market seems to be vacillating, frustrating both bulls and the bears. Let us look at both cases in order to try to understand what the gold market may have in store for us during the coming weeks and months.
The above introductory comments are edited excerpts from an article* by Andrew Hecht (technomentals.com) entitled Precious Metals Prices Fall: Gold At A Critical Juncture.
Hecht goes on to say in further edited excerpts:
…There are many mixed signals out there and the market seems to be vacillating, frustrating both bulls and the bears. Let us look at both cases in order to try to understand what the gold market may have in store for us during the coming weeks and months.
The Bullish Case
1. Fiat currencies are not “real” money
Gold bulls have argued for a long time that fiat currencies have little intrinsic value:
- These currencies, the U.S. dollar, yen, euro and others have only the full faith and credit of the countries that print them supporting their value.
- Central Bank policy of printing more and more currency, which some argue, will lead to an eventual inflationary spiral discredit the paper money.
- The current move higher in the U.S. dollar is occurring because dollars are the best choice in a foreign exchange environment loaded with only poor choices.
- Moreover, throughout history, gold is the only means of exchange that has survived thousands of years and gold is real money.
2. China is a massive buyer that waits in the wings
There are two components to Chinese buying:
- The Chinese government holds a very small percentage of their foreign exchange reserves in gold relative to other countries in the world. Therefore, the Chinese government plans to increase these reserves. China has recently become the largest gold producer in the world, producing 420 tons in 2013, more than 15% of world production. It is likely that much of that production will serve to increase governmental reserves with occasional purchases adding to the mix.
- Chinese citizens will continue to purchase gold particularly while the Chinese currency, the yuan, remains non-convertible. Lower gold prices will spur physical buying in China.
- Gold Rush Is On In China (to replace USD with a gold-backed Renminbi?)
- Don’t Worry About the Future Price of Gold – China’s Got Your Back! Here’s Why
3. Gold has corrected lower and is oversold
- Gold has moved 36% lower from the highs to an oversold condition on daily, weekly, monthly and quarterly charts.
- A technical rally is overdue in the gold market and recent selling has seen tepid volume.
- Not only is gold in an oversold condition, but gold mining stocks are also putting in bottoming formations.
- Buckle Up: Gold’s About to Begin A Major Breakout! Here’s Why
- Part 2: Gold Has Bottomed & Is Now On Way to $4,000
4. Festival season in India will reinvigorate physical demand
There is certain seasonality to the price of gold, and festival and wedding season in India tends to bring buying to the market.
- Signs of Indian buying are clear, as premiums for physical bullion in India have moved higher over the past week.
5. Production costs are above current prices
Some argue gold is now falling below production cost and in the case of some producers and mining projects, this is true.
- Higher gold prices have caused aggressive mining concerns to explore for, and mine, higher cost production.
- Mines in South Africa have become deeper over recent years; the deeper the mine, the more expensive production becomes.
The Bearish Case
1. Strong U.S. Dollar
Since June 30, 2014, the dollar has rallied 7.3%.
- Priced and traded in U.S. dollars, gold traditionally has an inverse relationship with the greenback.
- The current trend in the dollar is negative for the price of gold.
- U.S. Dollar Strength Suggests Continuing Decline in Canadian, Australian & U.K. Currencies – and Price of Gold – Here’s Why
- Gold Price Dependent on Extent of Money Supply NOT Direction of US Dollar Index – Here’s Why
2. Prospect for higher U.S. interest rates
The U.S. economy has been showing signs of strength, which has prompted some Federal Reserve members to favor raising interest rates in the future. The prospect for higher US interest rates increases the cost of carry for all commodities, including gold.
- What Do Current Low Interest Rates Mean For the Future Price of Gold?
- Goldbugs Should Pray for Higher Interest Rates – Here’s Why
3. Weak precious metals prices
Clearly, recent action in precious metals markets has been bearish:
- Silver has shed 18.5% of its value since early July.
- Platinum is down 14.5% during the same period.
- Gold has only depreciated by 9.5%.
The key question for the future is, given recent price moves and relative values, is gold expensive relative to silver and platinum, or are the industrial precious metals too cheap at current levels?
- Gold: Likely to Fall to $950 – $1100; Unlikely to Rise Above $2,000 – Here’s Why
- Final “thud” In Gold to $1,190 Level Coming! Here’s Why
- Gold Will Drop to $900 – Silver to $15 – Before Going Parabolic!
4. Technical weakness
- Interest in gold ETF products has been tepid:
- An oversold condition in gold has been in place for over a month, but the yellow metal continues to move lower. The relative strength index on daily charts has remained below the 30 level, with slow stochastics also below 30.
- Momentum and sentiment in gold remains negative, according to technical indicators.
- Open interest in COMEX gold futures has dropped from 417,000 contracts in July to 388,000 contracts, a decrease of almost 7%.
- The Gold Price Could Go Even Lower – Here Are 5 Reasons Why
- These 4 Indicators Say ” the immediate outlook doesn’t look good for gold”
- What Are Factors That Motivate Gold Saying Today?
5. No rally in the face of military action
Last week’s failure of gold to react on news of military actions in Syria and Iraq is another example of gold’s inability to appreciate on geopolitical tensions at its current price level…
- Gold Is NOT An Effective Hedge Against A Financial Crisis! Here’s Proof
- Careful! Gold’s Performance in Times of Crisis Often Not As Expected
6. No evidence of a big short position
The low level of open interest in gold futures (the total number of open long and short positions) provides evidence that there are no large long or short positions in the gold market at present. A move lower will likely encourage trend, following systems to short the gold futures market, which would set the stage for lower prices, at least initially.
Lower prices will eventually set the stage for another leg in what will be a continuation of the long-term bull market in gold….Gold has always represented value and it always will, however, it is possible that the price of gold continues to trade in a sleepy range, frustrating bulls and bears alike. Whether bullish or bearish, we should never forget that the daily price of gold is the right price for the commodity….[reflecting] a consensus indication of the perception and faith in political and economic systems.
I am not on the fence here. I believe gold will eventually test and break the $1185 support [but] there is too little interest in the market to support a rally now. Right now,
- the overall pressure on commodity prices,
- a stronger U.S. dollar,
- the prospect for rising interest rates and
- weakness in other precious metals
will most likely overwhelm the bulls in the near future.
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
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