Is Gold Going Nowhere?

May 17, 2014 | By | Reply More

Both gold and silver are in the doldrums, anybody can see that. The questions are why and how long will it last? Activity in the spot market for both metals is low, lacking little interest from funds, speculators or retail investors. The technical indicators seem to contradict each other on an almost daily basis, allowing little encouragement for those many whose trading is so reliant on reading the charts. Fundamentally the long term reasons for sticking with the metals has barely changed although expectancies for a period of deflation before the (as good as certain) eventual hyper inflation have appeared to harden.

Where is the Logic?

The shorter term fundamentals point to an uncertain mix of dollar strength, bond yields and the strength, or lack of it, of stocks and shares. Stock market movements were once upon a time driven by the logic of good or bad news, nowadays it seems that so often that logic is upside down with investor sentiment as reflected in stock market movements being high when the news or statistics are poor and vice versa.

Futures Drive the Gold & Silver Markets

There is a much higher level of activity in the futures market for both metals and we can only conjecture that it is this speculative activity that is driving the metals contrary to our logical analysis. Access to the Commitment of Traders (COT) web site, free if you don’t mind week old statistics, shows us that there are substantial open short positions but encouragingly a growing number of long positions being taken.

While the shorts have been driving the price down gold is managing to hang on in at the $1300 an oz. level or near for several weeks that may be encouraging the longs into the market and hopefully resulting in a short squeeze. For example bear in that silver futures are traded with margins of up to 10:1 so any reasonable upward movement in gold is likely to be reflected in silver which can move 2% to 3% faster than the yellow metal. Such a move could wipe out many of those shorts and both metals will soar.

Is it likely to happen? Who knows but if and when it does there will be ‘blood in the streets’ to quote the Sage of Omaha. Of course this applies equally if gold drops back to nearer $1200 an oz. also a shorter term possibility.

Be Wary of Buying Until a Substantial Breakout Occurs

Gold and silver are stagnant at present. There is an argument that this is a good time to buy at these lows but I would be more encouraged to see the Indians coming back strongly in the hope that the new government will lift or lessen the tariffs on gold imports and a renewal of the strong demand from China.

In the longer term we will sit on our holdings of both metals, indulge in the occasional covered call trade and hope that the better times are just around the corner. Meanwhile we just have to accept that gold is going nowhere!

 

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Category: Gold

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