With the metal markets having difficulty in breaking out from the current downtrend and suffering a few false starts during the last two weeks, now seems a good time to try to analyze recent price moves in the hope that some directional clues will emerge.
There is no doubt in our mind that the technical indications have been pointing to a gold pullback with a fall to around $750 an ounce being a favorite.
Our concern with this is that so many analysts have had the opportunity to air their bearish views that it has undermined the confidence of the investment community in the virtues of holding gold in the face of the developing economic crises in the US and many other western economies.
We have been told that there is a propaganda assault, by the “powers that be”, to undermine the gold price.
There seems to be some justification for this accusation when we read and hear some of the opinions going the rounds that fly in the face of the obvious, but then again should we blame governments and bankers for attempting to put a positive spin on such a grim economic outlook?
We have expressed the view previously, particularly in the case of gold, that technical issues are way down the pecking order in the current economic climate and that investors, both big and small, should be aware that it is news, positive or otherwise, that must drive the market in both the short and long term.
The problem is that so many fund managers, hedge or otherwise, and investors in general have become so brainwashed with the power of historical charts to foretell the future that many no longer have the confidence to put their money where their logic suggests.
It is this slavish following of technical indicators that, in our opinion, accounts for much of the contradictory moves in the gold price that we have experienced since $1000 high. That is not to say that we did not expect a correction for a period as profit taking is a reasonable reaction.
Thursdays trading was a case in point. Initially Wednesday’s .25% drop in interest rates prompted a $20 surge in gold, a sensible and logical reaction although much of the rise was previously factored in.
Then some dubiously encouraging news caused the dollar to strengthen against the Euro and Sterling, oil retreated and as a consequence gold fell to a four month low of $847 an ounce. This defies traditional thinking and we can only conclude that there was a serious unwinding of short positions in the dollar, oil and gold.
This seems at the moment of writing, to be backed up in European morning trading where gold has recovered to $852 an oz. having reached just short of $856.
Our problem is with the ebb and flow around the $850-900 an ounce price range as it seems to us that the publicists of gold’s doom and gloom theory are coming face to face with the rational thinking of the followers of fundamental facts and to date neither seem to have gained the upper hand.
Now and again there are signs that gold has disconnected from the oil price movement, an association we do not think is backed by sufficient logic, and in view of this latest price action we reluctantly come to the conclusion that it is looking a possibility that the propagandists and technicians will have their way, even if oil goes to $150 a barrel in the next few weeks.
Silver will follow the same trend as gold with the platinum group metals being much more sentiment driven. That is to say investors perception of demand from the BRIC nations in particular being maintained or falling in the face of a world wide lowering of economic and development activity.
We still maintain a long term bullish stance on gold and silver and expect common sense to prevail before long as western currencies in general continue to lose purchasing power and the US remains embroiled in war and political opportunism.
We are encouraged by the presence of underlying support for gold at the $850 level indicated by the price action of the last 36 hours and maybe we will see a rebound from here within the next 2-3 weeks.
Should the price of gold bottom out at around $750 an ounce within the next three months we will contain our shock/horror by diving into our rainy day fund to top up ready for bull run to get back on target.
Just maybe this will happen very soon after the Beijing Olympics are over. We only have a gut feeling that this will be a decisive time in world affairs but who knows?