The price of gold has been hit by selling
under concerns over the upcoming U.S. “fiscal cliff.” At least that’s what the news media’s
explanation for gold’s decline has been.
Here’s what Reuters had to say in a recent news article:
“U.S. stocks sold off late in the day to
close at session lows on Wednesday as talks to avert a year-end fiscal crisis
turned sour, even as investors still expect a deal….
“President Barack Obama and congressional
Republicans are struggling to come up with a deal to avoid early 2013 tax hikes
and spending cuts that many economists say could send the U.S. economy into
recession.”
Now here’s the problem with trying to apply
“rational” analysis of the news headlines in making gold price predictions: because
the financial markets are by nature irrational and volatile, you can never know
from one day to the next how the market will react to a certain piece of news
or legislation.
For instance, doesn’t it make sense that if
the U.S. falls off the fiscal cliff and a recession is thereby caused that gold
would benefit from the safe haven inflows that would surely follow? Logic dictates that scared investors would
transfer money from equities and into gold and gold equivalents to escape the
punishment that paper assets would presumably suffer in a fiscal cliff
scenario. But as we’ve seen all too many
times in the past, the market isn’t always logical.
All of this is by way of preface to a point
that I’ve made many times in this newsletter, namely that the best approach to
gold is a trading approach which involves buying only when the technical
conditions are clearly ripe for a rally.
And we haven’t had a technical buy signal for gold lately.
Fundamental analysis, while helpful at times,
is no substitute for a good technical discipline. That’s why gold with all its bullish
longer-term fundamentals can be under selling pressure in the short term. It doesn’t really matter what the actual
reason is; the only “reason” we need concern ourselves with is that right now
there are more sellers than buyers.
Until this situation reverses we’ll remain in cash and let the gold
market sort itself out.
It has been reported that John Paulson’s
hedge fund group holds $3.67 billion in shares of the SPDR Gold Trust (GLD). In July, gold-related assets of one of his
funds comprised 44% of total assets. As
one analyst has observed, “The big correction in the mining stocks has hurt his
performance and reputation.” Businessweek reported that two of
Paulson’s largest funds, Paulson Advantage and Advantage Plus, lost 36 percent
and 52 percent in 2011. The two flagship
funds are down 6.3 percent and 9.3 percent as of the end of May with losses
continuing into July.
Paulson is a giant of sorts in the hedge fund
world. He made a $25 billion fortune for
his hedge fund investors during the 2008 credit crisis. Although Paulson is widely regarded as a true
hedge fund king, his mistiming of the gold market has cost him dearly in the
near term. While it’s very possible (I
would even say likely) that Paulson will eventually be proven correct on his
big bet on gold, the point is that you can be the greatest hedge fund trader on
Wall Street and still get punished by Mr. Market for ignoring the short-term
technicals in preference for the longer-term fundamentals. Technicals rule over fundamentals in the
short term. Investors ignore this truism
at their peril.
Now having said all this, there’s a chance
that the fiscal cliff resolution could turn out to be favorable for gold. We’ll let the price and volume action of the
gold ETFs speak for us, and a 2-day higher close above the 15-day moving
average would speak very loudly indeed.
I note with interest that the aforementioned
SPDR Gold Trust (GLD) is hovering slightly under its 150-day (30-week) moving
average and is trying to re-establish support around it. Long-time readers of this report will
remember the importance I attached on this longer-term trend line during the
boom years of 2009-2011, for the gold ETF always respected the 150-day MA as
the proverbial “line in the sand” during corrections in those years. During the entirety the 2009-2011 rally, the
gold ETF never once penetrated the 150-day MA until late 2011 when the last
bull swing ended.
Since then GLD has fluctuated above and below
the 150-day MA. It tried to establish a
new long-term base of support above it in this past summer’s rally and is now
testing this vital trend line once again.
Note also the extremely high amount of trading volume in GLD that
occurred between Dec. 18 and Dec. 20.
This could be a sign of investor capitulation, i.e. a “selling climax,”
which in turn would be a bullish sign for the interim gold outlook. I’d view as very favorable the prospects for
a first quarter rally if GLD manages to get back above the 150-day MA next
week.
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Strategies Report newsletter.
Clif Droke is the editor of the three times
weekly Momentum Strategies Report newsletter, published since 1997, which
covers U.S. equity markets
and various stock sectors, natural resources, money supply and bank credit
trends, the dollar and the U.S. America
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