Trading
volume across all exchanges has been muted lately due to the holidays. Traders are still mostly on vacation which
has produced low volatility and a lack of excitement. Not much is going on in the news front,
either.
There
was one news headline recently that was quite conspicuous, however. A news site known as the Deccan Chronicle (www.deccanchronicle.com)
published a story on Dec. 25 entitled, “Lift of import curbs may crash gold
prices.” The story was in reference to
the Indian government’s proposal to relax import duties on gold. Dharmesh Bhatia,
of Kotak Commodities Services Ltd., was quoted in the article as
predicting a gold price crash if the Indian government removes the duties on
gold imports or even relaxes the curbs significantly.
Mr Bhatia said that Barclays Bank had stated that commodity-linked
investment funds are headed for record outflows in 2013 and between
November 2012 to November 2013, there has been a $88 billion decline in assets
under management. The article stated
that investors had withdrawn $36.6 billion from commodity funds during this
period due to the decline in prices of sugar, coffee, nickel, gold,
silver, and other resources. By far the
biggest decline, however, was witnessed in gold, with a 29 per cent crash
after a rise over nearly 11 years. EPFR
global estimated that investors have withdrawn $38.8 billion investments
from gold funds alone.
“While there is no indication that government is in any hurry to
left the ban on gold imports,” the Deccan Chronicle reports, “there has been a
demand from the Union commerce and industry minister Anand Sharma for
relaxing the curbs on gold imports. Even the
Reserve Bank of India governor Raghuram Rajan is of the view that if curbs on
gold imports continue. It would
incentivize smuggling.”
Experienced investors know that when the word “crash” appears in a
headline it typically carries a contrarian implication. It should further come as no surprise that
this highly charged emotional word is prominent after a stock or commodity has
experienced a steep decline. Could the
appearance of a crash warning for gold signal the metal’s imminent reversal? Perhaps, although a more likely
interpretation is that gold has reached – or nearly reached – a temporarily
“oversold” technical condition and is primed for at least a short-term
technical rally.
We still need to see gold close at least two days higher above its
15-day moving average, and for the 15-day MA to turn up. This will provide the technical context for
an immediate-term bottom and short-covering rally based on our technical
discipline. A corresponding decline in
the U.S. dollar index would increase the likelihood that an immediate-term
breakout signal in gold won’t prove to be a false signal. For now the immediate-term trend for gold
remains down as defined by the position of gold’s price line to the 15-day
moving average (see chart below).
Wall
Street’s reaction to the Fed’s taper announcement at its December meeting was
interpreted by many as a vote of confidence for the U.S. economy. The resulting rally in stocks and subsequent
decline of gold’s value would seem to justify this view. As I’ve argued in these pages, what’s good
for stocks is bad for gold and until something comes along to upset investor
confidence in the economic and/or stock market outlook the bear market in gold
is likely to continue.
Gold
is in need of a catalyst to launch a revival of its fortunes. The year 2014 is the best bet for such a
revival due to the influence of the major long-term yearly cycles scheduled to
bottom later next year. A return of
broad market volatility and global economic uncertainty would be the most
likely candidates.
Speaking
of the long-term cycles, a reader shared with me the following scenario: “Could
it be that the gold and
precious metals markets are reflecting the hard done phase of the Kress cycles? The
action in gold the past few years is certainly consistent with what one
might expect in the final sharp decline of the long term cycles. In fact,
the action of silver might have been the best harbinger of the concomitant
decline in the fall of the middle class over the second thirty year
period.
“As
you know, silver peaked in 1980 around $50/oz fairly close to the peak of
the first half of the 60 year cycle. Setting up the hard down phase in
the Kress cycles in 2011, silver failed to take out its 1980 high just
under the $50/oz level. The middle class was teased, with silver flirting
with its 1980 high, camouflaging the massive decline in purchasing power
the last 30 years has wrought. Furthermore, the collapse in the silver
price since 2011 has the potential on an inflation adjusted basis to
challenge the 89% stock market decline witnessed during the early stage of the
Great Depression.
“It
might be that this time the 120 year cycle bottom coincides with the bottom in
the precious metals bear cycle. Perhaps
the stock market does not have a harsh decline until interest rates accelerate
higher with the initial lift from a new 120 year cycle?”
My
answer: This is thought provoking, and perhaps you’re right that gold/silver
will bottom out, long-term, in late 2014 with the 120-year cycle. As far
as gold and silver bearing the brunt of the cycle, I’m not so sure. The
Kress cycles are primarily equity cycles and secondarily economic cycles.
I don’t think Mr. Kress would have agreed gold and silver are primary
recipients of the final “hard down” phase. Considering that gold is
inflation/deflation sensitive, however, it’s likely that the metals are
experiencing a spillover effect from the cycles, however.
The
main effects of the deflationary cycle, IMO, can be seen in the economic
numbers: despite record levels of liquidity generated by the Fed since 2008,
unemployment has dropped only slightly and inflation remains below 2%.
What else other than the 120-year cycle of inflation/deflation can
explain this?
