Sunday, May 20, 2012

Good chance Gold and Silver have bottomed - Part 2

Early Friday morning (Australian time, it was just after US markets closed on Thursday) I wrote a hurried post explaining that I thought Gold has put in a significant bottom. You can read it here:

I didn't get the chance to include everything I would have liked so have decided to follow up with a brief addendum.

First I would like to clarify what I meant by a "bottom" in Gold and Silver. There is of course the potential for Gold and Silver to trade lower than the recent lows at $1526/$27, however I think there is a good chance that these prices formed a low point which won't be breached again before the end of the bull market (if ever).

Big call I know. One which may prove to be wrong, but the only scenario I see the metals going a lot lower than these price points is in a credit crunch similar to that seen in 2008 and I think that there is enough gunpowder left in the barrels of the Fed, ECB and other intervening central banks to push risk of such a crisis down the road.

Gold (priced in AUD) continued to rally during Australian/Asian trade Friday due to a falling Australian Dollar and rallied a further US$18 in US trade overnight. AUD Gold is now trading back above AUD$1600. My expectation is that even if Gold trades back below US$1530 later in the year, we should get a respectable rally from these oversold conditions. Something comparable to the January rally should be expected, so at minimum a run up to US$1700-1750+ is likely. 

This has been the most significant correction since 2008. The way I see it there is potential downside here of perhaps $200-300 at most. On the upside if we saw a rebound from these lows that was as significant as 2008 (+48% over 4 months) then we could be looking at a Gold price north of $2200 by the end of the year. Such a move to the upside would not surprise me.

One of the current risks which has the potential to derail stability and send the world toward a 2008 redux is a hard default (and exit from Euro) of Greece. This topic has been absolutely hammered to death in the financial press over the past two weeks since the Greek elections failed to result in a new government (with a new election date set for June 17th). 

It seems that almost everyone is expecting Greece to exit the Eurozone imminently. While I think there is a good chance it will eventually happen, I wouldn't be so sure it's going to happen in the next couple of months and if by chance it does I think central banks and governments will be standing at the ready to expand QE programs and bailout any banks that are put at risk as a result.

Over the weekend the G8 met and following released a declaration of which the first few points are as follows:
The Global Economy

Our imperative is to promote growth and jobs.

The global economic recovery shows signs of promise, but significant headwinds persist.

Against this background, we commit to take all necessary steps to strengthen and reinvigorate our economies and combat financial stresses, recognizing that the right measures are not the same for each of us.
It reads to me that they are prepared to ease as much as will be required to maintain growth, regardless of whether it's sustainable long term without further borrowing to prop it up.

The mainstream media was last week lighting up with negative stories on Gold, here are some examples:
Gold’s hasty demise from safe haven to risky asset

From darling to whipping boy, risk haven to risky business.

Gold took another wobbly step in its steep descent Wednesday, shedding $16.80 (U.S.) to $1,540.30 an ounce in New York, as Greece’s political uncertainties once again spooked financial markets. It was the metal’s 11th decline in the past 13 trading sessions, during which time it has lost more than $120.

Gold is an investing theme that has thrived through years of seismic shifts in financial markets. But now, one of the long-accepted rationales for turning to the precious substance – as a haven from risk – has been turned on its ear. The metal is getting sold off whenever concerns about Greece, sovereign debt and the euro grab the day’s headlines.

“Gold is now behaving like a risky asset,” said Capital Economics chief global economist Julian Jessop in a research note.
Bloomberg claims a Gold "Bear Market":
Gold Tumbles Into Bear Market on Greece Euro-Exit Concern 
Gold, on the brink of a bear market, declined for a fourth straight session as concern that Greece will have to leave the euro boosted the dollar and cut the metal’s appeal as an alternative asset.

The U.S. Dollar Index, a measure against six major counterparts, rose for a 13th day to a four-month high after Greece’s political leaders failed to form a ruling coalition.
Enlarge image Gold Drops Near Bear Market as Greece Prepares for New Election

“The market no longer seems to be seems pricing in whether Greece will leave the Europe Union, rather when it will happen,” Steve Scacalossi, a New York-based vice president at TD Securities Inc., wrote in a report. “The risk-off tone continued.”

Gold futures for June delivery fell 1.3 percent to settle at $1,536.60 at 1:45 p.m. on the Comex in New York. The settlement leaves prices down 19 percent from a record close of $1,891.90 reached on Aug. 22, about 1 percentage point shy of a bear market.
This from CNBC:
Global Demand for Gold Falls, Adding to Gloom for Precious Metal

Global demand for gold fell 5 percent in the first quarter to 1,097.6 tones, according to the World Gold Council (WGC), driven by a decline in jewelry and central bank buying.

Purchases by the “official sector”, largely made up by central banks, fell 41 percent to 80.8 tones, while demand in the jewelry sector slipped 6 percent to 519.8 tones as a result of higher prices, the London-based industry group said Thursday in a report.

Worries over Europe’s debt crisis have spurred a flight from gold, sending prices to a 10-month low, and raising questions about the safe haven status of the commodity. The fall in gold prices has been accompanied by a rise in the U.S. dollar, which is being viewed as a safer option by investors.

“(Gold’s) negative correlation with the U.S. dollar is increasing. Last year it was close to zero, at the moment it’s approaching negative 0.7, telling us every time the U.S. dollar increases, gold will continue to fall,” Andrew Su, CEO of Compass Global Markets told CNBC.

Su expects prices to fall to $1300 an ounce within the next three months and he says the recent price declines are unlikely to prop up demand for the yellow metal.
These sorts of reports are exactly the sort of material you should be expecting to see at a bottom, just like you would see the opposite (journalists pumping the metal with upside targets) when Gold is nearing short term tops. 

The way I see it, even if we have another credit crunch it's likely to come with a large price shock to the AUD as well. So by some amazing chance we see Gold back at US$1300, I wouldn't be surprised to see the AUD sold off to 80c in the same conditions which would result in an Australian gold price much the same as we have today (AUD$1625).

Miss out on this buying opportunity at your own risk. Current prices are a gift.

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  1. Your last paragraph about the AUD is the crucial one in calling a bottom for us, I totally agree.

    If I had the money, I'd be definitely buying now. I'm not keen on the idea of getting a margin loan for it though due to the potential for price manipulation of the metals.

    1. Indeed we have the benefit of an overvalued dollar (IMO) which will provide a softer landing for the metal priced locally even if the US price sells off below $1500.

      I avoid margin as well. I'd rather just ride the bull market out in comfort buying when I can afford to, rather than worrying about stops and margin calls.

  2. not sure if I should be choosing something rodeo western music or that track by the Doors for this one

    1. That track by the doors? lol pretty specific... Riders on the storm? :)