For four straight quarters, the World Gold Council has reported waning demand in gold consumption, on a year-over-year as well as a quarter-to-quarter basis. In fact, Q4’s total consumption of 858 tonnes of gold is the weakest interest in the metal we’ve seen since the second quarter of 2009, with no end in sight for the downtrend.
Of course, why would anyone want or need gold? It’s primary purpose is to hedge against inflation and/or economic turbulence. We’ve seen nether since 2008. Indeed, despite 2008’s fears of rampant inflation stemming from the Fed’s injection of billions of worthless dollars into the U.S. economy, the highest inflation rate we’ve seen since then is the peak rate of a very palatable 3.85% in September of 2009.
Since late 2012, the annualized inflation rate has remained anemic, below 2.0%. If we were going to suffer from runaway inflation, we would have done so by now. Most traders, realizing we’re just not likely to see an inflationary Armageddon, simply don’t have a real need for the metal anymore.
There’s not a lot of gray area here. In the short run, gold prices have room and reason to keep chugging higher, particularly if things remain tense in Ukraine. In the long run, however, the tide is turned against gold … and silver prices, too.
The question then becomes when and where the short-term uptrend runs into that long-term reality. The most likely answer is at or before $1471 per ounce. That level represents a key 38.2% Fibonacci retracement of gold’s entire pullback from mid-2011 to late-2013. Fibonacci lines tend to become floors and ceilings, largely for psychological reasons.
But considering that the bigger, longer-term fundamentals don’t actually support higher gold prices (the rally is founded mostly on hype and hope at this point), gold prices may not even reach $1471 before rolling over.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.