The Bears Should Clamp Down on Gold Prices Again … And Soon

by James Brumley | April 28, 2014 9:25 am

Just when it looked like gold prices were going to turn bearish again, stocks started to tank, Putin turned up the heat in Ukraine and the World Gold Council said Chinese demand for gold was poised to start growing again[1]. Those factors — among others — led the SPDR Gold Shares (GLD[2]) to a 0.5% gain last week, while gold futures advanced from a low of $1,268.40 per ounce to a weekly close of $1,300.80.

As one could guess, the gold permabulls used the modest uptick as a platform to pound the table on the world’s most popular metal. Are gold prices really back in the bullish mode they were in at the beginning of the year, however, when gold pushed off its late-December lows to climb 15% before topping out in mid-March?

Truth be told, it’s still on the fence. The good news is, the bullish and bearish drivers for the price of gold are pretty clear.

What’s Working for Gold

With all due respect to the World Gold Council, China can ramp up its gold demand till the cows come home — it won’t offset the plunge in demand from every other arena. Namely, central banks are still net buyers, but have scaled back their purchases from a peak of 163 tonnes in the second quarter of 2012 to a mere 61 tonnes last quarter. And, for the fourth quarter in a row, ETFs were net sellers of gold, to the tune of 180 tonnes in the fourth quarter of 2013[3], and a total net-sale of 881 tonnes of gold for all of last year.

Still, raw consumption (buying) isn’t the only factor that pushes gold prices.

Also in play is the fact that Treasury yields remain stuck at weak levels, and the U.S. dollar remains suppressed due to a myriad of ongoing geopolitical pressures.

Specifically, yields on the 10-year Treasury never hurdled the key ceiling at 2.8% after several attempts over the first four months of the year, while the U.S. Dollar Index continues to drift lower in admittedly erratic fashion, putting pressure on a key support level around 79.25. If the U.S. Dollar Index breaks below 79.25 and/or the yield on 10-year treasury bonds moves below a floor at 26.00 (and it looks like that’s what’s in the cards), that might well be enough to hurl gold futures and the GLD to higher highs … and back into an uptrend.

Of course, as long as the crisis in the Ukraine remains in motion, investors also will seek safe havens, with gold being at the top of the list.[4] And the abduction of a handful of observers[5] from the Organization for the Security and Cooperation in Europe on Friday is almost sure to elevate Ukrainian tensions.

What’s Working Against Gold Prices

While the price of gold might be hitting headwinds on some fronts, it’s the beneficiary of tailwinds on other fronts.

The biggie is the fact that the U.S. economy is still on the mend, resulting in a stock market that’s seemingly rewarding enough to choose it over gold. Last week, for instance, orders for durable goods jumped 2.6% including transportation orders[6], and were even up 2% ex-transports.

That’s not the only reason the gold outlook may turning bearish, however.

The Michigan Sentiment Index rose from 80 in March to 84.1 for April as well. The annualized inflation rate was still a paltry 1.51% as of March[7]. And, even with Friday’s pullback for stocks, the market remains within reach of breaking to new all-time highs.

Throw in the fact that actual overall gold consumption has fallen for four straight quarters[8] — a detail the World Gold Council didn’t underscore when touting a projected increase in demand from China — and is unlikely to meaningfully reverse that trend when Q1’s demand numbers are revealed in mid-May, and it’s not like investors need a safe haven.

Bottom Line: The Outlook for Gold Prices

When all is said and done, gold’s bullish fundamentals pretty well match the bearish undertows, which might largely explain why the precious metal’s price has been volatile since the middle of last year, but unprogressive. The current price of $1,300 per ounce is right where the commodity was trading in July of last year — and a price it’s hit (both coming and going) several times since then.

Until gold prices break out of their range between $1,190 and $1,392 per ounce, one can only assume they will remain range-bound. The only way to break out of that funk: Traders must decide to ignore either the bullish or the bearish case, which is particularly tough to do in the current environment.

But until that happens, gold could continue to bounce around in that range for a while longer, still making no real progress either way.

That said, gold does indeed look like it’s gearing up for a bigger, prolonged move, for better or for worse.

It’s an easy-to-overlook nuance, but gold’s key moving average lines have converged right around $1,300. Most charts’ moving average lines are forever in a pattern of convergence and divergence, so seeing how gold has consolidated right around the $1,250/$1,330 range this month, we’re apt to see these lines begin separating themselves from one another now.

As for which direction that might be…

While gold might currently be trapped between two equal-but-opposite forces, in the bigger picture, the deck remains stacked against gold and the GLD. Specifically, the Fed has made mention more than once lately that higher interest rates are on the horizon, as is the end of QE. That’s going to put bullish pressure on the U.S. Dollar Index.

Yes, the Ukraine crisis looms, but it’s unlikely Putin truly wants to escalate that situation any more than it’s already been. He’s not apt to be concerned about threats of relatively hollow sanctions. But the lack of benefit of a tighter grip on Ukraine — in addition to the bigger-picture probability that he’ll be seen as disruptive and unpredictable in the future — is likely to mean he’ll ease off before the crisis becomes an all-out war. As that political gamesmanship fades away, so too will the demand it has created for gold.

Realistically, gold futures are apt to test the floor at $1,190 before testing the ceiling at $1,392, and if the support at $1,190 breaks, that’s when gold prices could really turn bearish and the selling floodgates could open wide.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Source URL: https://investorplace.com/2014/04/price-of-gold-prices-gld/

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