Back at the end of December, I opined that gold (trading at $1,546 per ounce at the time) was ultimately destined to reach $1,442 before making a more permanent bottom and beginning the slow march toward a recovery.
Though that expected 6.7% price dip seems dramatic now, it didn’t then. Remember, the 29th was the day gold prices fell under a key support level that extended back to early 2009, and it was just a few days removed from a fateful cross under the 200-day moving average line — the first such bearish cross since 2008. Considering gold prices already had plunged 18% by then, what was another 6% to 7% worth of selloff, right?
Murphy’s Law kicked in, of course. Gold hasn’t been under $1,546 since then. In fact, it has managed to fight its way back to $1,643 per ounce.
Despite the egg currently on my face, I’m going to stick to my guns and say gold’s rout isn’t over yet; a visit with $1,442 — give or take — still is in the cards. Here’s my reasons for the grave outlook.
1. I Mean It — Gold Investors Have to Be Terrified
Almost all great bottoms are made at points when the majority of investors think things can only get worse from there. Take March 2009, for instance. Consumers had just witnessed an absolute slaughter for stocks in the latter part of 2008, and there wasn’t even a glimmer of economic hope for 2009. Consumer confidence was at multi-decade lows. The market has gained 61% since the end of March 2009, defying the “obviously bearish” conclusions at the time.
The explanation is simple — folks don’t sell until they’re bearish. That, or they’re not bearish until they sell. Either way, when investors as a group are that pessimistic, it means the majority of them already have sold. With nobody left to drive stocks lower, the remaining buyers become the majority, and the tide starts to carry the market higher again.
The same principle applies to individual stocks, currencies and, yes, commodities like gold.
You know what we haven’t seen for gold yet? A knock-down, drag-out, screaming hysteria about its horrible future.
The late-December tumble was alarming, to be sure, but it wasn’t terrifying. We still need to see a point where things get so spooky for gold that it flushes the majority of the longs out because they’re convinced the party’s over forever. All we saw at the end of last year was some tepid grumbling. Gold’s capitulation actually should be painful.
2. Gold Has Been Inching Higher — on Very Low Volume
Click to Enlarge If a gold rally is to last, it has to be fueled by a majority and/or growing number of buyers. I’m seeing a lethargic volume for gold futures contracts, as well as the easier-to-trade SPDR Gold Trust (NYSE:GLD).
The volume for gold futures has been waning since the September top anyway, bearish or bullish. Of the three main rallies we’ve seen since then, however, not only has each been on below-average (50-day) volume, but each of them has been made on subsequently lower volume.
Click to Enlarge The same basically goes for trade of the SPDR Gold Trust, which tends to attract more typical retail investors, as opposed to the futures market, which tends to be dominated by institutional traders. Although we’ve seen three gold rebound efforts since the initial September tumble, all three have been on weak — and weakening — volume.
It’s not surprising that in both cases, the 50-day moving average line stepped in as a technical ceiling late last week.
Prognosis
So, it’s no secret I’m still a short-term gold bear. One more pullback should take care of item No. 1 (spooking the market) because item No. 2 (a decent amount of bullish volume) isn’t in place yet. With the next pullback slated to be the third big one in about four months, that should sufficiently scare investors who are watching gold slip to lows that were unthinkable just a few weeks ago.
And, once we see a complete blowout day on huge volume during that pullback, then I’m flipping back to a bullish stance. For the futures, I’m still looking for $1,442. For GLD, that translates into a retest of $142, give or take.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
