To give credit where it’s due, gold has at least held the line over the past seven weeks. Unfortunately, it’s what happened eight weeks ago that may (still) mean the second quarter of 2012 was the cyclical beginning of the end for the world’s most popular precious metal.
The Technical View
Assuming nothing has dramatically changed between the point in time this was published and the time you’re reading it, gold — the commodity — gave up 5% of its value in Q2. That’s not a horrifying number, though the recent price of $1,585/ounce is nearly 19% below the peak from August of 2011. That’s a tad more troubling.
It’s not the most troubling aspect, however. No, gold’s biggest red flag is the way it tumbled under a major rising support line that’s been in place since early 2009. It’s also on the underside of the 100-day and 200-day moving average lines for the first time since 2009 (both of which are also sloped downward now).
Put it all together, and what you have is a chart that’s in a lot of technical trouble despite what gold’s permabulls are saying.
Of course, while the chart can certainly dictate the way the fundamentals are viewed, gold’s fundamentals can also influence the chart. To that end…
The Fundamental View
Most chalked up gold’s volatile performance in Q1 of this year and bearish results in Q4 of last year to a slightly reckless runup in August of that year. It’s not an unfair explanation. To see the weakness linger into the middle of the second quarter though? That we can’t ignore.
What’s different now, and will it continue? A handful of forces are in effect.
- The U.S. dollar’s on the rise. Gold is priced in U.S. dollars, even for the rest of the world. Ergo, if the dollar is increasing in value — which it is — gold is losing relative value. And, until the European debt crisis is fixed and isn’t putting its currency in jeopardy, U.S. dollars are going to keep looking and feeling like much better bets.
- Demand for gold is waning in India. In 2012’s first quarter, Indian demand for gold fell nearly 30% as the rupee remained weak and the economy continued to struggle. Though the jewelry tax that got the disruption ball rolling has since been repealed, not much else has changed in the meantime.
- Demand for gold is still increasing in China. Despite India’s lull, the Chinese are still gobbling gold up. In April, the country imported more than 100 tons of it, more than a 65% increase in consumption. Some experts are forecasting a 10% increase in China’s demand for 2012.
- Contrary to assumptions spanning all the way back to 2009, inflation has yet to become rampant. It’s currently at 1.7% in the U.S., and given that interest rates can’t go any lower but the global and domestic economy are still groggy, it’s unlikely inflation’s going to be strong enough to send gold meaningfully higher anytime soon. The Fed seems pretty well married to the idea of not putting any new monetary easing on the table, which could have prodded higher inflation.
With the exception of higher demand in China, all the other factors suggest gold is going to remain under pressure for a while. Even a fix in Europe, complete with a bailout of Spain’s banks and some sort of sensible decision about Greece, won’t actually make the continent’s collective currencies any more attractive. In other words, look for the U.S. dollar to stay strong.
As for the India/China face-off, the two are neck and neck in terms of consumption. Between the two, there’s no significant net gain or loss in demand.
That leaves inflation as the only potential catalyst for gold. If it hasn’t happened by now though, it’s not likely to ignite now, under current conditions.
The bottom line? I started posting this bearish gold price target late last year. I caught a lot pf flack for it then, and I expect to catch a lot now. But I don’t think gold’s going to hit a bottom until $1,442/ounce, give or take a couple of bucks.
The outlook flies right in the face of other price targets. Bank of America analyst Michael Widmer, for instance, thinks prices could hit $2,000 sometime in Q4. Peter Sorrentino of Huntington Asset Advisors says it should happen sometime by Q1 of 2013. Fair enough. None of these bullish experts have answered the big question though. In light of the four points made above … how’s that going to happen without greater net demand or a catalyst?
James Brumley holds no positions in gold.