Don’t Get Married to Gold Prices Here (But Flings are OK)

by James Brumley | March 13, 2014 6:00 am

To say that gold prices have turned around since the beginning of the year would be an incredible understatement. During the last two months of 2013, the SPDR Gold Trust (GLD[1]) fell 9% and was knocking on the door of multiyear lows.

Source: Flickr[2]

Since the beginning of 2014, however, gold prices have advanced nearly 12% and look like they’re testing the waters of even higher highs.

What happened to let gold prices — and silver prices too — sidestep certain disaster and get back in a bullish mood/mode? A handful of things.

But the big question facing investors now is: Are those factors built to keep gold prices and silver prices in their uptrend?

Answer: A definite maybe.

Short-Term Gold Prices

Over the long haul, inflationary pressures and global economic turmoil tend to drive gold prices in an upward direction. In the short run, though, gold prices inversely correlate to treasury yields and the value of the U.S. dollar. (All four factors are intra-related, but the impact of interest rates and the sawbuck’s strength are the ones that matter the most day-to-day.)

With that in mind, gold’s rally this year at least makes partial sense.

Interest rates — using the yield on 10-year treasuries as the proxy — were flying high over the last two months of 2013, with treasury yields rising from 2.48% in late October to a multi-year high of 3% by the end of December. The rapid rise was spurred by concerns that the Federal Reserve was finally seeing enough strength to put the brakes on the impact of all those cheap dollars that had been injected into “the system.”

It didn’t take long for traders to figure out that the economy is still nowhere near firm enough for the Fed to do much of anything to cool it off[3]. By early February, rates were back to 2.58%. Though they’ve wandered back to 2.76% in the meantime, there’s no real “umph” behind the effort. While not bullish for gold prices, stagnant yields certainly aren’t bearish.

As for the greenback, it has peeled back from some modest strength seen between November and January, and is still in pressing downward.

Gold Prices Versus Yields and the U.S. Dollar

Throw in the unnerving impact of the Ukraine crisis and the possibility that China’s economy is hitting a headwind[4], and gold bulls have several drums to beat for a while.

Long-Term Gold Prices

With none of the driving forces behind the U.S. dollar or interest rates poised for big change, the short-term trend for gold prices may remain bullish. The longer-term, bigger picture for gold, however, still isn’t good.

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.

Gold Prices Versus Inflation and Demand

Bottom Line

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.

Gold Prices with Fibonacci Lines

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.

  1. GLD:
  2. Flickr:
  3. nowhere near firm enough for the Fed to do much of anything to cool it off:
  4. unnerving impact of the Ukraine crisis and the possibility that China’s economy is hitting a headwind:

Source URL:
Short URL: