Gold prices just hit a five-year low, with the precious metal and related gold ETFs down more than 40% from their 2011 peaks and looking to decline further.
That’s bad news to those investing in gold.
Worse news? The next level of support for gold prices is at $1,000 an ounce — and if that is breached, we could be looking at $700 an ounce for gold prices, the lowest levels since 2008.
At the beginning of 2015, some investors had hoped that the rout was over after gold prices rallied about 10% to start the year. But gold bullion prices couldn’t hold, and the jump at the beginning of the year can now clearly be seen as a head fake.
How can we say that with certainty? Well, just look at the facts on the ground:
- Despite a soft Q1, subsequent economic reports have proven that fears over consumer trends were overblown, with a series of encouraging jobs reports and a nice retail sales bounce in May.
- Geopolitical conflicts in Syria, Ukraine and elsewhere were moved to the backburner as Americans lost interest in troubles abroad. (Thank Donald Trump, in part, for that).
- The U.S. dollar staged an impressive run, as central banks in Japan and Europe continued to ease policies. And with the Fed talking about raising rates before the end of the year, that trend is assuredly going to continue.
- The so-called “supercycle” for commodities remains working against everything from gold to oil to grains, as prices across the board are hard pressed to move higher.
It’s hard to imagine these challenges abating anytime soon — not just for gold prices, but for the value of any commodity.
If you really want to dig into details, however, there are even more reasons to be bearish on gold prices. Consider India, where gold is actually discounted significantly vs. global pricing as jewelry demand remains weak, even in this nation where gold remains an important cultural touchstone. Or consider China, where demand is weaker than expected.
Any way you slice it, gold prices are in trouble.
How to Trade Troubled Gold Prices
Bears will note that much of the narrative working against gold is old news. In fact, Bank of America Merrill Lynch, which recently called gold “undervalued” by a small measure — even if upside is limited and equities are expected to continue their outperformance.
Click to Enlarge But technical analysis shows that the recent breakdown of gold prices could push the precious metal back to 2009 prices around $1,000 — or, worse, back to around $700 an ounce as the next level of support if $1,000 doesn’t hold. Take this chart from analyst Jesse Colombo on Forbes if you need a visual.
I wouldn’t touch gold here, given these downtrends, and aggressive traders may consider a short — or, if you’re really interested in living dangerously, consider a bargain buy in mining stocks.
Why buy gold mining stocks after this rout? Well, because mining companies have fallen much more than gold from their high-water marks earlier this year. Take AngloGold Ashanti (AU), which is down about 40% from February while gold is only off by a little more than 15% in the same period. AngloGold stock now trades for about 0.55 time next year’s sales and at a forward price-to-earnings of about 7 — but it’s still turning an adjusted profit, so it’s not at risk of bankruptcy like some undercapitalized junior miners.
I certainly don’t think a direct investment in gold bullion or gold miners will give you reliable returns over the next few years, and there’s a decent chance that the broader pressure against gold and gold miners will continue. So expect volatility, and protect yourself whatever you choose.
Me, I’m sticking with developed equity — it’s boring, but the outlook is much brighter.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.
