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Gold Remains Defensive But Cycles Suggest Opportunity

Published 04/23/2014, 01:50 PM
Updated 07/09/2023, 06:32 AM

Gold remains defensive amid expectations that the Fed will continue with its taper campaign next week and what seems to be a complete dismissal of the rising geopolitical tensions in Ukraine. Currency markets have been pretty well contained recently, providing little in the way of fresh directional clues for the yellow metal.

Jon Hilsenrath of The Wall Street Journal expects that the FOMC will hold steady on policy after their two-day meeting next week, scaling back asset purchases to $45 bln per month. As for an eventual rate hike, Hilsenrath believes the Fed will remain purposefully vague.

Of growing concern for the Fed has to be the housing market. New home sales plunged 14.5% in March to 384k, missing expectations of 450k homes by a wide margin. Analysts continue to blame the weather, but the Northeast — one of the hardest-hit regions as far as weather goes — actually saw new home sales rise by 12.5%. The more likely culprits are sluggish jobs growth, declining affordability, and rising mortgage rates.

Existing home sales in March, reported yesterday, fell for a third consecutive month. It was the seventh monthly decline out of the last eight and the lowest print since July of 2012.

In gradually tightening policy via the taper, the Fed risks completely derailing the already tepid housing recovery. If home values rotate lower once again, it could threaten to derail the broader economic recovery as well.

In an article yesterday, The Wall Street Journal called the recovery “one of the most lackluster in modern times.” Said “recovery” is also now approaching the mean duration of post-WWII recoveries. We risk falling into the next recession, before the country has fully recovered from the last one.

If that were to happen, arguably all bets would be off with the Fed. They would likely flood the market with dollars yet again, and ramp the QE back up in an effort to underpin asset prices and the economy.

And speaking of cycles: It would seem that the corrective pullback in the gold market is very long in the tooth as well.

The World Gold Council studied the twelve gold price pullbacks of 20% or more, going back to 1970. The average length of those corrections was 18 months. The most recent correction lasted 28-months, assuming that it ended in December 2013. The average rebound after these corrective periods has been 69%.

I encourage you to read our latest Review & Outlook entitled Pullbacks-retracements study points to solid gold buying opportunity to get our own Michael Kosares’ take on the topic, which is summed up in this quote:

“If we apply the 69% average retracement figure to the $1185 bottom that came in December, 2013, it would put the gold price back at the $2000 per ounce level sometime over the next two years.”

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