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Gold has once again begun to assert its safe haven value
after the recent drop in equity prices. Last weeks Argentina bond
default scare coupled with rising tensions between Russia and Ukraine have
combined to spook global equity markets.
On Thursday NATO warned that Russia was preparing to send
20,000 troops into eastern Ukraine under the pretext of a humanitarian
mission to save separatist rebels. Due to these concerns golds value
has risen to a 2-week high. Golds rally is all the more conspicuous
in light of the recent rally in the U.S. dollar index.
Adding to golds growing attraction as a safe haven was
Thursdays decision by the European Central Bank (ECB) to leave the
benchmark interest rate unchanged at record lows. This was preceded by
news on Wednesday that Germany experienced a second monthly decline in
factory orders (-3.2% versus an expected +1.0%, according to
Briefing.com). Elsewhere in the euro zone, Italys economy sank into
recession after two consecutive quarters of contraction in its GDP. The
economic trouble in Italy is reflected in the iShares MSCI Italy ETF (EWI)
chart shown below.
The MSCI France ETF (EWQ, not shown) is also reflecting
weakness within France. Meanwhile the former star of the last global
economic crisis two years ago ago, namely Greece, is once again showing signs
of weakening. The Greece 20 ETF (GREK), a proxy for the countrys
stock market, recently plunged to a new low for 2014. The financial press
hasnt yet begun to focus on Greece, but it would appear that several
countries in the European Union are struggling with economic problems.
The last vestiges of the longer-term deflationary (Kress) cycle are in
evidence right now as the 60-year cycle is scheduled to bottom in late
September/early October.
To date the rally in gold futures price has beaten gains
made in equities, Treasuries and commodities, according to a Reuters
report. Indeed, many commodity prices have taken a beating this summer
as the deflationary cycle nears its terminus. Corn and wheat prices are
at multi-year lows while oil and gasoline prices have recently begun to
retreat. Treasury prices are on the rise as anything with safe haven
quality has been the focus of investors attentions lately as the long-wave
deflationary cycle makes it final curtain call.
By contrast silver was lower on Thursday and continues to
lag the yellow metal as safety concerns fuel golds latest rally.
Silver is likely to continue its position of relative weakness as long as the
climate of investor fear remains the driver for gold. Only when fear
subsides does silver typically see increased demand due to its greater
exposure as an industrial metal.
My contention over the last several months has been that
as the 60-year cycle of deflation nears its final low this autumn the gold
price would likely benefit from it. Were beginning to see an uptick
of interest in gold as now that fear has taken the front seat again in the
news. Until recently investors cheered all the positive economic news
that came out while ignoring bad news pertaining to Russia/Ukraine and the
Middle East. Now good news is routinely ignored while bad news is
amplified by investors, a tell-tale sign of a fear-driven market as the
long-term cycle bottoms. A further acceleration of fear should serve to
increase investors interest in gold.
Lets once again turn our attention to the investor
sentiment picture. Last years decline in the gold price was blamed in
large measure on ETF managers dumping physical gold from their funds.
According to a recent report from Commerzbank, ETFs have repeated this action
through much of this year. Commerzbank observed:
Over the year so far on balance, there has still been
an outflow of some 30 tons of gold from ETFs. In view of the headwinds
presented by additional demand components, [any] ETF inflows will probably
merely have slowed down the price decline in recent weeks.
The bank emphasized that while gold prices may have been
somewhat stabilized by last months ETF inflows, it doesnt foresee a
revival in the gold price anytime soon:
While the present negative factors remain a strong
US dollar, weak physical demand in Asia, and weak coin sales in the west
we do not envisage any serious price gains. In addition to modest coin
sales in the US, Australian coin sales too, for example, dipped sharply month
on month in July to 25,100 ounces.
Thus another major bank has joined the ranks of the gold
bears in what could be setting up another contrarian play for gold.
Adding to the contrarian factor is the behavior of small speculators of
late. According to Barrons, speculative investors have been cutting
back on Comex gold futures and options.
Meanwhile, the latest data from the SPDR Gold Trust
(GLD),the world's largest gold-backed ETF, showed that holdings fell 1.79
tons to 800.05 tons, according to Reuters. This marks the first drop
since July 24. Thus we see that even ETF managers are once again
turning bearish on gold.
The overall sentiment backdrop that is forming is
gradually changing more in golds favor. An ideal market environment
is one where most retail traders and institutional investors are bearish on
the metal, which in turn sets up a potential technical rally as short
interest increases. If the fuel (i.e. bearish sentiment) for the next
gold technical rally is ample enough, it could go beyond a simple technical
bounce to something more extended.
Kress Cycles
Cycle analysis is essential to successful long-term
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analysis and technical analysis is crucial for short-term market timing,
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While cycles are important, having the right set of
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years after having been perfected by the late Samuel J. Kress.
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Clif Droke is a recognized authority on Kress cycles
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