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The price of gold has been hit by
selling under concerns over the upcoming U.S. “fiscal cliff.” At
least that’s what the news media’s explanation for gold’s
decline has been. Here’s what Reuters had to say in a recent news
article:
“U.S. stocks sold off late in the
day to close at session lows on Wednesday as talks to avert a year-end fiscal
crisis turned sour, even as investors still expect a deal….
“President Barack Obama and
congressional Republicans are struggling to come up with a deal to avoid
early 2013 tax hikes and spending cuts that many economists say could send
the U.S. economy into recession.”
Now here’s the problem with trying
to apply “rational” analysis of the news headlines in making gold
price predictions: because the financial markets are by nature irrational and
volatile, you can never know from one day to the next how the market will
react to a certain piece of news or legislation.
For instance, doesn’t it make
sense that if the U.S. falls off the fiscal cliff and a recession is thereby
caused that gold would benefit from the safe haven inflows that would surely
follow? Logic dictates that scared investors would transfer money from
equities and into gold and gold equivalents to escape the punishment that
paper assets would presumably suffer in a fiscal cliff scenario. But as
we’ve seen all too many times in the past, the market isn’t
always logical.
All of this is by way of preface to a
point that I’ve made many times in this newsletter, namely that the
best approach to gold is a trading approach which involves buying only when
the technical conditions are clearly ripe for a rally. And we haven’t
had a technical buy signal for gold lately.
Fundamental analysis, while helpful at
times, is no substitute for a good technical discipline. That’s why
gold with all its bullish longer-term fundamentals can be under selling
pressure in the short term. It doesn’t really matter what the actual
reason is; the only “reason” we need concern ourselves with is
that right now there are more sellers than buyers. Until this situation
reverses we’ll remain in cash and let the gold market sort itself out.
It has been reported that John
Paulson’s hedge fund group holds $3.67 billion in shares of the SPDR
Gold Trust (GLD). In July, gold-related assets of one of his funds comprised
44% of total assets. As one analyst has observed, “The big correction
in the mining stocks has hurt his performance and reputation.” Businessweek reported that two of Paulson’s
largest funds, Paulson Advantage and Advantage Plus, lost 36 percent and 52
percent in 2011. The two flagship funds are down 6.3 percent and 9.3 percent
as of the end of May with losses continuing into July.
Paulson is a giant of sorts in the hedge
fund world. He made a $25 billion fortune for his hedge fund investors during
the 2008 credit crisis. Although Paulson is widely regarded as a true hedge
fund king, his mistiming of the gold market has cost him dearly in the near
term. While it’s very possible (I would even say likely) that Paulson
will eventually be proven correct on his big bet on gold, the point is that
you can be the greatest hedge fund trader on Wall Street and still get
punished by Mr. Market for ignoring the short-term technicals
in preference for the longer-term fundamentals. Technicals
rule over fundamentals in the short term. Investors ignore this truism at
their peril.
Now having said all this, there’s
a chance that the fiscal cliff resolution could turn out to be favorable for
gold. We’ll let the price and volume action of the gold ETFs speak for us, and a 2-day higher close above the 15-day moving
average would speak very loudly indeed.
I note with interest that the
aforementioned SPDR Gold Trust (GLD) is hovering slightly under its 150-day
(30-week) moving average and is trying to re-establish support around it.
Long-time readers of this report will remember the importance I attached on
this longer-term trend line during the boom years of 2009-2011, for the gold ETF
always respected the 150-day MA as the proverbial “line in the
sand” during corrections in those years. During the entirety the
2009-2011 rally, the gold ETF never once penetrated the 150-day MA until late
2011 when the last bull swing ended.
Since then GLD has fluctuated above and
below the 150-day MA. It tried to establish a new long-term base of support
above it in this past summer’s rally and is now testing this vital
trend line once again. Note also the extremely high amount of trading volume
in GLD that occurred between Dec. 18 and Dec. 20. This could be a sign of
investor capitulation, i.e. a “selling climax,” which in turn
would be a bullish sign for the interim gold outlook. I’d view as very
favorable the prospects for a first quarter rally if GLD manages to get back
above the 150-day MA next week.
2014: America’s Date With Destiny
Take a journey into the future with me
as we discover what the future may unfold in the fateful period leading up to
– and following – the 120-year cycle bottom in late 2014.
Picking up where I left off in my
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narrative and explain how the 120-year Mega cycle influences the market, the
economy and other aspects of American life and culture. My latest book, 2014:
America’s Date With Destiny, examines the most vital issues facing
America and the global economy in the 2-3 years ahead.
Clif Droke
2014: America’s Date With Destiny
Take a journey into the future with me as we
discover what the future may unfold in the fateful period leading up to
– and following – the 120-year cycle bottom in late 2014.
Picking up where I left off in my previous
work, The Stock Market Cycles,
I expand on the Kress cycle narrative and explain how the 120-year Mega cycle
influences the market, the economy and other aspects of American life and
culture. My latest book, 2014:
America’s Date With Destiny, examines the most vital issues
facing America and the global economy in the 2-3 years ahead.
The new book explains that the credit crisis
of 2008 was merely the prelude in an intensifying global credit storm. If the
basis for my prediction continue true to form – namely the long-term
Kress cycles – the worst part of the crisis lies ahead in the years
2013-2014. The book is now available for sale at:
http://www.clifdroke.com/books/destiny.html
Order today to receive your autographed copy
and a FREE 1-month trial subscription to the Momentum Strategies Report
newsletter.
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