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In a few of my previous articles, I have tried to lay out the fundamental reasons for why we are far closer to the end of this consolidation in gold (GLD) than the beginning. As this year has unfolded, price action has strained that thesis; turning the last month, in particular, into a gut-wrenching exercise in relentless price-capping and high volume indiscriminate precisely-timed selling which has forced longs to retreat again and again. The mixture of the Asian Lunar New Year and the G-20 meeting created the perfect backdrop for what I think is the final down move in gold before the fundamentals take over.

Having watched the ticker in gold for far longer than any rational person should, I can tell you that the sheer magnitude of the selling in the face of very stiff support has been unique in this bull market. Every time you would think there was a high volume stand at a major support level that would mark a normal bottom has been met the next day or even hour with more coordinated selling. Normal markets simply do not trade that way. This kind of relentless pushing down of the price of gold is designed to do two things.

  1. Support the narrative that the recovery is real and that the economy is improving.
  2. Allow further accumulation of gold by the strongest players in the market at the expense of retail investors.

Every bull market goes through moments like this. It doesn't matter the instrument type. The sentiment in gold is as bearish as I've ever seen it. Some like the contrarian nature of that as an indicator. I'm ambivalent to it as bearish sentiment can last for years. No bull market wants to take the uncommitted along for the ride. I own physical gold and silver (SLV) for a number of reasons, not the least of which is that it keeps me from making a fear-driven mistake during a day like Friday.

This is why I do not look at my holdings of physical metal as an investment. Gold is not an investment; it is a form of savings which hedges against political venality, investment banker sociopathy and central planner hubris, all of which I see as being in a massive bull market at the moment. For that reason alone I advocate having a measure of your portfolio in gold. That measure is personal but it should be something.

Traders don't see this. They see everything as an opportunity to exploit an edge and therefore come at any discussion that way and will backfill their argument for a particular position based on what they are seeing in the price action of the moment. I don't begrudge them this. I'm just not impressed with their investment theses when it comes to gold.

The current price action in GLD for February is as follows. The range, defined here as the difference between monthly closes, for GLD on average is $6.25 in any given month. January closed at $161.20 and GLD closed on Friday 2/15 at $155.76 after hitting a low of $154.60. This move to $154.60 is very likely to be all the downward movement we'll see in gold this month. Moreover, the normal move below the open for the month is $4.92 and we've seen GLD drop $8.06 from the open this month. So, we are well past normal behavior and the farther we are from normal, the lower the probability of more of a move in that direction - in this case, down.

This is why I'm comfortable with saying we've very likely seen prices go as low as they will this month. Lastly, we have the round number effect of $1600 per ounce corresponding to that low on GLD and round numbers like that are magnets in both directions. It will be important to watch Asian trading sessions this upcoming week to see if that uncovers heavy number of bids at this price level.

Now, that said, there is no percentage in calling bottoms or tops, however, no matter how many you get right or wrong. The best you can do is look at the fundamentals, assess the probabilities and place your bets. When gold approached $1696 last month, a breakout opportunity came into view. I said as much. It was a good trade setup and that setup failed. It happens. Traders dust themselves off and move on. Analysts ask why it failed and attempt to figure it out.

My position on gold from a fundamental standpoint is similar in mindset to a value investor who looks at an asset and decides it is undervalued at that moment in time. It doesn't matter, necessarily, if the asset is 20% undervalued and is trending down and can be picked up for 30% off later. It is undervalued therefore it should be bought with little worry about the timing. Some of the reasons for it being undervalued are as follows:

  1. The Fed is expanding its balance sheet and the monetary base at the fastest rate since TARP.
  2. Currency debasement is happening all around the world, not just in Japan.
  3. The Fed is inviting inflation to chop down the savings rate and stimulate money velocity.
  4. The Fed will simply not allow any kind of deflation to occur. Mr. Bernanke has made that abundantly clear.
  5. Purchases of U.S. Treasuries (IEI) have slowed considerably since the QE III announcement front-running the Fed's purchases.
  6. The Republicans will yield on the debt ceiling paving the way for no real budget cuts in 2013.
  7. Physical demand is so strong that closed-end funds like the Sprott Physical Trust (PHYS) are trading at a premium to NAV (1.22% for PHYS).
  8. Gold is in backwardation out to April as of the close on February 15th.
  9. The biggest coin dealers in the U.S. are buying 1 oz Gold Eagles at $46 (2.5%) over the current futures price.

For potential gold investors trying to figure out if this is the bottom or not but don't possess the skills of timing to decide, dollar cost average into a position over time if you like the story. If you don't look at something else to buy because nothing will break your spirit faster than trying to time the gold price looking for a bottom.

(click to enlarge)

Source: G20 Sparks Gold's Ugly Sell-Off

Additional disclosure: I own physical gold, silver, a few goats and an unwavering cynicism towards those in power.