During the height of the banking crisis in Cyprus, I figured gold (NYSEARCA:GLD) would be a good trade. That lasted for all of a few days. Now, instead of bouncing off recent lows, GLD is breaking down through those lows, reaching levels last seen July, 2011. That period immediately preceded GLD's swift run-up to the September, 2011 highs.
GLD finally breaks down
I have seen some articles try to explain this breakdown as a reaction to the potential of Cyprus selling gold reserves to help fund its banking bailout. These prospects have led to quick trigger hypotheticals of what could happen to the gold market if other struggling eurozone countries are forced to sell gold for similar reasons. If there is anything the rolling panics over the eurozone have taught us, it is that sell-offs generate buying opportunities. Gold is no different. Dedicated gold investors know that these acts of desperation of forced selling will literally be golden opportunities, the long awaited big dip to provide a chance to add to holdings at much better prices.
If Cypress does plan to sell gold, the gold market's plunge ahead of those sales will put added pressure on them to dump before prices go ever lower. If Cypress does sell, the speculation of "who's next" should persist for a while, producing an environment where a bottom for GLD (GLD) will prove quite elusive. The Japanese yen (NYSEARCA:FXY) provides a second reason to expect an elusive bottom.
When the yen began its latest phase of devaluation in the wake of the Bank of Japan's acceleration of monetary accommodation, gold actually gapped down (April 2, 2013). This was the exact opposite reaction I would have expected. A new phase of yen devaluation should eventually put upward pressure on asset types as Japanese seek better places to store their wealth than a currency getting shredded to pieces. The contrarian reaction suggests that such a pursuit for gold is not likely to happen anytime soon (or at least the market is behaving consistently with such a conclusion). In fact, the chart below shows that the U.S. dollar (NYSEARCA:UUP) has benefited so much from the yen's devaluation, that gold priced in dollars has experienced pressure for the past 6 months or so.
While the relation between USD/JPY and GLD periodically changes, the divergence since Oct, 2012 is very clear
Source for charts: FreeStockCharts.com
This chart suggests that the gold sell-off has little to do with deflation fears and a lot more to do with relative shifting of preferences in currencies. Note well that these shifting preferences can take on numerous forms. It just so happens that since October, the divergence between USD/JPY and gold is quite clear and consistent. So it seems as long as the U.S. dollar is benefiting from yen devaluation, a bottom for GLD will prove elusive.
A third and final reason a bottom for gold will likely prove elusive is seen in my old "gold enthusiasm index." I last updated this stylized measure of gold sentiment just over a year ago (see "Gold Enthusiasm Is Waning Again Despite Surging Before Gold's Recent Peak"). Since then, Google (NASDAQ:GOOG) has once again changed its indexing scheme. So now instead of a declining enthusiasm index, I have a flattening one.
The Gold Enthusiasm Index continues to bounce along its all-time lows
Source: Yahoo!Finance for GLD prices, Google Trends for "buy gold"
Combine the lackluster sentiment toward gold with the search index for "buy gold" and "sell gold", and I sense a general disinterest in gold either way.
Google trends shows no spike of interest in "buy gold" or "sell gold" since gold's peak in 2011
Source: Google Trends
I now suspect that sentiment has to somehow reach a new extreme before gold can print its next (likely sustainable) bottom. As I have mentioned before, this gold enthusiasm index is still a learning process. So consider it just another piece of context to enhance the other fundamentals described earlier.
As I patiently wait for all this to play out, I plan to make periodic additions to gold-related holdings. I will not get aggressive until (if?) the sell-off gets particularly extreme. On Friday, I added to my favorite gold miner, Goldcorp (NYSE:GG). Next up, I will be planning to accumulate more silver-related holdings. Silver is suffering alongside gold.
Be careful out there!
Disclosure: I am long GLD, GG, SLV. In forex, I am net short yen. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.