Gold prices have fallen sharply this year, in a series of sharp moves lower followed by weak recoveries. The first decline occurred in the middle of February, followed by drops on 12-15 April, and again in the second half of June.
The failure of investors worldwide to step in as bargain hunting buyers of gold in the wake of the June sell-off suggests that while they saw the sharp drop to $1,320 in the middle of April as a buying opportunity, investors now are not buying gold for two reasons. Some investors are waiting for still-lower prices before they buy. Others are shifting their opinions about future gold price trends and directions, away from expecting higher prices toward expecting lower prices.
Prices may have more short-term downside, but they are approaching fundamentally unsupportable low levels. While prices may move lower in the next two months, from an intermediate term perspective prices may be at or approaching their cyclical lows.
We expect gold prices around present levels to be the cyclical lows for gold. We are expecting another leg down on a short-term basis, most likely in the period from now through August. The reason for this is the fact that investors, at least through today, have not signaled that they view prices all the way down to $1,200 to be low enough to whet their appetite for gold.
Beyond that, we expect gold prices to consolidate, moving sideways perhaps between $1,350 and $1,550, through 2015, before possibly rising again. These views are based on our analysis of gold market fundamentals and the macro-economic outlook.
All of this leads to the question as to whether now is a good time to buy gold again for an intermediate-term investor. At these levels at this time gold may make sense as an intermediate to long term buy. Silver is looking less attractive. Platinum and palladium continue to look more attractive.
Several issues must be considered by individual investors in determining whether gold makes sense to buy at this level. Some of the issues are specific to individual investors, and some are related to the opportunity costs, or benefits, of moving more assets into gold at this time.
Short Term Considerations; The Risk of A Spike Lower
For one thing, on a short-term basis, the gold price still is vulnerable to a spike lower in the near term. Some investors may want to hold off on making fresh purchases at present levels but should be prepared to purchase gold on a possible steep decline in prices at some point over the next two months during the period of seasonal weakness in gold demand and prices, and the time of greatest risk to such a move downward in prices. Other investors may well be content to purchase gold at current levels and not try to pick the low of the market. Still others may want to wait to see where gold prices are in September, after the period of seasonal price weakness and heightened risks of a sell-off are past.
Whether or not investors see the current lower prices as another opportunity to stock up on gold is critical to the short term gold price, and also bears important implications for prices over the next few years. If investors have shifted their views and do not see prices around $1,200-$1,250 as a bargain, if they refrain from buying either because they do not think prices are low enough yet, as they did in April, or because they have decided prices are heading lower on a longer term basis and thus a sell off is no longer a buying opportunity, then prices are at risk of another leg down.
At present, there are few signs of strong demand at these lower prices. Indian market sources reported increased demand, but said the buying levels were less than half the volumes seen in the first week of May. Chinese dealers reported modestly stronger purchases, but said investor appetite was well below the levels seen during the sharp sell-off in April.
Following the sharp decline in the middle of April, which had pushed gold prices to two-year lows, there was strong demand for buying the metal from investors around the world. While much of the market press focused on demand in Asia, investors in North America, Europe, the Middle East, Latin America, and other quarters all participated in what they saw as a bargain hunting opportunity. Those shorter term funds that had shorted gold around $1,560 before the sell-off bought back their shorts, and in some cases went long on a short-term basis, adding to the strength of the price rebound. As a result, prices quickly rebounded to around $1,480 in nine trading sessions. This was not as high as gold prices were before the selling began on 12 April, and the rally stalled out. This signaled likely further weakness in prices, which was seen in May and then again late last week and this week.
The decline in prices in the middle of April had been very timely, occurring just prior to the wedding seasons in India and China. This resulted in a substantial amount of buying from consumers in those countries, especially India. This demand helped push gold prices higher through the end of April.
Some investors were taking advantage of the increase in prices during the second half of April to exit their long positions in gold, however. Physically backed exchange traded product (ETP) holdings continued to decline through the rest of April and May, and non-commercial market participants on the Comex were building even larger net short positions, taking gross shorts to record levels by late May. These investors were disillusioned by the lack of gold's inability to rise for more than 18 months past its 2011 highs, and by the fact that the late April rebound only saw a partial recovery that fell far short of the ranges of prices prior to 12 April.
The premiums on gold products issued by the U.S. Mint resumed their earlier slide in May, after rising in the second half of April. With a majority of the buying from the Indian and Chinese wedding season done during the second half of April there this one large factor no longer was providing support to gold. Prices fell back in May, and staged an even less healthy recovery in late May and early June, signaling vulnerability to another steep decline. Comments regarding the winding down of monetary accommodation by Federal Reserve Chairman, Ben Bernanke, on 19 June pushed most asset prices down sharply on 20 June. The negative impact of these comments lingered into this week, with prices declining to $1,196.10, on an intraday basis, on 26 June.
This time around there may be little reason to expect gold prices to rise after the sharp decline in prices, as was seen in the middle of April this year. The inability of gold prices to sustain the gains seen during the second half of April may cause gold market participants to wonder if they should wait for prices to decline further before they step in as buyers.
Even in countries like India and China, where there is a great deal of demand to own gold, there is less incentive to rush in and buy at present levels. It is not clear if investors this time have the same sense of urgency to purchase gold as they did in the middle of April.
In India, any weakness in the gold prices is likely to be offset by a decline in the Indian rupee against the U.S. dollar and an increase in import duties by the government. Both of these factors would make imports into the country more expensive. The next marriage season in India is not until November. The next round of gold buying for weddings in China is not expected to occur until September, ahead of October when there would be an increase in the auspicious days for weddings. The gold market is moving into a seasonally weak period, typically both fabrication demand and investment demand slow over the next few months.
Investors in gold ETPs [(GLD), (IAU), (SGOL), (AGOL), (GLTR)\ have been selling into prices rallies and price declines, which suggests that there is an eagerness among these investors to exit their gold positions. There was a marginal increase in the premiums on U.S. Mint gold coins following the sharp decline in gold prices on 20 June. Total open interest in Comex gold has been rising alongside the sharp decline gold prices, which suggests that investors are building fresh short positions.
The next support level for gold prices is $1,200. If there is not sufficient demand for gold at this level, prices could see another round of declines, possibly toward $1,150 or even $1,100. Gold market participants who have not been buying or have been selling gold may be more inclined to see value in owning gold at those levels.