I recently wrote an article titled "Don't Buy The Gold Dead Cat Bounce." Unfortunately, by the time I wrote it I had written so many bearish articles on gold that the article was rejected and relegated to the netherworld of the instablog. At the time I wrote the article, gold was sitting around $1,325, and I predicted gold may make it as high as $1,335. In reality, gold made it up to $1,347, so my peak estimate was a bit low, but still within 1% of the eventual peak.
The down trendline sits around $1,335, so gold may have another $10 on the upside before reality sets in.
My reasoning was simple: Gold is in a sharp downtrend, and trying to pick a bottom is like trying to catch a falling knife. To compound the issue, interest rates are increasing, so the main reason for holding gold is evaporating.
buying gold/SPDR Gold Trust (NYSEARCA:GLD) and silver/iShares Silver Trust (NYSEARCA:SLV) now is like trying to catch the proverbially falling knife. It is more gambling than investment. Because gold doesn't pay an income and is priced based upon the 'greater fool theory,' it is difficult to create an investment model to explain it.
This concept isn't only held by me; it is a common theme throughout the market. This video highlights how interest rates are viewed as a -- if not the -- major headwind for gold. The concept is that gold doesn't pay interest or dividends, so as interest rates increase, bonds provide a better and safer return than gold does. People simply exchange gold for bonds as interest rates make bonds more attractive.
Key Points From the Video:
- Gold is off 5% from its dead cat bounce peak, and is now below $1,300.
- "Gold just can't seem to get our of its own way."
- Gold's break above the 50-day moving average was immediately stopped by resistance at $1,350.
- Critical support rests at $1,272.
- The short-term uptrend has been broken.
- If the U.S. dollar continued to weaken and interest rates "back off" a bit, gold may retest $1,350.
- In the short term, the driver of gold is interest rates.
- The clear trend is for the Federal Reserve is to pull back on liquidity vs. adding liquidity.
In conclusion, it appears as if the recent rally in gold was nothing more than a "dead cat bounce." Gold has resumed its downtrend, and that downtrend should remain in place as long as the U.S. economy continues to slowly heal and interest rates continue to slowly creep upward. I would not expect the U.S. dollar to continue to weaken, nor would I expect interest rates to back off significantly, so I would not expect gold to break above its critical resistance of $1,350. I would not be surprised if it didn't even make it back up there to test it. In my opinion, gold is "dead money."
Disclaimer: This article is not an investment recommendation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.